Determing What I Can Afford

[oldtoyota]

My current FIRE plan is to retire in around 5-9 years, depending upon market returns.

I am looking to move into a new house for several reasons. This new house will cost more than my current one.

My question is what is the best way to calculate "how much I can afford." It seems to me that mortgage people and real estate agents want to increase that number to get more money for their paychecks. One thing we think we did right the last time we bought a house was to buy LESS than we could afford. That helped us be a-okay during the recession.

Houses in the areas where we're looking to live run from $350K - $1MM. If we can live with a 2 BR 1 BA, we can probably get something in the $400K range. My goal is to get something under $500K. I am not interested in paying $1MM.

Factors Affecting Cost:

*We pay tuition now. Moving into a neighborhood with better schools means a savings of around $7K per year. This could go into the new house or savings.
*We will likely have around $70-80K to put down on the new house.
*I would like my calculation to assume I am selling the old house and not keeping it to rent out.

[Fishingmn]

Buying a house typically isn't just a financial calculation since you must address your families lifestyle, location and emotional needs.

That said, if you were looking for a financial analysis I would do it this way.

Calculate the loan costs for a mortgage at different house price intervals along with the corresponding maintenance and tax costs of a home at those rates.

Since you say you want to retire in 5-9 years I'm assuming you have done the analysis to look at expected expenses along with assets & retirement income.  Then plug those numbers into a tool like Firecalc - http://www.firecalc.com/ 

Basically, you are adjusting your spending needed/expenses for different housing prices and seeing how that impacts the resulting retirement output.

[oldtoyota]

Okay. Thanks!

It seems like I just need to pick a pretend price (until I actually buy) and then calculate from there what the taxes, payment, etc would be. I can do that.

And then I can use a spreadsheet to lay out different scenarios at different housing price points.

[Gray Matter]

Do you want to be mortgage-free by the time you retire?  If yes, then what you can afford to pay down each month will come into play.  I used a combination of a simple savings calculator and a mortgage calculator with various extra payments to run a bunch of scenarios of projected retirement dates.  Knowing your target retirement date and expected retirement expenses is the most important--you can flex from there is the amount you'd need to pay extra on your mortgage is too much (you either push out retirement date, buy a less expensive house, or reduce your after-retirement spending).

At any rate, there are a lot of variables to play with, but a geek like me finds that fun!  And housing is one of the things I'll pay more for to be where I want to be in a safe neighborhood with good schools and some character.

Good luck!

[oldtoyota]

Okay. Thanks!

It seems like I just need to pick a pretend price (until I actually buy) and then calculate from there what the taxes, payment, etc would be. I can do that.

And then I can use a spreadsheet to lay out different scenarios at different housing price points.

Thank you for confirming!

That's basically what we did when we looked last time.  Spreadsheets are great for helping you make rational choices!

[oldtoyota]

Do you want to be mortgage-free by the time you retire?  If yes, then what you can afford to pay down each month will come into play.  I used a combination of a simple savings calculator and a mortgage calculator with various extra payments to run a bunch of scenarios of projected retirement dates.  Knowing your target retirement date and expected retirement expenses is the most important--you can flex from there is the amount you'd need to pay extra on your mortgage is too much (you either push out retirement date, buy a less expensive house, or reduce your after-retirement spending).

As long as I have enough money to cover a mortgage in retirement, I am not particular as to whether the house is paid off or not.

My current scenario takes into account being without a mortgage in around 7-9 years. With these new scenarios, I'd just have to lay everything out and do my best to take it all into consideration.

Although I have not yet made the calculations, I assume I will need more in retirement if I am planning to have a mortgage in my budget...unless I can cut that same amount from elsewhere.

So, it looks like it's time to play with numbers!