Author Topic: Mortgage - too high?  (Read 7092 times)

teamzissou00

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Mortgage - too high?
« on: April 16, 2013, 11:30:35 AM »
Our house was bought for 193k and I owe 175k and its worth around 205k.

My mortgage payment all-in is $1250, which is 27% of my net income.  I'd consider selling and buying a cheaper house, but concerned it wouldn't be something we'd feel ok living in.  I bought 2 years ago with 4% rate- so refinancing not going to help. 

What is the goal for mustachians as far as % net income on housing?  I could rent an apt for $875 and save an extra $4,500/yr toward larger down payment and approx 2k/ year on home improvements

Another Reader

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Re: Mortgage - too high?
« Reply #1 on: April 16, 2013, 12:02:21 PM »
It sounds like you bought with a small down payment and have some kind of mortgage insurance.  Does "all in" include taxes and insurance and mortgage insurance?

If you can pay down the mortgage to 80 percent loan to value, you may either get the PMI canceled or be able to refinance at a lower rate.  If you went FHA originally, refinancing away from FHA into a conventional loan is also a possibility.  It's worth making a few phone calls to your current lender and a couple of other lenders to get your options.

If you are happy with the house and it meets your needs, in your shoes I would try to lower the payment instead of moving to a less desirable situation.  Lowering your housing cost will allow you to increase your savings rate.  That is what gets you to FI faster.

DoubleDown

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Re: Mortgage - too high?
« Reply #2 on: April 16, 2013, 12:08:17 PM »
Hmmm, I guess it would boil down to your needs/goals and the typical rent vs. buy calculators. You might try running the numbers through the commonly recommended NYT rent vs. buy calculator and see what you come up with. Not knowing anything else about your situation, it's hard to say. For example, do you expect to stay in the area for a long time? Expecting your family to grow or needing more room? Expecting housing prices or rents in your area to appreciate? Commute costs from each?

Saving that extra $350/month on rent plus other home ownership expenses sounds good on the surface, but that could evaporate fairly quickly through rent increases over the next few years, or if you find you need a larger apartment to accommodate a growing family. And assuming you have some kind of conventional loan, at least a fair amount of your mortgage payment is paying down the principal and therefore building up equity/savings. So, there might not be quite as much (or any savings) as you anticipate by moving to an apartment. And if you end up only saving $100 a month or something like that, I'm not sure if it's worth it to you to move and give up some of the benefits of home ownership (like greater privacy and independence, for example).

Good luck!

teamzissou00

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Re: Mortgage - too high?
« Reply #3 on: April 16, 2013, 12:16:07 PM »
We did a conventional loan

We love the house, but wish it was only one story. 

Good idea on getting it paid down to remove the PMI

JohnGalt

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Re: Mortgage - too high?
« Reply #4 on: April 16, 2013, 12:27:46 PM »
If i'ts really worth $205,000, you could just come to a refinance another ~$9,000 and probably be able to drop PMI.  I did a 3% down FHA 3 years ago (bought way too much house in my pre ERE/MMM days), renovated, brought some extra cash to the table for a refinance to a conventional a year and a half later to hit 80% and drop PMI. 

Personally - I think 27% of net pay is too high as my goal is to save 70%-80% of net pay (about to put my house on the market in order to get there), but it all depends on your overall goals/needs as to whether or not it makes sense - there is no hard rule. 

Another Reader

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Re: Mortgage - too high?
« Reply #5 on: April 16, 2013, 12:43:39 PM »
Since you have a conventional loan, paying the balance down should also allow you to do a conventional refinance.  You may be able to do a low or no cost refinance that would save you enough on the monthly payment to make it worthwhile.  Not sure if you can still get a no-cost refi at 3.5 percent, but it's worth doing the research to see what's out there.

jrs

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Re: Mortgage - too high?
« Reply #6 on: April 16, 2013, 01:02:25 PM »
Paying down to eliminate PMI is great advice, so I'll second that.

I disagree with your math though.
Your Math:
(all-in mortgage) <Versus> (apartment rental).

I humbly suggest you use this math:

(all-in mortgage) (Portion of payment applied to loan principal) <Versus> (apartment rental) + (renter's insurance)

Use it up, wear it out...

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Re: Mortgage - too high?
« Reply #7 on: April 16, 2013, 01:32:22 PM »
Paying down to eliminate PMI is great advice, so I'll second that.

I disagree with your math though.
Your Math:
(all-in mortgage) <Versus> (apartment rental).

I humbly suggest you use this math:

(all-in mortgage) – (Portion of payment applied to loan principal) <Versus> (apartment rental) + (renter's insurance)

Well, as long as you're going that way, it probably should be:

(all-in mortgage) - (applied to principal) + (homeowner's insurance) + (taxes) + (hoa fees) + (repairs) - (reduced income taxes) <Versus> (apartment rental) + (renter's insurance)
« Last Edit: April 16, 2013, 01:37:58 PM by Use it up, wear it out... »

marty998

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Re: Mortgage - too high?
« Reply #8 on: April 16, 2013, 05:27:54 PM »
27% is nothing. When I started I was paying 55% in after-tax income towards my minimum monthly mortgage payment, and I already had 30% equity so it's not like I was one of those no-deposit people.

If 73% of your income is left over after housing, where is all that going?

Things always get easier with time. The balance starts reducing and incomes (tend to) go up. Gradually things get better on 2 fronts. I can't actually measure what % I am paying now due to the way my loan is structured but it's a lot less than a couple of years ago, and in a few years time I'll be paying nothing.

Forget renting IMO, where will that get you. Pay off this place and then buy another and rent out your current one if you want to move. $175 should be knocked down pretty soon if you are a duel income couple.

James

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Re: Mortgage - too high?
« Reply #9 on: April 16, 2013, 05:45:15 PM »
Our house was bought for 193k and I owe 175k and its worth around 205k.

My mortgage payment all-in is $1250, which is 27% of my net income.  I'd consider selling and buying a cheaper house, but concerned it wouldn't be something we'd feel ok living in.  I bought 2 years ago with 4% rate- so refinancing not going to help. 

What is the goal for mustachians as far as % net income on housing?  I could rent an apt for $875 and save an extra $4,500/yr toward larger down payment and approx 2k/ year on home improvements


I would talk to some banks and see if you can get an appraisal that would let you refinance into a conventional mortgage without PMI.  Rates are around 3.5% so that doesn't hurt either.  Selling in order to downsize is a great idea if you can find a house that works for you, but only you can know that. Doesn't sound like you are in an urgent situation, talk to some banks, look at the market, figure out where to go with the decision after getting all the info and sitting on it for a while.