Author Topic: Monthly House Payment Higher than Rent?  (Read 3249 times)

coast2coast

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Monthly House Payment Higher than Rent?
« on: June 26, 2015, 08:16:34 AM »
Hello everyone!

My wife and I are considering becoming first-time homeowners but have the luck/misfortune of living in a high-priced real estate market (Bay Area).  When we started the process, we told ourselves we didn't want our overall monthly housing (PITI) payment to exceed what we currently pay on rent ($3200).  Now I'm wondering: was that self-imposed benchmark completely arbitrary and possibly counter-productive? 

After a couple months looking at homes, we are realizing that finding a neighborhood we subjectively feel comfortable in with a tolerable commute--with a 20% down payment--leads to a monthly PITI payment of roughly $3500-4000.  I am confident we can handle that amount from a cash flow standpoint.  And, as I understand it, once (1) the mortgage interest and property tax deduction and (2) principal payment "savings" are taken into account, the after-tax real monthly cost may be less than our current rent. 

Initially, we were ruling out any house with a payment higher than our rent, thinking it would be so satisfying to have our outflow decrease as a result of home ownership.  No luck so far.  So my question for you all, is my self-imposed rule crazy?  Is it just a recipe for ending up in a property that doesn't meet our basic neighborhood and commute distance criteria?  Or are we talking ourselves into home ownership when we should take a couple years to save more down payment and drive down the monthly costs?  (Of course, I'm worried that continued Bay Area appreciation and rising interest rates would cancel out our prospective savings!)   Thanks for reading!

Here is some basic info:

Down Payment Saved: 130,000

Monthly Gross Income:  15,000
Non-Housing Monthly Spending: 2,000
Current Monthly Rent: 3,200
Projected PITI payment (estimate): 4,000

Marginal Federal Tax Bracket: 25%

« Last Edit: June 26, 2015, 08:20:16 AM by coast2coast »

Jeremy E.

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thd7t

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Re: Monthly House Payment Higher than Rent?
« Reply #2 on: June 26, 2015, 11:19:29 AM »
You should try to factor in an annual cost of 1% of your home price for maintenance.  You should also consider whether utility costs will be similar or higher in your new home.  However, your should also consider the average rate at which your rent would increase over the time that you own the home.  Home ownership is (often) closer to being a fixed cost than rent.  For that reason, if you plan on staying in the house for a longer time, a higher payment may not be as bad as it looks.  A fixed rate mortgage can be an inflation hedge.

Basically, if your horizon for FI is short or you don't plan on staying in the house for long, buying will not help you along.

CanuckExpat

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Re: Monthly House Payment Higher than Rent?
« Reply #3 on: June 26, 2015, 03:52:00 PM »
http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

You should also mention whether that monthly house payment high than rent is with a 30 year fixed, 15 year fixed, or something else.
You can fudge that monthly number up and down by changing your amortization.

Based on your numbers, I think you are looking at a 15 amoritization, is that right?

coast2coast

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Re: Monthly House Payment Higher than Rent?
« Reply #4 on: June 26, 2015, 11:57:29 PM »
Thanks for the helpful responses.  When I run the rent vs buy calculator (at NYT and elsewhere) it always come up to buy.  I've also run calculators weighing buying now vs waiting a year or more (assuming reasonable appreciation), and they always favor buying sooner. 

@CanuckExpat - the 3500-4000 range is based on a 30 year amortization rather than a 15 year, alas. 

@thd7t - great point about starting a home maintenance fund.  Apart from repairs, the biggest additional utility bill out here in CA is the water bill (tenants do not typically pay this).  And thanks for the tip on measuring the decision against time horizon in the house as well.  I think we could end up in a 4000/month house for quite a while, say 10-15+ years.  We could just as easily stay in our current apartment for 5+ years, apart from what I feel is the financial downside of renting in this high rental market. 

CanuckExpat

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Re: Monthly House Payment Higher than Rent?
« Reply #5 on: June 27, 2015, 12:13:26 AM »
@CanuckExpat - the 3500-4000 range is based on a 30 year amortization rather than a 15 year, alas. 

Oh my.. good luck.

Without sounding condescending, you might want to see if you can find cheaper housing options that work for you, either buying or renting. That is at least as good a question as buy vs. rent.


coast2coast

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Re: Monthly House Payment Higher than Rent?
« Reply #6 on: June 27, 2015, 12:21:49 AM »
Not condescending at all, and that is definitely a goal.  I'm just not sure how much lower we can get without starting to sacrifice time on the commute (or subjective sense of safety), or alternatively adding expenses such as car ownership, fuel, etc.  In the shorter term, renting out a room is definitely an option to mitigate monthly payments.  Thanks for the thoughts.