house affordability math

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seaparrett
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Joined: Sat Dec 19, 2020 12:24 pm

house affordability math

Post by seaparrett »

Hi all,
I'm curious to see what people think of the housing affordability calculators being used across the web. I'm more curious to specifically see what percentage of gross income is recommended toward principle, interest, insurance and property taxes. Not that I'm basing any of my future decisions on anyone's calculations, I'm just curious to see what people accept as a "normal" level of housing cost.

Thanks.
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simplesimon
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Re: house affordability math

Post by simplesimon »

Everyone's cost structures are different depending on where they live and what they spend the rest of their money on. It's more useful to look at your total expenses and see where PITI would fit in the budget rather than have a calculator tell you you should be spending 36% of your income on housing.

I think a better starting point is how much you're currently spending on rent and from there do a more nuanced analysis like how much a house you want costs, how much it costs to rent such a house, and deciding if the trade-offs are worth it.
snowox
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Re: house affordability math

Post by snowox »

To many variables really but I wouldnt want it to be more than 25% of my income for sure and probably less than that.
Lee_WSP
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Re: house affordability math

Post by Lee_WSP »

I think it's a backwards way to think about it. I think you should first figure out your housing expenses budget and then do a rent vs buy comparison.

The typical budget is 50/30/20 needs/wants/savings
katrid11
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Re: house affordability math

Post by katrid11 »

I don't use the home affordability calculators. They base it off gross income. They don't really take health insurance, retirement funding, transit costs, etc into account. There are so many variables to consider on a house affordability decision.

For me, I look at net income and see what I have for other expenses first and deduct those to get to a house payment, taxes, insurance, and maintenance savings. Other factors to consider is the commute. Location is always key but a larger home with a 1.5 hr commute only increases your expenses even if the house price is lower. Heating, cooling, maintenance, lack of time all stretch that budget.

25% net income for house payment, taxes & insurance is a good rule of thumb for affordability. Gives you a good deal of flexibility for things like commuting costs, daycares, vacations, etc.

In my experience, the people I know that followed the home affordability calculators were house poor for several years. For many it worked out. For some it did not.

1 caveat -I am from NY originally. I could easily see going to 40% net income to get into a home in a good school district in NYC vicinity due to house prices. Having been in a spot where my rental was 40% of net income - it is NOT fun to manage every penny. Far easier at 25%.
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geerhardusvos
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Re: house affordability math

Post by geerhardusvos »

seaparrett wrote: Tue Dec 22, 2020 2:48 am Hi all,
I'm curious to see what people think of the housing affordability calculators being used across the web. I'm more curious to specifically see what percentage of gross income is recommended toward principle, interest, insurance and property taxes. Not that I'm basing any of my future decisions on anyone's calculations, I'm just curious to see what people accept as a "normal" level of housing cost.

Thanks.
There is no normal. You will get varying answers. If anything, the normal thing to do is to overbuy on a house. I don’t use other peoples calculators. I look at my situation and my goals and make a decision.

The goal is to try to spend the least amount of your money on real estate. It totally depends on your income, the stability of that income, where are you plan to be long-term, if your kids go to public schools... there are just so many variables. People should spend less on housing than they do typically if their goal is to build wealth and to be financially secure. Obviously some peoples business is real estate, but for most people we are just consuming it.

When considering house buying and how much to spend: Check this out for starters
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stan1
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Re: house affordability math

Post by stan1 »

People with high income and relatively low living expenses can take out a higher percentage of income in a mortgage, if they want to. The calculators don't take that into account. If you are high income there's a lot of cookie-cutter information on the internet that may or may not be useful in your specific situation.
Silverado
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Re: house affordability math

Post by Silverado »

I’d say take whatever the calculator outputs and use 50% of that figure as a starting point, and try to go down from there. That is based off quick use of the one on nerdwallet. It said we could go 2 times what I’d be comfortable with and 2.25 times what we bought this year.
dsmil
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Re: house affordability math

Post by dsmil »

I'm not a big fan of these house affordability calculations but I'd normally try to stay below 25% of gross income. I do think that using a ratio like this is at least more useful than the ones that look at income vs. mortgage amount because low or high interest rates completely change home affordability. Please also note that the higher income level you have, the more above that 25% you should be able to go, and vice versa at lower income levels. For instance, if you are pulling in $400k annually and spend $100k on housing, that still leaves $300k (minus taxes). If instead you are pulling in $80k and spending $20k on housing, that only leaves you with $60k (minus taxes).
Ron Ronnerson
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Re: house affordability math

Post by Ron Ronnerson »

If you’re taking out a loan, each $100k you borrow will require about a $400/month payment on a 30 year loan at current rates. 40 years ago, it was 4 times higher. This is another example of a variable that greatly matters.
Kaizen Soze
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Re: house affordability math

Post by Kaizen Soze »

Echoing others, too many variables for a one-size-fits-all approach. I'll generally say I think the housing affordability calculators aren't really "affordability" calculators, they are "how much will a bank be willing to loan me" calculators. And those are not the same.

I just did the affordability calculator on Bankrate.com and it came back with 28% of gross with a purchase price 75% more than what we recently bought our home for. Our PITI is 17% of gross, but 32% of our paychecks (gross includes bonus). To us it feels a bit house poor at the moment, but we hope to grow into it.
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BolderBoy
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Re: house affordability math

Post by BolderBoy »

Someone said to me once that so long as you don't spend more than one paycheck per month on your housing cost that you'll probably do okay. This presuming you get two paychecks/month.

I've not found fault with that rule-of-thumb.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
vinhodoporto
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Re: house affordability math

Post by vinhodoporto »

As others have said the calculators don’t take in to account enough details about your specific situation to be useful. 40% of gross may work for one person while 15% may be a stretch for someone else.

For example, at one point we spent 32% of gross on PITI. It worked for us because of the following - YMMV:
1. Solid job stability and lots of upward career momentum / opportunities
2. Minimal expenses beyond housing
- Frugal at home spouse who took care of house/yard maintenance, shopping, and of course we had no child care expenses
- Only other debt was a student loan payment that was less than 2% of our income
- Newer house in good condition and very energy efficient (low utilities)
- Strong benefits package at work - low cost to me and minimal risk of unexpected medical expense
3. Emergency fund with 6+ mo expenses in cash, plus additional assets in a taxable account
4. 10% employer contribution to 401k (not included in my gross calculation) plus a DB plan so we were still building retirement assets
hi_there
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Re: house affordability math

Post by hi_there »

Even if affordability calculator is accurate, it should obviously be treated as the high point, not a recommendation. I'm sure you can afford a lot of things, but that doesn't mean you must go and buy everything...
JHU ALmuni
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Re: house affordability math

Post by JHU ALmuni »

For me personally affordability depends on the big picture. For example someone with $500K net worth and minimal debit can afford to spend on a house more than someone with $200K salary and $100K in student loans/debt.

If you are where you supposed to be in regards of saving/retirement then you can afford to spend more on house. But if you have some catch up to do, then better be more conservative.
Bernard
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Re: house affordability math

Post by Bernard »

Bill Ramsey states that the cost of housing should not be more than 25% of one's income, and that on a 15-year mortgage. If I followed that advice, the wife and I would be living in a van.

We paid $2,200 rent when we bought our home. After recently refinancing to 2.75% we now pay $2,500 for Principle, Interest, and about $700 per month escrow for taxes and insurance. Since buying our home in summer of 2017, it has increased about $120K in value.

If we could rent our home for $1,500, I'd say it really depends. But if renting and owning costs the same, it's a no brainer in my book.
balbrec2
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Re: house affordability math

Post by balbrec2 »

you can afford a house priced roughly 2.5 times your annual salary
old rule of thumb
vinhodoporto
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Re: house affordability math

Post by vinhodoporto »

balbrec2 wrote: Wed Dec 23, 2020 9:07 am you can afford a house priced roughly 2.5 times your annual salary
old rule of thumb
One problem with this rule of thumb is it is from a time when interest rates were like 9% but rates today are below 3%.

For the same monthly payment that supports a mortgage of 2x annual income at 9% you could support a mortgage of roughly 4x today.
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geerhardusvos
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Re: house affordability math

Post by geerhardusvos »

Bernard wrote: Tue Dec 22, 2020 10:19 pm But if renting and owning costs the same, it's a no brainer in my book.
The cost of the mortgage and taxes of owning a home should be significantly less than the comparable monthly rent payment to make it viable. There are a lot of other costs associated with homeownership, so if renting is the same as the mortgage, renting is usually a much better financial option even long-term, and even considering appreciation.
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