How much house can I afford?

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sqw12
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How much house can I afford?

Post by sqw12 »

Hi all - I’m 37 years old and married with 1 kid. Curious to get thoughts on how much home I can afford. Please keep in mind that my current residence is very modest for my VHCOL area.

Income per year: 300,000

Net worth: 1.4m

Investments: 1.1m
IRA/401k: 850,000
Taxable: 250,000

Cash: 30k

Current home: 1m with mortgage of 690k @ 2.9%

No other debt or fixed costs.

What’s reasonable? What’s pushing it? I’m thinking about moving.
sailaway
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Re: How much house can I afford?

Post by sailaway »

A good rule of thumb is 3 * income, which you are already exceeding.

How is that working out for you? What is your savings rate? Does your budget feel tight or are you saving what you feel you should plus throwing extra into investments each month because you just don't know what to do with all your money? Is upgrading your housing a high priority for your family, or have you just been watching th Jones'? (aka, why should I keep in mind that your current housing is modest for your area? Nothing wrong with modest housing!)
Olemiss540
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Re: How much house can I afford?

Post by Olemiss540 »

sailaway wrote: Thu Dec 09, 2021 1:18 am A good rule of thumb is 3 * income, which you are already exceeding.

How is that working out for you? What is your savings rate? Does your budget feel tight or are you saving what you feel you should plus throwing extra into investments each month because you just don't know what to do with all your money? Is upgrading your housing a high priority for your family, or have you just been watching th Jones'? (aka, why should I keep in mind that your current housing is modest for your area? Nothing wrong with modest housing!)
The rule of thumb is 3x income for the MORTGAGE which the OP is not exceeding.

OP,

I would say you are doing fairly well keeping a good balance between saving and spending given your NW and current housing costs. Could probably bump the house by 150k in cash and 200k in additional loan ($350k total) but it would be wise to try and do that in a couple years trying to stockpile that cash versus liquidate your taxable investments.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.
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Watty
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Re: How much house can I afford?

Post by Watty »

sqw12 wrote: Thu Dec 09, 2021 12:02 am I’m 37 years old
.....
Investments: 1.1m
.....
What’s reasonable? What’s pushing it?
You can afford to buy a lot more expensive house by cashing out some of your investments and writing a big check so that you would have a reasonable mortgage. If you do not want the house enough to write a big check then you should reconsider it.

I am not sure where the official line is but you are coming up on middle age so it is a good time to start being a bit more conservative.

One thing that would be pushing it would be to get a new 30 year mortgage which would not be paid off until you are 67 years old. Even if you want to work that long you might not be able to

I would do my calculations based on being able to pay the house off by the time you plan on retiring.

It is sort of arbitrary but the old rule of thumb of having a mortgage that is 3x your income would be as good as any and you could handle the mortgage payment on a $900K 15 year mortgage which would be about $6K a month and that would be paid off when you are 52.

With your current home equity that would allow you to get a $1.2 million dollar house. If you want one that is more expensive then I would highly suggest that you use your investments to make up the difference.

You might very will still decide to get a 30 year mortgage for flexibility but you should have a firm plan for being able to pay it off early.
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vanbogle59
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Re: How much house can I afford?

Post by vanbogle59 »

sqw12 wrote: Thu Dec 09, 2021 12:02 am What’s reasonable? What’s pushing it? I’m thinking about moving.
What kind of house? Ongoing costs hit cash flow just as much as mortgage.
My son is going through this calculation. The numbers change significantly if you choose new vs old (or really old), HOA (or CDD), taxes vary by county, pool, yard, solar, Insurance (flood, hurricane)....
Zagnificent
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Re: How much house can I afford?

Post by Zagnificent »

sqw12 wrote: Thu Dec 09, 2021 12:02 am Hi all - I’m 37 years old and married with 1 kid. Curious to get thoughts on how much home I can afford. Please keep in mind that my current residence is very modest for my VHCOL area.

Income per year: 300,000

Net worth: 1.4m

Investments: 1.1m
IRA/401k: 850,000
Taxable: 250,000

Cash: 30k

Current home: 1m with mortgage of 690k @ 2.9%

No other debt or fixed costs.

What’s reasonable? What’s pushing it? I’m thinking about moving.
No word on whether that income is yours alone or combined with spouse. If it's combined, I might have concern about basing a home-buying decision off of that top-line number. I think you'll find that most folks here would say your current situation is "unreasonable," but as you've noted, you're in a VHCOL area and a 1m home is not anything to be impressed by. If you have a relatively secure job and plan to work until retirement age, I think I'd be comfortable taking out another 30yr and planning to pay it as a 20yr, ensuring that all housing costs don't eclipse 35% of YOUR income. I wouldn't be surprised if that means you're buying a 1.3m house, or it requires you raise your down payment with some of that taxable account.

My wife and I are looking at building a house in a moderate cost of living area for around 1.2m and my financials are largely similar to yours, but we plan to put down about 50% just to get that monthly cost to the 25% mark on my salary alone.
KlangFool
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Re: How much house can I afford?

Post by KlangFool »

OP,

1) What is your current annual expense?

2) What is your current annual savings/investment?

3) What is your current annual mortgage payment (PITI)?

4) Do you plan to pay for your kid's college education?

5) What is the size of your current 1m house?

KlangFool
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Jags4186
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Re: How much house can I afford?

Post by Jags4186 »

Olemiss540 wrote: Thu Dec 09, 2021 5:42 am

The rule of thumb is 3x income for the MORTGAGE which the OP is not exceeding.
That rule of thumb makes no sense to me since I've heard that rule of thumb when 30yr mortgage interest rates were 7% and when they were 2.5%. Except that the payment on a 7% mortgage is 70% higher than a payment on a 2.5% mortgage. It also makes no sense to me because depending where you live the same value home could have property taxes are $3,000/yr or $20,000/yr.

OP, the rule of thumb you should go buy is:

Gross income - savings - taxes - discretionary spending = amount left for housing.

So, a pretend example for you could be:

$300,000 income - $75,000 taxes - $75,000 savings - $75,000 discretionary spending = $75,000 housing expense.

$75,000 housing expense needs to cover: mortgage, property taxes, insurance, maintenance, utilities, and improvements. Let's say maintenance and improvements are $10,000/yr, property taxes are $15,000/yr, insurance is $1,500/yr, $5,000 in utilities, that means you can afford $43,500/yr or $3,625/mo in mortgage payment. At a 3% 30-year mortgage that's approximately $860,000 in mortgage + whatever downpayment you want to put down. Of course, if interest rates go to 7% again that's only about a $550,000 mortgage + downpayment. If propriety taxes are only $5000/yr you can increase your mortgage amount. If property taxes are $30,000/yr you'll need to come down in price or come up with more down payment.
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vanbogle59
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Re: How much house can I afford?

Post by vanbogle59 »

Jags4186 wrote: Thu Dec 09, 2021 8:47 am
Olemiss540 wrote: Thu Dec 09, 2021 5:42 am

The rule of thumb is 3x income for the MORTGAGE which the OP is not exceeding.
That rule of thumb makes no sense to me since I've heard that rule of thumb when 30yr mortgage interest rates were 7% and when they were 2.5%. Except that the payment on a 7% mortgage is 70% higher than a payment on a 2.5% mortgage. It also makes no sense to me because depending where you live the same value home could have property taxes are $3,000/yr or $20,000/yr.

OP, the rule of thumb you should go buy is:

Gross income - savings - taxes - discretionary spending = amount left for housing.

So, a pretend example for you could be:

$300,000 income - $75,000 taxes - $75,000 savings - $75,000 discretionary spending = $75,000 housing expense.

$75,000 housing expense needs to cover: mortgage, property taxes, insurance, maintenance, utilities, and improvements. Let's say maintenance and improvements are $10,000/yr, property taxes are $15,000/yr, insurance is $1,500/yr, $5,000 in utilities, that means you can afford $43,500/yr or $3,625/mo in mortgage payment. At a 3% 30-year mortgage that's approximately $860,000 in mortgage + whatever downpayment you want to put down. Of course, if interest rates go to 7% again that's only about a $550,000 mortgage + downpayment. If propriety taxes are only $5000/yr you can increase your mortgage amount. If property taxes are $30,000/yr you'll need to come down in price or come up with more down payment.
+1
masteraleph
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Re: How much house can I afford?

Post by masteraleph »

Jags4186 wrote: Thu Dec 09, 2021 8:47 am
That rule of thumb makes no sense to me since I've heard that rule of thumb when 30yr mortgage interest rates were 7% and when they were 2.5%. Except that the payment on a 7% mortgage is 70% higher than a payment on a 2.5% mortgage. It also makes no sense to me because depending where you live the same value home could have property taxes are $3,000/yr or $20,000/yr.

OP, the rule of thumb you should go buy is:

Gross income - savings - taxes - discretionary spending = amount left for housing.

So, a pretend example for you could be:

$300,000 income - $75,000 taxes - $75,000 savings - $75,000 discretionary spending = $75,000 housing expense.

$75,000 housing expense needs to cover: mortgage, property taxes, insurance, maintenance, utilities, and improvements. Let's say maintenance and improvements are $10,000/yr, property taxes are $15,000/yr, insurance is $1,500/yr, $5,000 in utilities, that means you can afford $43,500/yr or $3,625/mo in mortgage payment. At a 3% 30-year mortgage that's approximately $860,000 in mortgage + whatever downpayment you want to put down. Of course, if interest rates go to 7% again that's only about a $550,000 mortgage + downpayment. If propriety taxes are only $5000/yr you can increase your mortgage amount. If property taxes are $30,000/yr you'll need to come down in price or come up with more down payment.
THANK YOU

This is a massive pet peeve of mine- the tendency to treat mortgages and mortgage payments as though they've been totally static for decades. The NAR's Housing Affordability Index (granted, a biased source) shows median housing payments today relative to median family income to be lower than they were in 2018, because a typical 2018 30-year mortgage was 4.72%. Initial downpayments are higher, but monthly costs haven't really risen.
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lthenderson
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Re: How much house can I afford?

Post by lthenderson »

The only way to know if you can afford a house is to sit down, figure out your budget and see if the mortgage payments fit in there comfortably and your remaining assets you didn't use for a down payment still meet your retirement goals.
KlangFool
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Re: How much house can I afford?

Post by KlangFool »

Folks,

If someone is living paycheck to paycheck now, how could the person spend more money and upgrade his/her house? So, whether someone can upgrade his/her house has nothing to do with gross income and so on. It has to do with whether the person has the additional current savings in his/her current budget to accommodate the additional expenses.

KlangFool
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Jags4186
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Re: How much house can I afford?

Post by Jags4186 »

KlangFool wrote: Thu Dec 09, 2021 9:36 am Folks,

If someone is living paycheck to paycheck now, how could the person spend more money and upgrade his/her house? So, whether someone can upgrade his/her house has nothing to do with gross income and so on. It has to do with whether the person has the additional current savings in his/her current budget to accommodate the additional expenses.

KlangFool
The OP has managed to accumulate $1.4mm in assets by age 37. Unless he inherited all that money it seems he isn't living paycheck to paycheck?
sureshoe
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Re: How much house can I afford?

Post by sureshoe »

KlangFool wrote: Thu Dec 09, 2021 8:37 am OP,

1) What is your current annual expense?

2) What is your current annual savings/investment?

3) What is your current annual mortgage payment (PITI)?

4) Do you plan to pay for your kid's college education?

5) What is the size of your current 1m house?

KlangFool
KlangFool is asking all the questions I would ask. "Can you" vs. "Should you" are two very different questions.

The OP can AFFORD a $2M house. Cash out 250k taxable. Cash out 850k from retirement, let's say that's 650k. Add in $300k from sale of current house, and he can do a down payment in the range of $1.3M with a $700k mortgage. So he could make these payments comfortably, because he already is making a $700k-ish mortgage payment.

The real question is what it does to his current month cashflow and savings rate.
KlangFool
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Re: How much house can I afford?

Post by KlangFool »

Jags4186 wrote: Thu Dec 09, 2021 9:54 am
KlangFool wrote: Thu Dec 09, 2021 9:36 am Folks,

If someone is living paycheck to paycheck now, how could the person spend more money and upgrade his/her house? So, whether someone can upgrade his/her house has nothing to do with gross income and so on. It has to do with whether the person has the additional current savings in his/her current budget to accommodate the additional expenses.

KlangFool
The OP has managed to accumulate $1.4mm in assets by age 37. Unless he inherited all that money it seems he isn't living paycheck to paycheck?
Jags4186,

850K is in 401K/IRA. The maximum that you can save in 401K/IRA each year is usually 39K + 12K = 51K per year.

The portfolio is 1.1 million. The other 300K is in home equity.

KlangFool
Last edited by KlangFool on Thu Dec 09, 2021 10:46 am, edited 1 time in total.
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student
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Re: How much house can I afford?

Post by student »

Olemiss540 wrote: Thu Dec 09, 2021 5:42 am
sailaway wrote: Thu Dec 09, 2021 1:18 am A good rule of thumb is 3 * income, which you are already exceeding.

How is that working out for you? What is your savings rate? Does your budget feel tight or are you saving what you feel you should plus throwing extra into investments each month because you just don't know what to do with all your money? Is upgrading your housing a high priority for your family, or have you just been watching th Jones'? (aka, why should I keep in mind that your current housing is modest for your area? Nothing wrong with modest housing!)
The rule of thumb is 3x income for the MORTGAGE which the OP is not exceeding.

OP,

I would say you are doing fairly well keeping a good balance between saving and spending given your NW and current housing costs. Could probably bump the house by 150k in cash and 200k in additional loan ($350k total) but it would be wise to try and do that in a couple years trying to stockpile that cash versus liquidate your taxable investments.
I guess different people using different rules of thumb. The one that I am aware of is up to 2.5x income for mortgage such as https://www.investopedia.com/articles/pf/05/030905.asp. Some use up to 3x income for the price of the house such as https://www.cnbc.com/2020/09/10/always- ... xpert.html

Back to OP question. I guess it is depends on OP trajectory of income in the future.
UnLearnYourself
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Re: How much house can I afford?

Post by UnLearnYourself »

student wrote: Thu Dec 09, 2021 10:36 am
I guess different people using different rules of thumb. The one that I am aware of is up to 2.5x income for mortgage such as https://www.investopedia.com/articles/pf/05/030905.asp. Some use up to 3x income for the price of the house such as https://www.cnbc.com/2020/09/10/always- ... xpert.html

Back to OP question. I guess it is depends on OP trajectory of income in the future.
It's scary how many people in this market are buying WELL above those income multipliers. For many first time homebuyers, even many people looking to upgrade from a starter home to a more family friendly home people are forced to consider homes priced 4x 5x or more.

I don't know where this market lands, but I can't for the life of me see how a 30-50% or more rise in home prices within the past year makes sense, is sustainable, or is financially safe for many people pushing to get into them. Perhaps its the new norm and this has been some form of broad market correction given remote work potential and other factors. But it looks awfully bubbly to me.
Topic Author
sqw12
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Re: How much house can I afford?

Post by sqw12 »

vanbogle59 wrote: Thu Dec 09, 2021 8:23 am
sqw12 wrote: Thu Dec 09, 2021 12:02 am What’s reasonable? What’s pushing it? I’m thinking about moving.
What kind of house? Ongoing costs hit cash flow just as much as mortgage.
My son is going through this calculation. The numbers change significantly if you choose new vs old (or really old), HOA (or CDD), taxes vary by county, pool, yard, solar, Insurance (flood, hurricane)....
The homes I'm considering are relatively small (~1500 sqft), so I'm hoping ongoing expenses will be manageable. Most of the homes are fairly old, however, so I'll need to ensure that roof, foundation, etc. are in good shape.
Topic Author
sqw12
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Re: How much house can I afford?

Post by sqw12 »

KlangFool wrote: Thu Dec 09, 2021 8:37 am OP,

1) What is your current annual expense?

2) What is your current annual savings/investment?

3) What is your current annual mortgage payment (PITI)?

4) Do you plan to pay for your kid's college education?

5) What is the size of your current 1m house?

KlangFool
Hi KlangFool,

1) Around 100,000 per year (includes mortgage and all expenses)
2) Last year I saved $115,000 (includes principal on mortgage, retirement contributions, taxable contributions) - I didn't quite make 300,000 last year, but I will make that much this year, plus a bit more given RSUs vesting
3) Current mortgage is $3,600 a month
4) Yes
5) 1300 sqft
Topic Author
sqw12
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Re: How much house can I afford?

Post by sqw12 »

Jags4186 wrote: Thu Dec 09, 2021 9:54 am
KlangFool wrote: Thu Dec 09, 2021 9:36 am Folks,

If someone is living paycheck to paycheck now, how could the person spend more money and upgrade his/her house? So, whether someone can upgrade his/her house has nothing to do with gross income and so on. It has to do with whether the person has the additional current savings in his/her current budget to accommodate the additional expenses.

KlangFool
The OP has managed to accumulate $1.4mm in assets by age 37. Unless he inherited all that money it seems he isn't living paycheck to paycheck?
Hi - I did not inherit the money. And to answer someone else's question, my wife does not work currently, but she hopes to return to the workforce eventually.
Topic Author
sqw12
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Re: How much house can I afford?

Post by sqw12 »

Thanks for the feedback everyone! There's a lot of info for me to digest. It seems like I need to tread cautiously on this potential purchase / upgrade, but at least I wasn't totally laughed out of the room! For reference, the homes I'm looking at are in the ~1.2M range.
Olemiss540
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Re: How much house can I afford?

Post by Olemiss540 »

student wrote: Thu Dec 09, 2021 10:36 am
Olemiss540 wrote: Thu Dec 09, 2021 5:42 am
sailaway wrote: Thu Dec 09, 2021 1:18 am A good rule of thumb is 3 * income, which you are already exceeding.

How is that working out for you? What is your savings rate? Does your budget feel tight or are you saving what you feel you should plus throwing extra into investments each month because you just don't know what to do with all your money? Is upgrading your housing a high priority for your family, or have you just been watching th Jones'? (aka, why should I keep in mind that your current housing is modest for your area? Nothing wrong with modest housing!)
The rule of thumb is 3x income for the MORTGAGE which the OP is not exceeding.

OP,

I would say you are doing fairly well keeping a good balance between saving and spending given your NW and current housing costs. Could probably bump the house by 150k in cash and 200k in additional loan ($350k total) but it would be wise to try and do that in a couple years trying to stockpile that cash versus liquidate your taxable investments.
I guess different people using different rules of thumb. The one that I am aware of is up to 2.5x income for mortgage such as https://www.investopedia.com/articles/pf/05/030905.asp. Some use up to 3x income for the price of the house such as https://www.cnbc.com/2020/09/10/always- ... xpert.html

Back to OP question. I guess it is depends on OP trajectory of income in the future.
So if the OP had a paid off house that's worth 5x income they can't afford it?

What if the OP bought the house 5 years ago and it's now worth double, they cant afford it any longer?
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.
sailaway
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Re: How much house can I afford?

Post by sailaway »

Olemiss540 wrote: Thu Dec 09, 2021 11:24 am
student wrote: Thu Dec 09, 2021 10:36 am
Olemiss540 wrote: Thu Dec 09, 2021 5:42 am
sailaway wrote: Thu Dec 09, 2021 1:18 am A good rule of thumb is 3 * income, which you are already exceeding.

How is that working out for you? What is your savings rate? Does your budget feel tight or are you saving what you feel you should plus throwing extra into investments each month because you just don't know what to do with all your money? Is upgrading your housing a high priority for your family, or have you just been watching th Jones'? (aka, why should I keep in mind that your current housing is modest for your area? Nothing wrong with modest housing!)
The rule of thumb is 3x income for the MORTGAGE which the OP is not exceeding.

OP,

I would say you are doing fairly well keeping a good balance between saving and spending given your NW and current housing costs. Could probably bump the house by 150k in cash and 200k in additional loan ($350k total) but it would be wise to try and do that in a couple years trying to stockpile that cash versus liquidate your taxable investments.
I guess different people using different rules of thumb. The one that I am aware of is up to 2.5x income for mortgage such as https://www.investopedia.com/articles/pf/05/030905.asp. Some use up to 3x income for the price of the house such as https://www.cnbc.com/2020/09/10/always- ... xpert.html

Back to OP question. I guess it is depends on OP trajectory of income in the future.
So if the OP had a paid off house that's worth 5x income they can't afford it?

What if the OP bought the house 5 years ago and it's now worth double, they cant afford it any longer?
We are literally talking about upgrading, so you what ifs are irrelevant.
Jags4186
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Re: How much house can I afford?

Post by Jags4186 »

KlangFool wrote: Thu Dec 09, 2021 10:11 am
Jags4186 wrote: Thu Dec 09, 2021 9:54 am
KlangFool wrote: Thu Dec 09, 2021 9:36 am Folks,

If someone is living paycheck to paycheck now, how could the person spend more money and upgrade his/her house? So, whether someone can upgrade his/her house has nothing to do with gross income and so on. It has to do with whether the person has the additional current savings in his/her current budget to accommodate the additional expenses.

KlangFool
The OP has managed to accumulate $1.4mm in assets by age 37. Unless he inherited all that money it seems he isn't living paycheck to paycheck?
Jags4186,

850K is in 401K/IRA. The maximum that you can save in 401K/IRA each year is usually 39K + 12K = 51K per year.

The portfolio is 1.1 million. The other 300K is in home equity.

KlangFool
Yes, so it seems that the OP is not living paycheck to paycheck, which is why I was confused with your comment. Unless you were speaking in generalities, which I agree with, but that doesn't seem to be germane to this particular post.
mervinj7
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Re: How much house can I afford?

Post by mervinj7 »

sqw12 wrote: Thu Dec 09, 2021 11:17 am Thanks for the feedback everyone! There's a lot of info for me to digest. It seems like I need to tread cautiously on this potential purchase / upgrade, but at least I wasn't totally laughed out of the room! For reference, the homes I'm looking at are in the ~1.2M range.
OP, for what it's worth I think that's a perfectly reasonable range for a house considering your current income and high net worth (for your age). If you put $300k of your existing home equity for the downpayment, that leaves a $900k mortgage.
At 2.875% 30 year fixed, that's a monthly payment of $3,734. Let's $300/month for insurance and $15,000/year in property taxes. Your PITI then comes to $5284/month or 21% of your gross income.
ClassII
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Re: How much house can I afford?

Post by ClassII »

I recently bought a house basing my final mortgage payment being ~30% of my monthly gross pay. Ended up being a bit lower than that (thankfully, as we've had to devote a chunk of the budget to repairs and improvements this year) but I think it's a good way to work. At the time it felt like a big stretch as it's a lot more than our old house but I can't argue with the results. Considering how the house appreciated in this last year (and yes, it doesn't mean anything unless I sell it) it was one of the better financial decisions I've made to stretch a bit and get a forever house and lock in the mortgage payments for 30 years.
KlangFool
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Re: How much house can I afford?

Post by KlangFool »

sqw12 wrote: Thu Dec 09, 2021 11:12 am
KlangFool wrote: Thu Dec 09, 2021 8:37 am OP,

1) What is your current annual expense?

2) What is your current annual savings/investment?

3) What is your current annual mortgage payment (PITI)?

4) Do you plan to pay for your kid's college education?

5) What is the size of your current 1m house?

KlangFool
Hi KlangFool,

1) Around 100,000 per year (includes mortgage and all expenses)
2) Last year I saved $115,000 (includes principal on mortgage, retirement contributions, taxable contributions) - I didn't quite make 300,000 last year, but I will make that much this year, plus a bit more given RSUs vesting
3) Current mortgage is $3,600 a month
4) Yes
5) 1300 sqft
sqw12,

1) Including principal on mortgage, what is your annual expense?

2) Excluding principal on mortgage, what is your annual savings?

3) Does that including the principal?

KlangFool
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Re: How much house can I afford?

Post by KyleAAA »

You can probably afford a $1.5-1.8mm house assuming you roll all your equity over from your current home. I'm assume you can afford a mortgage 4x your income, then adding your down payment. You can probably stretch to 5x your income at these rates if you really need to, but you will be house poor. I'd look in the $1.4-1.5mm range in your shoes.
Topic Author
sqw12
Posts: 30
Joined: Tue Jan 12, 2021 10:19 am

Re: How much house can I afford?

Post by sqw12 »

KlangFool wrote: Thu Dec 09, 2021 11:58 am
sqw12 wrote: Thu Dec 09, 2021 11:12 am
KlangFool wrote: Thu Dec 09, 2021 8:37 am OP,

1) What is your current annual expense?

2) What is your current annual savings/investment?

3) What is your current annual mortgage payment (PITI)?

4) Do you plan to pay for your kid's college education?

5) What is the size of your current 1m house?

KlangFool
Hi KlangFool,

1) Around 100,000 per year (includes mortgage and all expenses)
2) Last year I saved $115,000 (includes principal on mortgage, retirement contributions, taxable contributions) - I didn't quite make 300,000 last year, but I will make that much this year, plus a bit more given RSUs vesting
3) Current mortgage is $3,600 a month
4) Yes
5) 1300 sqft
sqw12,

1) Including principal on mortgage, what is your annual expense?

2) Excluding principal on mortgage, what is your annual savings?

3) Does that including the principal?

KlangFool
Hi KlangFool,

1) The expense included principal on mortgage. Perhaps this is confusing, as I also considered the principal portion in my savings number.

2) I think my principal portion is only ~1200 per month, so I guess my savings would be closer to $100K per year, if I were to exclude the principal pay down.

3) The expense & savings amounts I quoted before included principal.
student
Posts: 10761
Joined: Fri Apr 03, 2015 6:58 am

Re: How much house can I afford?

Post by student »

Olemiss540 wrote: Thu Dec 09, 2021 11:24 am
student wrote: Thu Dec 09, 2021 10:36 am
Olemiss540 wrote: Thu Dec 09, 2021 5:42 am
sailaway wrote: Thu Dec 09, 2021 1:18 am A good rule of thumb is 3 * income, which you are already exceeding.

How is that working out for you? What is your savings rate? Does your budget feel tight or are you saving what you feel you should plus throwing extra into investments each month because you just don't know what to do with all your money? Is upgrading your housing a high priority for your family, or have you just been watching th Jones'? (aka, why should I keep in mind that your current housing is modest for your area? Nothing wrong with modest housing!)
The rule of thumb is 3x income for the MORTGAGE which the OP is not exceeding.

OP,

I would say you are doing fairly well keeping a good balance between saving and spending given your NW and current housing costs. Could probably bump the house by 150k in cash and 200k in additional loan ($350k total) but it would be wise to try and do that in a couple years trying to stockpile that cash versus liquidate your taxable investments.
I guess different people using different rules of thumb. The one that I am aware of is up to 2.5x income for mortgage such as https://www.investopedia.com/articles/pf/05/030905.asp. Some use up to 3x income for the price of the house such as https://www.cnbc.com/2020/09/10/always- ... xpert.html

Back to OP question. I guess it is depends on OP trajectory of income in the future.
So if the OP had a paid off house that's worth 5x income they can't afford it?

What if the OP bought the house 5 years ago and it's now worth double, they cant afford it any longer?
What if, what if.... That wasn't presented. My comment is based on available info. Rule of thumb is just rule of thumb. It does not apply to all situations. You replied to sailaway's 3x salary stating that "The rule of thumb is 3x income for the MORTGAGE which the OP is not exceeding." I replied to you that the ones I am familiar with are "2.5x income for mortgage" and "3x income for the price of the house" and I gave references to them.

What exactly is your point? My point is different sources have different rules of thumb, and sailaway is simply quoting a common one, and he/she is not incorrect as your statement implied.
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vanbogle59
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Re: How much house can I afford?

Post by vanbogle59 »

sqw12 wrote: Thu Dec 09, 2021 11:04 am
vanbogle59 wrote: Thu Dec 09, 2021 8:23 am
sqw12 wrote: Thu Dec 09, 2021 12:02 am What’s reasonable? What’s pushing it? I’m thinking about moving.
What kind of house? Ongoing costs hit cash flow just as much as mortgage.
My son is going through this calculation. The numbers change significantly if you choose new vs old (or really old), HOA (or CDD), taxes vary by county, pool, yard, solar, Insurance (flood, hurricane)....
The homes I'm considering are relatively small (~1500 sqft), so I'm hoping ongoing expenses will be manageable. Most of the homes are fairly old, however, so I'll need to ensure that roof, foundation, etc. are in good shape.
A lot of this is personal. My son (with approx $25K saved for down payment) decided he could afford a brand new $500K home or a very old $250K home. Quite the spread. :beer
Olemiss540
Posts: 2140
Joined: Fri Aug 18, 2017 8:46 pm

Re: How much house can I afford?

Post by Olemiss540 »

student wrote: Thu Dec 09, 2021 1:22 pm
Olemiss540 wrote: Thu Dec 09, 2021 11:24 am
student wrote: Thu Dec 09, 2021 10:36 am
Olemiss540 wrote: Thu Dec 09, 2021 5:42 am
sailaway wrote: Thu Dec 09, 2021 1:18 am A good rule of thumb is 3 * income, which you are already exceeding.

How is that working out for you? What is your savings rate? Does your budget feel tight or are you saving what you feel you should plus throwing extra into investments each month because you just don't know what to do with all your money? Is upgrading your housing a high priority for your family, or have you just been watching th Jones'? (aka, why should I keep in mind that your current housing is modest for your area? Nothing wrong with modest housing!)
The rule of thumb is 3x income for the MORTGAGE which the OP is not exceeding.

OP,

I would say you are doing fairly well keeping a good balance between saving and spending given your NW and current housing costs. Could probably bump the house by 150k in cash and 200k in additional loan ($350k total) but it would be wise to try and do that in a couple years trying to stockpile that cash versus liquidate your taxable investments.
I guess different people using different rules of thumb. The one that I am aware of is up to 2.5x income for mortgage such as https://www.investopedia.com/articles/pf/05/030905.asp. Some use up to 3x income for the price of the house such as https://www.cnbc.com/2020/09/10/always- ... xpert.html

Back to OP question. I guess it is depends on OP trajectory of income in the future.
So if the OP had a paid off house that's worth 5x income they can't afford it?

What if the OP bought the house 5 years ago and it's now worth double, they cant afford it any longer?
What if, what if.... That wasn't presented. My comment is based on available info. Rule of thumb is just rule of thumb. It does not apply to all situations. You replied to sailaway's 3x salary stating that "The rule of thumb is 3x income for the MORTGAGE which the OP is not exceeding." I replied to you that the ones I am familiar with are "2.5x income for mortgage" and "3x income for the price of the house" and I gave references to them.

What exactly is your point? My point is different sources have different rules of thumb, and sailaway is simply quoting a common one, and he/she is not incorrect as your statement implied.
My point is that a rule of thumb based on the value of a house is not near as useful to ANYONE as a rule of thumb based on mortgage amount which takes into account the impacts to one's cashflow.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.
student
Posts: 10761
Joined: Fri Apr 03, 2015 6:58 am

Re: How much house can I afford?

Post by student »

Olemiss540 wrote: Thu Dec 09, 2021 3:41 pm
student wrote: Thu Dec 09, 2021 1:22 pm
Olemiss540 wrote: Thu Dec 09, 2021 11:24 am
student wrote: Thu Dec 09, 2021 10:36 am
Olemiss540 wrote: Thu Dec 09, 2021 5:42 am

The rule of thumb is 3x income for the MORTGAGE which the OP is not exceeding.

OP,

I would say you are doing fairly well keeping a good balance between saving and spending given your NW and current housing costs. Could probably bump the house by 150k in cash and 200k in additional loan ($350k total) but it would be wise to try and do that in a couple years trying to stockpile that cash versus liquidate your taxable investments.
I guess different people using different rules of thumb. The one that I am aware of is up to 2.5x income for mortgage such as https://www.investopedia.com/articles/pf/05/030905.asp. Some use up to 3x income for the price of the house such as https://www.cnbc.com/2020/09/10/always- ... xpert.html

Back to OP question. I guess it is depends on OP trajectory of income in the future.
So if the OP had a paid off house that's worth 5x income they can't afford it?

What if the OP bought the house 5 years ago and it's now worth double, they cant afford it any longer?
What if, what if.... That wasn't presented. My comment is based on available info. Rule of thumb is just rule of thumb. It does not apply to all situations. You replied to sailaway's 3x salary stating that "The rule of thumb is 3x income for the MORTGAGE which the OP is not exceeding." I replied to you that the ones I am familiar with are "2.5x income for mortgage" and "3x income for the price of the house" and I gave references to them.

What exactly is your point? My point is different sources have different rules of thumb, and sailaway is simply quoting a common one, and he/she is not incorrect as your statement implied.
My point is that a rule of thumb based on the value of a house is not near as useful to ANYONE as a rule of thumb based on mortgage amount which takes into account the impacts to one's cashflow.
There are always situations that one way is better than the other. In most situations, following conventional wisdom of 20% down payment, "2.5x income for mortgage" and "3x income for the price of the house" are more or less the same.

PS: I would not have responded originally if you have said that a rule of thumb on the mortgage amount is better. I only responded because you implied that the original quote of a rule of thumb is not correct.
Olemiss540
Posts: 2140
Joined: Fri Aug 18, 2017 8:46 pm

Re: How much house can I afford?

Post by Olemiss540 »

student wrote: Thu Dec 09, 2021 4:02 pm
Olemiss540 wrote: Thu Dec 09, 2021 3:41 pm
student wrote: Thu Dec 09, 2021 1:22 pm
Olemiss540 wrote: Thu Dec 09, 2021 11:24 am
student wrote: Thu Dec 09, 2021 10:36 am

I guess different people using different rules of thumb. The one that I am aware of is up to 2.5x income for mortgage such as https://www.investopedia.com/articles/pf/05/030905.asp. Some use up to 3x income for the price of the house such as https://www.cnbc.com/2020/09/10/always- ... xpert.html

Back to OP question. I guess it is depends on OP trajectory of income in the future.
So if the OP had a paid off house that's worth 5x income they can't afford it?

What if the OP bought the house 5 years ago and it's now worth double, they cant afford it any longer?
What if, what if.... That wasn't presented. My comment is based on available info. Rule of thumb is just rule of thumb. It does not apply to all situations. You replied to sailaway's 3x salary stating that "The rule of thumb is 3x income for the MORTGAGE which the OP is not exceeding." I replied to you that the ones I am familiar with are "2.5x income for mortgage" and "3x income for the price of the house" and I gave references to them.

What exactly is your point? My point is different sources have different rules of thumb, and sailaway is simply quoting a common one, and he/she is not incorrect as your statement implied.
My point is that a rule of thumb based on the value of a house is not near as useful to ANYONE as a rule of thumb based on mortgage amount which takes into account the impacts to one's cashflow.
There are always situations that one way is better than the other. In most situations, following conventional wisdom of 20% down payment, "2.5x income for mortgage" and "3x income for the price of the house" are more or less the same.

PS: I would not have responded originally if you have said that a rule of thumb on the mortgage amount is better. I only responded because you implied that the original quote of a rule of thumb is not correct.
Glad that's settled. Thanks for the clarification. Regards,
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.
Iorek
Posts: 1569
Joined: Fri Mar 08, 2013 8:38 am

Re: How much house can I afford?

Post by Iorek »

I think PITI is the best way to answer this and I would say you could easily do $4k PITI even recognizing you haven’t told us the age of your kid or if others might arrive.

What that works out for a house purchase is left as as an exercise to the reader depending on mortgage rates, down payment, and tax rates.
KlangFool
Posts: 31525
Joined: Sat Oct 11, 2008 12:35 pm

Re: How much house can I afford?

Post by KlangFool »

Iorek wrote: Thu Dec 09, 2021 4:20 pm I think PITI is the best way to answer this and I would say you could easily do $4k PITI even recognizing you haven’t told us the age of your kid or if others might arrive.

What that works out for a house purchase is left as as an exercise to the reader depending on mortgage rates, down payment, and tax rates.
Iorek,

OP's current PITI is $3,600 per mortgage with a mortgage of 690K on a 1 million house. OP is asking whether he could increase the PITI by another 50% or 100%.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Iorek
Posts: 1569
Joined: Fri Mar 08, 2013 8:38 am

Re: How much house can I afford?

Post by Iorek »

KlangFool wrote: Thu Dec 09, 2021 4:42 pm
Iorek wrote: Thu Dec 09, 2021 4:20 pm I think PITI is the best way to answer this and I would say you could easily do $4k PITI even recognizing you haven’t told us the age of your kid or if others might arrive.

What that works out for a house purchase is left as as an exercise to the reader depending on mortgage rates, down payment, and tax rates.
Iorek,

OP's current PITI is $3,600 per mortgage with a mortgage of 690K on a 1 million house. OP is asking whether he could increase the PITI by another 50% or 100%.

KlangFool
Thanks, sorry I missed that. Personally I don’t see PITI of $7000 as making sense. $5k is probably doable, depending on college savings, daycare, other priorities, etc., but ymmv (as long as you nisiprius’ sig line in mind)
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