House question...

[ScrimpAndSave]

When people give you that rule of thumb that you can't afford a house more than 2.5x your income...do they mean a mortgage or house value?

For example...if someone makes 60k a year...and has $30k available for a downpayment...does that mean they can afford a house that is $150l or does it mean that they can afford a house that is $180k with $30k down and a $150k mortgage.

Geez. I sure hope that made sense!

[minnie1928]

My interpretation has always been the size of the mortgage, not the price of the house.

[ScrimpAndSave]

Thanks Minnie...and I know it is all relative to the amount of debt a person has and so on. I was just curious. Thanks!

[gamecock43]

Someone brought up a good point in the blogs...the rule of thumb seems kind of ridiculous because if you have children your expendable income will be quite different from someone without children. So rule of thumb meant to be a generalization or not- it doesn't seem like good advice.

[MoneyTrev]

Originally Posted by gamecock43

Someone brought up a good point in the blogs...the rule of thumb seems kind of ridiculous because if you have children your expendable income will be quite different from someone without children. So rule of thumb meant to be a generalization or not- it doesn't seem like good advice.

Good point.

If you just calculate your finances, it'll be alright for people with or without kids.

[ScrimpAndSave]

Well, I am not having kids...so I think it might roughly work for me.

[jIM_Ohio]

I would add in your situation because income is going up, one might bend the rule of thumb to its extremes.

[ScrimpAndSave]

I just know I am eyeballing a 300k figure. Now, in my situation, I can buy my father's home or I can look elsewhere. I know that it's purely a personal decision...and no one can really answer it for me. But I am having such a hard time deciding what to do. If I buy my dad's home, he leaves basically everything behind for me. Sure - it is like walking into 1993, but everything is in great shape and doesn't need to be updated because it has been well kept and is in beautiful, working condition.

I know a lot of new home owners my age and they are appauled at all of the money they have to spend to buy things like tools, lawn mowers, cleaning supplies...all of the things that they didn't think about. Well, in this case, I would have these things in place.

My fiance likes the house a lot...he feels as though he will like anything once he owns it - so he doesn't give me a very strong opinion of what he wants (but who can blame him, he is in his last year of law school and has bigger fish to fry right now).

Another pro of getting the house is that I know what I am walking into. I know the history of when things have been replaced (appliances, windows, siding, roof, etc.) and my dad has owned the house for about 35 years. It was built in 1965. It's in a very nice established neighborhood and is in a favorable school district.

Buying a different home would definitely make it more "ours"...but there are a lot of costs involved with that...and I feel like if we can avoid it...it would be a lot better that way. I guess I also feel like I would be giving up a great opportunity if I didn't buy my dad's house. It's appreciation isn't incredibly impressive...he bought it in 1973 for $41,000 and now it appraises for around $320,000 (we would have a professional appraiser at the time of purchase obviously)...but we know the area is established and favorable.

That's all...sorry for rambling...and thanks for listening.

[disneysteve]

Rules of thumb are always generalizations, but I still think they are worth paying attention to as a baseline, if nothing else. I believe the other rule is that your housing costs shouldn't exceed 28% of income. If you put those two rules together, you come up with a ballpark figure of what you can afford to spend on a house.

In recent years, lenders started giving loans with payments that consumed a much bigger percentage of borrowers' incomes and allowing them to buy homes that far exceeded 3 times their incomes. We all know where that has gotten us.

I do think Jim makes a good point about rising income, though. If you are reasonably certain that your income will rise within a few years of buying, stretching the limit a bit isn't a bad idea. In fact, I think I suggested that in one of your other threads where you were asking about buying the "keeper" house or the "starter" house. I'd stretch and get the "keeper" house first and save yourself the trouble and expense of moving.

[ScrimpAndSave]

Disneysteve, I agree that it is smarter to wait and get the longterm home instead of just getting a starter home and then "moving up"...


...but I do have to say that I fear missing the boat with this possible 4.5% interest rate that we may have. If it is ever put into place, it will be around the time that I am truly able to afford something around $200k (which would be a tiny cape cod around here - or something of the sort). Financing that with a 4.5% interest rate would be fabulous...but it wouldn't be something that we could stay in forever.

And even though a year and a half from now we could afford something that is 300k...we might be looking at a MUCH higher interest rate.

So, I sort of feel like I am stuck between a rock and a hard place here...

[Beccagold]

S&S- You've mentioned on a few occasions that you don't plan to have children. Usually, the reason people move out of their "starter" home is because they need more room for a family. Have you kept in mind that your needs will change very little?

[disneysteve]

I wouldn't let the prevailing interest rate be a deciding factor in when or what to buy. Taking the lower rate in order to buy a house that you don't really like and don't plan to stay in just doesn't make sense to me. What's the point in buying the 200K house at 4.5% and moving a year or two later and then paying whatever the rate is then?

[jIM_Ohio]

Three comments are ringing to me

Originally Posted by disneysteve

I wouldn't let the prevailing interest rate be a deciding factor in when or what to buy. Taking the lower rate in order to buy a house that you don't really like and don't plan to stay in just doesn't make sense to me. What's the point in buying the 200K house at 4.5% and moving a year or two later and then paying whatever the rate is then?

Originally Posted by Beccagold

S&S- You've mentioned on a few occasions that you don't plan to have children. Usually, the reason people move out of their "starter" home is because they need more room for a family. Have you kept in mind that your needs will change very little?

Originally Posted by ScrimpAndSave

My fiance likes the house a lot...he feels as though he will like anything once he owns it - so he doesn't give me a very strong opinion of what he wants (but who can blame him, he is in his last year of law school and has bigger fish to fry right now).

Your fiance is a smart man- I can tell from the comment in blue. Know the difference between a house and a home. You can buy anything and make it a home- as long as you enjoy living there it will be a home. My wife and I lived in an apartment for about a year, then a condo for another 5, then about 3 months into living into the house we have now, we looked at each other and said we could not even remember living anywhere else- it only took 3 months for the new house to feel like home. It will not take long for you to turn any place you live into "home".

No way could I ever live in the house my parents had. The thought of being in their bedroom, for example, would make me uncomfortable. You can make your own memories somewhere else.

You are again focusing on the house tree without commenting on the overall financial forest.

I agree you could find a small house (2 or 3 BR cape cod type) and make it a great home without needing to find a larger (more expensive) option with 4 or 5 BR and more living space. You made a "good school district" comment, yet don't plan to have kids- did you think of moving to a community with lower property taxes (and house prices) to save money?

The interest rate is a branch on one tree (the house tree) in a much larger financial forest. Do lot let the one branch lock you in to many other financial costs (property taxes, moving costs, cost of house) unless the other financial aspects of your situation have been properly dealt with.

[ruth333]

I would have to agree. You will make it work either way. Just get something you can afford.

[ScrimpAndSave]

I know...you are right about the forest thing, Jim.

I mention school districts because I know they are important for resale...and my dad's house is in a favorable area for schools. I know I don't *need* 4 or 5 bedrooms...so maybe it is worth looking at smaller homes priced around $200,000. We could get a ranch or cape cod around 1200-1500 sq. ft. for that.


I guess some of it is sentimental. I've lived in this home for almost 28 years (my entire life) and I cannot imagine driving by it and seeing another family in it. Also, I feel like I would be helping out my dad by buying if off of him. He wouldn't have to move anything really...worry about selling it...but I know I need to worry about what my fiance and I want as well.

I know - I am a pain in the butt.

My dad always says, "Sure...you can get a tiny house for $230,000...but you might as well spend the extra $50,000 or so and buy a larger house...those small houses have the same square footage of one FLOOR of this house! And they don't gain equity the same way."

He wants me to do whatever I want to do...but I know he is very proud of his meticulously maintained pad.

[disneysteve]

Originally Posted by ScrimpAndSave

I mention school districts because I know they are important for resale

I cannot imagine driving by it and seeing another family in it.

"small houses have the same square footage of one FLOOR of this house! And they don't gain equity the same way."

I think you are contradicting yourself. You look at this as a house you would live in permanently, and yet you are concerning yourself with the resale prospects before you've even bought the place.

As for your father's comment about gaining equity, you aren't buying an investment property. You are buying a home, your own personal residence. What's the difference how much value it gains if you plan to live there long-term?

You and your fiance need to decide together if you want this house. If you do, end of story. Save up and buy it. Stop looking at other houses. Stop exploring other alternatives. If you don't want this house, stop looking because you aren't buying for a couple more years and there is no way of knowing how the market will change between now and then. I think you are driving yourself crazy for no reason.

[ScrimpAndSave]

I understand what you are saying. I know I am not buying an investment property...and if I get this house (or one in the same price range), I would be looking at a long term home. I don't want to have to buy another house...but I consider the school district and things like that because I don't know if my fiance will someday get a job elsewhere and we will be forced to move...I guess I just keep things like those on the back burner.

And you are right - I am driving myself nuts. I tend to obsess over things. Sorry.

[disneysteve]

Actually, I think the school district is important, but not for the reason you mentioned. In these parts, at least, the desirable neighborhoods are the ones in good school districts. I would not consider living in the neighborhoods with not-so-good schools. They aren't nice areas. Property values are lower, but so are the demographics of the area. They have a lower tax base and subsequently have a lower level of municipal services.

So I'd want to buy in a good school district because it is generally a better neighborhood, not because of any concerns with resale value of the home.

[ScrimpAndSave]

Disneysteve,

I have to say that is very similar to my area as well (and I don't think we live all that far apart actually)...although NJ is much different market from where I am. The better neighborhoods are in the better school district. More specifically, better neighborhoods are districted within better elementary schools...even though they are all in the same school district. I teach at a low income, urban elementary school...but I live in a township where the students go to a higher end elementary school...even though both schools are within the same district. The demographic is WAY different.

[jIM_Ohio]

houses might keep up with inflation, but have little real return when you factor in mortgage interest.

Think about it this way:

Buy a house for 200k and in a good situation appreciated to 400k in 24 years (3% annual return). In same 24 years you might pay 300k of mortgage interest on property. Did you gain anything?