Have you bought too much house?

[gackle]

Craigslist is a great idea for furniture. We've got other priorities right now, but in the future we'll have to check it out.

[Ima saver]

Lots of people say our house is too big, it is 3200 square feet for 2 people. We also have a 2 car garage, then another 2 car separate garage with an eff. apt. and bath room.
However, we built it ourself and it was what we wanted at the time and we don't have any mortgage payment, so we are ok. I think I will go a little smaller next time!

[Mr. Potato Head]

The traditional rule of thumb is that your monthly housing costs shouldn't exceed 28% of income and the home shouldn't cost more than 3 times your income. I

Hi,

New poster here, but I've lurked for awhile and wanted to follow up on Disneysteve's post. I've read these rules before, but I'm a little confused.

Our mortage, taxes, and insurance works out to 27% of our income. But the purchase price of the house was 5 times our income.

I'm wondering if it really matters what the purchase price of the house is if you keep the housing costs at the 28% mark?

And thank you all for some of the great advice I've picked up here over the last few months.

[LivingAlmostLarge]

No, because people have different length mortgages (15 versus 30 years, or even 20 years), and property taxes, etc are different.

We too might have bought too much house. Honestly not pricewise but space wise.

Ours is 28% PITI, and it's affordable. Problem? We were used to living in a 1 bedroom, 500 sq ft condo. Well we bought a 3 bd, 1800 sq ft townhouse. We tripled in size and I hate it. I hate cleaning. I thought we'd have kids here, but turns out, we're waiting longer than expected and while the space is nice I sometimes wish we had stuck with maybe a 2 bedroom condo.

But we have a roomie now (great way to decrease expenses) which lowers our output to something like 20% PITI. But anyway it fills one bedroom/bath so until we're pregnant I'm okay with it.

But seriously cleaning gives me headaches. I also had a housekeeper, until I got a dog with issues. But now we're too nervous to have someone come in. Maybe this year, we might try it out.

So you can definitely buy too much house and it not even be financial.

[disneysteve]

New poster here, but I've lurked for awhile and wanted to follow up on Disneysteve's post. I've read these rules before, but I'm a little confused.

Our mortage, taxes, and insurance works out to 27% of our income. But the purchase price of the house was 5 times our income.

I'm wondering if it really matters what the purchase price of the house is if you keep the housing costs at the 28% mark?

To buy a house for 5 times income and still keep costs below 28%, you would have to put down a really large downpayment.

Let's say you earn 100K and buy a house for 500K, 5 times income.
With a 20% downpayment of 100K and a 30-year mortgage of 400K at 6%, you payments would be $2,400/month or $28,800/year. So that would already have you just over the 28% mark and you haven't included taxes and insurance.

If, instead, you put down 40% or 200K, your payments would drop to $1,800/month or $21,600/year. If you live in a low cost area, taxes and insurance could still have you around that 28% mark.

I'm not sure, but I think the 3-times income advice might have something to do with not being house-poor, having too much of your personal wealth tied up in your home. Does anyone else know?

[Mr. Potato Head]

To buy a house for 5 times income and still keep costs below 28%, you would have to put down a really large downpayment.

Let's say you earn 100K and buy a house for 500K, 5 times income.
With a 20% downpayment of 100K and a 30-year mortgage of 400K at 6%, you payments would be $2,400/month or $28,800/year. So that would already have you just over the 28% mark and you haven't included taxes and insurance.

If, instead, you put down 40% or 200K, your payments would drop to $1,800/month or $21,600/year. If you live in a low cost area, taxes and insurance could still have you around that 28% mark.

I'm not sure, but I think the 3-times income advice might have something to do with not being house-poor, having too much of your personal wealth tied up in your home. Does anyone else know?

Thanks for the reply, disneysteve.

We put down 37%.

I'm only asking, because I've seen that rule before and it makes me scratch my head because we spend about 27% of income on housing, but the home price to income rule is out of whack for us.

Any ideas?

[disneysteve]

We put down 37%.

I'm only asking, because I've seen that rule before and it makes me scratch my head because we spend about 27% of income on housing, but the home price to income rule is out of whack for us.

There's your answer, as I suggested. The vast majority of buyers don't put down anywhere near 37%. At this point, the old "standard" of 20% isn't even followed much.

Without knowing any more about your big picture, I'd say you are probably just fine if your monthly costs are 27% of income. Don't worry about the home purchase price.

[LivingAlmostLarge]

I honeslty think the price of the home unimportant. Because if you put a large DP, then what really matters is size of mortgage. Many people get caught up with not buying too much house, true. But if you have $200k to drop on a $400k house and only a $200k mortgage does it matter if you house it 10x your income?

[disneysteve]

But if you have $200k to drop on a $400k house and only a $200k mortgage does it matter if you house it 10x your income?

Well, in that particular example, you'd have a 200k mortgage on a 400k house with a 40k income. The payments alone, not counting taxes and insurance, would be 36% of gross income which would probably not be possible. So the house price does matter somehow.

[LivingAlmostLarge]

Hmm...true. So the $40k person might need an extra $40k so a $240k downpayment and then it would be more manageble?

[disneysteve]

Hmm...true. So the $40k person might need an extra $40k so a $240k downpayment and then it would be more manageble?

Even that would be a stretch. Principal and interest alone would be 29% of income. Add in taxes and insurance, utilties, maintenance, and you're probably up to 40% of income going to housing, which is well above the guidelines. Add in an auto loan, maybe a credit card balance, income taxes, etc. and they wouldn't have much left to live on. And that is all assuming that someone earning 40K could manage to save up a 240K downpayment.

[kristinecfp]

This is a really good thread, thanks for starting it!

The only thing I would like to add is that, as a financial planner, I have seen people sacrifice their retirement for a big house, or to have no mortgage. While having no mortgage is a great goal, you can't use your house to fund your retirement (unless you sell the house for enough $ to fund your retirement, but you still have to live somewhere!), and in this crazy real estate market you can't count on your house to appreciate enough to fund your retirement.

Anyway, whatever route you go, I would encourage you to find a way to resume saving in your 401K as soon as possible. Take a good look at your tax return this year. It's possible that you'll get a large refund thanks to the mortgage interest and real estate taxes that you are now paying. If that's the case, then you should consider using that refund to fund your 401K. Or even better, adjust your withholding and use the extra money each month to fund your 401K.

[kristinecfp]

Just saw a great article on Money.com on this very topic...

Retirement plan interrupted - Dec. 24, 2007

[JasonEngler]

Most financial experts recommend no more than 33% of your income going towards your housing.

Is this before or after tax (take home)?