Should you factor in two incomes when buying a house?

[LivingAlmostLarge]

I think it really depends. We're also DINKS but we have a majorly disparate incomes because I'm still in school and DH works. So we'll probably never know true dual incomes until much later. The reality is if we had kids, I should stay at home period. But with my degree, I probably can afford daycare.

Now what's the earning potential? Would it necessarily be your wife who should stay at home or you? Who carries the family benefits? Is that why she has to work? You earn more but not medical benefits?

When we bought much like Monkeymama, at 21/23, we used both incomes. But we knew that was short term, long term our incomes would easily quadruple or more. And it has. We were earning peanuts though, DH $18k, and me $30k.

So we bought with a tiny bit of risk. And now we know we're on "double" incomes but I'm at 30k. If needed I could go out and get a job paying $60k. That would tide us over.

Also if you aren't having kids yet, why not wait to buy until pregnant? Maybe the single families will become more affordable.

[buzz]

-If you buy debt, pay it off ASAP. There is no reason to pay more in interest when you can use that money somewhere else like savings.

It sounds like you are recommending to take all one's money out of savings and pay off the mortgage, so you can have...savings?

[jasanderson]

It sounds like you are recommending to take all one's money out of savings and pay off the mortgage, so you can have...savings?

We have a $1200/month mortage payment and if you look closely only about $250 of it maybe goes to the principal. the rest goes to taxes, insurance and interest.

Seem to me like while you get a tax break you get a better return on money by paying down your mortgage so you don't pay as much interest. Makes sense to pay off the mortgage and then save - that is after you make sure you have 4-6 months in savings to cover you in the event of a disaster.

[disneysteve]

Seem to me like while you get a tax break you get a better return on money by paying down your mortgage so you don't pay as much interest. Makes sense to pay off the mortgage and then save

Again, it totally depends on the interest rate. My mortgage is at 5.875%. I'm perfectly happy to keep that mortgage and invest my money elsewhere and earn 8 or 10 or 12% return. Why would I want to pay off a mortgage that is costing me so little? After the tax deduction is figured in, the loan only costs me about 4.4%.

[buzz]

We have a $1200/month mortage payment and if you look closely only about $250 of it maybe goes to the principal. the rest goes to taxes, insurance and interest.

Seem to me like while you get a tax break you get a better return on money by paying down your mortgage so you don't pay as much interest. Makes sense to pay off the mortgage and then save - that is after you make sure you have 4-6 months in savings to cover you in the event of a disaster.

The taxes and insurance will be due regardless of mortgage status. The principal and interest are offset by the cash available.

If you have extra cash, you can either exchange the cash for principal and avoid interest, or keep the cash and earn a return on it.

There are costs and benefits either way, but financially it is probably inconsequential. The big benefit occurs if you pay down the mortgage rather than squandering the money, which is why I think it is often recommended.

[tripods68]

This entirely depends on the terms of the debt. If you have a mortgage at 5% but your investments are earning 10%, keep the mortgage as long as you possibly can. On the other hand, if your debt is a 25% credit card, pay it off as soon as humanly possible.

I'm being simplistic Steve. I think you know what I'm trying to say. I don't disagree with your statement.

Let me add this further. It is easy to borrow debt when you have ZERO percent interest on a loan or credit card balance. But you still have to pay it back no matter what. But the moment, you use that same card again, you automatically incur interest on the purchase you just made. Guess what there are to many people got into trouble because they incur more than what they can afford. This is always been the problem. Too much debt, and very little to show for. Fortunately, it is never too late. Stick to what you know that make sense.

[project15]

Thanks for the replies...here's some more info on our situation:

I'm 24, she's 25. We're both at the beginning of our professional careers and will only be moving into higher paying positions in the next 5-10 years. We have $30k in cash right now for a down payment and closing costs and are saving about $1250 a month toward a down payment. The other debts we have are car payments of about $500 total a month (2 small economy cars) and a student loan of $230 a month with a $37k balance at 2.75%. With the more expensive house, we would still be able to contribute the same amount we do currently to our retirement funds (4% to 401k plus full employer match, fully max my Roth IRA, she doesn't have a Roth IRA yet but i'm planning to start one soon and we could probably afford to max it out after buying the house)

We want a house (possibly townhouse) because this apartment living we're currently in just doesn't feel like home even though we've painted the walls and decorated how we want.

The more expensive house in the better neighborhood is the least expensive house in the community with the better schools, so it's not like we're trying to get into even a medium cost neighborhood.

My job carries the health care and the higher salary, so she could stay home if my salary raises were enough to cover the mortgage and living expenses in the future when we have kids.

[disneysteve]

Given the added details, it sounds like the more costly house wouldn't be unreasonable for you guys at all.

[brig2221]

My advice for young DINKs is to live like refugees and build as much wealth as you can. You should be able to make up that $60k price differential in a couple of years.

Sorry, responded before I went to page 2 to read your updated info.

To echo what Disney Steve said, it looks as though you are definitely on track to be able to purchase in a nicer area with just a little bit of time.

I am from Naperville myself (currently live in Dallas), and my parents live in Plainfield, so I feel your pain as it pertains to higher home prices in the Chicagoland area. That said, I couldn't think of a better time to be purchasing a home up there than right now. I'm pretty sure that 2008 is probably going to be as low as the market gets around there, and will surely start appreciating again in 2009.

I would love nothing more to move my family from Dallas back to Naperville, but that would mean trading in my 4 year old $175K 2000 square foot home for a 30-35 year old $350K 2000 square foot home. Not a very convincing trade for the wife. Still trying to sell her on the idea. Surprisingly enough she hasn't bitten yet

Good luck to you and your wife!

[LivingAlmostLarge]

Definitely at your age and earning potential, it might not be too bad a stretch. Our friend once told us buy something that is a bit tight when you start out and it might not be so bad in 5 years. Exactly what we did when we bought, and it's gotten better in 2 years.

[safari]

I bought a townhouse back in 2001 for $342K. A the time my income was only $72K. That was the best decision I ever made. Even though in the beginning it was really tight, and I couldn't save any money toward retirement, eventually my income increased and I was able to refinance my mortgage at a lower rate for 30 years fixed. If I had waited to save more money toward a downpayment, I'd still be renting. Right now my townhouse is valued at over $700K. My income would have to be around $200K in order to be able to buy it. I have many friends who are making 6 digits, but can't even buy a condo.

[Saving in So Cal]

We bought our home in during the beginning of the last boom. At the time, we were DINKS, but we were a bit older, established in our careers, and had a good feel for a our long term earning potential.

Because we had previously gone through a period where we were both unexpectedly unemployed, we wanted to be sure we could afford the house on one income. We paid off all our debt, which consisted primarily of student loans of over $50k, and we saved 20% down. We also bought a fixer-upper (and are still fixing it up).

Since we purchased our home, I took almost 2 years off to have a baby and my husband recently left his job to fulfill a life-long dream of starting a business. Neither of these things were things we had planned on doing when we bought our home and, had we not had a mortgage that fit within one income, we probably would not have been able to do them.

When we were looking for our home, we had an opportunity to purchase a bigger, newer home in a poorer school district. We decided not to pursue the opportunity because we did not want to risk a problem if we needed to sell the home. (We're very risk adverse.) However, even the homes in the poorer school district appreciated dramatically during the boom, so I am not sure we actually avoided a big risk. What we really avoided was the expense of moving and/or private school because our child can go to the public school in our neighborhood.

[myself]

Traditionally these guys know I am somewhat against home ownership simply because the risk is not matched with the potential for returns. I'd rather have my money in a retirement account, but that's me. Here's why.


I'm going to recommend something that most people here won't: put down as little as you possibly can to get the loan. Save the rest of your money. Don't spend it. Save it.
Very good advice to save it and not spend it.

Use the money to pay the mortgage when you have trouble with your job or health.

If anything happens to the house, you move your money into someone else's name and you default on the amount between what you owe and what the insurance company pays.
I believe this can be considered fraud in some states, so I'd strongly suggest that you talk to a lawyer about this before considering it. Now, if you've already moved it into someone else's name (i.e. Living Trust or other such instrument), then you'd be much safer ... but again check with a valid attorney.

You will have horrible credit but you will be able to preserve your cash. Make the lender bear the risk. If you try to do the right thing and pay off a house that's a total loss you will lose your retirement.

That's the one thing I don't think most people understand. If you have equity in a house you shoulder the risk. If you have no equity, the lender assumes the risk. Lenders have much much more money than you, and they can deal with a foreclosure. If you lose the equity in your house you will be out of your life's savings.
The lender only shoulders 80% of the homes value, since the other portion is typically in either PMI (which you shoulder), or a higher rate secondary/third mortgage (i.e. 80/10/10 mortgage).

What's worse is that people will rent out a house that's completely paid off. That's the biggest no-no. If something happens to the house you're out of luck. Same concept.
Aside from house insurance, which if properly set up (i.e. allows for renters) can pay you cash anyway. After all, house insurance is for the house, not it's contents (that's where they include riders in the policy).

I think a lot of people are very conservative and do not think about their finances aggressively. What I said isn't completely kosher but think about it.

What happens when you lose your job? You go out and get a new one if you can. If you've saved enough in the meantime, you'll cover any temporary lack of income. What happens when you get sick? Health insurance/Short Term Disability/Long Term Disability serves this purpose. What happens when your house burns down? Homeowners insurance covers this most of the time. Of course, you may have to watch out that there aren't stipulations like "if the heater in the house catches fire, the insurance company will not pay".

I know we refuse to believe it but these things are all very real. I'm not saying be paranoid, but here's the bottom line:

what can you do to mitigate these risks? See all the references above to insurance (which is part of any risk mitigation plan).

My comments above.
However there is one final comment. I would like my children to save every penny that they earn (or get as gifts), until they are out of college (if they choose to go). That way, they can pay cash for virtually everything.

[hellodeli1]

DINK it up

Currently, my wife and I are DINKs (Dual Income No Kids) and are looking for a house. We're in the suburbs of chicago and all the single family houses seem so expensive. I want a single family, not a condo or townhouse. When thinking about what we can afford, should we factor both incomes into the equation or try to go off just one?

This question seems easy to answer and I would normally want to go off just one income (or closest to it as possible), but here's the catch...the houses we can afford on my salary are all tiny houses that need work in a poor scoring school district (bad resale value) and lower income neighbors. The houses we can afford on both our salaries are in a good school district and have more space and overall have a better neighborhood and neighbors. We would buy the cheapest house in either neighborhood. My wife does not plan to stop working when we have kids someday (except for maternity leave).

Here's a break down:
Income: $90k ($50k + $40k)

Houses in bad school district: $190k (houses in this neighborhood normally sell for $210k-$250k - we are looking at foreclosures that need work)

Houses in good school district: $250k (houses in this neighborhood normally sell for $300k+ - we have our eye on a short sale house)



Any advice? I'm particularly hoping disneysteve comes in to give insight since he seems quite wise. But I know all of the rest of you have some good thoughts too!

I'll tell you this -- my wife and I are in a pretty similar situation to you and we decided to buy based on our combined income. It made perfect sense to us, and it has worked out well so far. If it comes down to it and you or your wife decide not to go back to work after you have kids, you can always revisit the situation at that ponit. Nothing is set in stone.

[zetta]

Go play with a mortgage calculator such as this one:
http://www.hughchou.org/calc/msimple_js.html


Assuming a rate of 5.875% on a 30 year fixed, with a $30k downpayment, and guessing property tax to be 1% and insurance to be $500/yr, I get the following monthly payments. (You'll have to find more accurate inputs for your region.)

$150k house: 851.51 + PMI
$260k house: 1526.38 + PMI

About $675/mo, or $8100/yr. It seems pretty reasonable to expect that one income will go up enough over the next few years to bridge this gap, so I would say go for it. Also, if you make it a point to live on one income except for the house payment, and save the remainder of the 2nd income, you will be in a position where you have the option to stay home with the kids for a few years. Even if you decide you prefer to work, it's nice to be able to work because you choose to rather than because you have to.