Mortgage guidelines for YOU

[dawnwes]

We are looking to move. The area we are looking in is slightly higher cost than where we are currently living. (Same region but we will be closer in to the city.)

Our guideline has been: No more than 25% of our take home pay towards mortgage on a 15 year loan.

We will have more than 20% down on whatever we choose, but we are considering going up just a bit in order to get a house more comparable to what we have currently.

Some people say no more than double your gross income.
Some say no more than 2.5 times your gross income.

I am not really looking for answers to my dilemma, just asking what YOUR guidelines are.

[disneysteve]

We used the standard guidelines of no more than 28% of income on a 30 year loan with 20% down. In reality, we spent a lot less than that but that was what we considered the max.

[MonkeyMama]

20% down payment, cash for closing costs, could afford on one income. At the time we bought our homes we had equal incomes. It's relative. From a high cost area so would be used to most of income going to housing. Not that we would qualify for loan on one income but would feel comfortable for loan on one income for the long run. Which was our eventual plan. Spouse has only worked 3 of 12 years of home ownership? Today our mortgage is quite modest. My income has about tripled and interested rates have halved in that time.

When we both work a 15 year is fine. With one income and kids and skyrocketing health insurance we stick to the 30 years.

[frugalredhead]

Our initial mortgage was 1.8 times our gross income and we feel very comfortable at that price point. If we didn't have so much credit card debt I would have even gone a little higher.

[dawnwes]

This is interesting.

We have had a 15 year for a while. We hear people say to get a 30 but pay like it is a 15 but have that buffer should you need to stop paying extra for a while.

The problem is, when I run the numbers, the amount we pay will be so much more.

A 15 year loan is roughly 3% interest right now. A 30 year is roughly 4% interest.

So, for example, on a $200,000 loan, paying on a fixed 15 year would have payments of $1,381 per month and a total of $48,600 in interest over the life of the loan.

That same loan ($200,000) on a 30 year but paid like a 15, would have payments of $1,480 and a total of $66,000 in interest over the same 15 year period.

The only thing the 30 year does is give you some reprieve should you fall on some hard times financially or need the extra $$ for another purpose.

Dawn

20% down payment, cash for closing costs, could afford on one income. At the time we bought our homes we had equal incomes. It's relative. From a high cost area so would be used to most of income going to housing. Not that we would qualify for loan on one income but would feel comfortable for loan on one income for the long run. Which was our eventual plan. Spouse has only worked 3 of 12 years of home ownership? Today our mortgage is quite modest. My income has about tripled and interested rates have halved in that time.

When we both work a 15 year is fine. With one income and kids and skyrocketing health insurance we stick to the 30 years.

[Petunia 100]

I think that you have to look at your overall picture, and consider what is really important to you.

Is it important to you to retire early? If so, buy far less than what the bank says you can afford.

Are you a homebody who puts a great deal of importance on the quality of your home over cars, vacations, eating in restaurants? If so, you may want to stretch a bit and buy a nicer home.

There's no right or wrong, it's about personal priorities.

[dawnwes]

True.

We just can't decide.

We already are buying far less than we "qualify" for. By like 50% less! We still stress.

I think that you have to look at your overall picture, and consider what is really important to you.

Is it important to you to retire early? If so, buy far less than what the bank says you can afford.

Are you a homebody who puts a great deal of importance on the quality of your home over cars, vacations, eating in restaurants? If so, you may want to stretch a bit and buy a nicer home.

There's no right or wrong, it's about personal priorities.

[cardtrick]

Agree with Petunia. Whatever your goals in life are.

I qualified for a $480K mortgage. I wasn't even comfortable spending $250K. My upper limit was $150K. We fell in love with this amazing brand new $200K house but I thought it was too expensive. Ended up spending $160K. And we're so glad we did! We have plenty of money left over every month and I don't feel like I'm a slave to my house.

The excitement about the new house lasted about 3 days. Now, it's just a place for me to store my stuff. I'd much rather have a smaller low end house and the flexibility to do the things I want to do than have a nice house that I will spend most of my money on for the next 15-30 years.

2 years ago when I bought the place, I emptied out my bank accounts for the 10% down payment. I was able to refi last year by putting more money down and getting rid of PMI. And I now have almost enough in cash to pay off the mortgage, although I don't plan on doing that. I can use the money for business and investment opportunities. I'm not an index fund guy.

If I had a massive house payment, I wouldn't have been able to spare any money for risky investments (or any investments for that matter). We also enjoy travelling and have been able to up the travel budget significantly this past year.

[dawnwes]

So what did you go with, a 30 year or a 15 year?

Agree with Petunia. Whatever your goals in life are.

I qualified for a $480K mortgage. I wasn't even comfortable spending $250K. My upper limit was $150K. We fell in love with this amazing brand new $200K house but I thought it was too expensive. Ended up spending $160K. And we're so glad we did! We have plenty of money left over every month and I don't feel like I'm a slave to my house.

The excitement about the new house lasted about 3 days. Now, it's just a place for me to store my stuff. I'd much rather have a smaller low end house and the flexibility to do the things I want to do than have a nice house that I will spend most of my money on for the next 15-30 years.

2 years ago when I bought the place, I emptied out my bank accounts for the 10% down payment. I was able to refi last year by putting more money down and getting rid of PMI. And I now have almost enough in cash to pay off the mortgage, although I don't plan on doing that. I can use the money for business and investment opportunities. I'm not an index fund guy.

If I had a massive house payment, I wouldn't have been able to spare any money for risky investments (or any investments for that matter). We also enjoy travelling and have been able to up the travel budget significantly this past year.

[cardtrick]

So what did you go with, a 30 year or a 15 year?

Initally a 15 year with 10% down and PMI. I refi-ed last year to a 30 year at 3.75% with no PMI. I had to put down another 4% and the rest was covered by a higher appraisal. Total all-in housing cost (PITI + hoa fees) is now 15% of my gross pay. With the 15 year mortgage, total cost was 19% of my gross pay.

[dawnwes]

Did you do this just to lower the payments?

19% doesn't seem too high to me, particularly if that includes taxes and insurance.

Dawn

Initally a 15 year with 10% down and PMI. I refi-ed last year to a 30 year at 3.75% with no PMI. I had to put down another 4% and the rest was covered by a higher appraisal. Total all-in housing cost (PITI + hoa fees) is now 15% of my gross pay. With the 15 year mortgage, total cost was 19% of my gross pay.

[cardtrick]

Did you do this just to lower the payments?

19% doesn't seem too high to me, particularly if that includes taxes and insurance.

Dawn

The slightly higher payment never bothered me. The refi was to get rid of PMI and the decision to go with the 30 yr fixed was just my bet on long term interest rates. I feel confident that my savings account will pay more than 4% in the near future. I think inflation will be far higher than it is today. My fixed monthly payment will become even more insignificant. I expect inflation to pay most of my house off for me.

Also the percentages I quoted earlier are based only on my W-2 income. My gf has an income and I also have another non-W2 income. So, as a percentage of household income, our housing payment is under 7% of gross.

[youshallliveinoverflow]

I would keep it low. You do not want to be house poor. Also, what happens if someone becomes sick and can not work. I like 20% or less. Good Luck!

[dawnwes]

Going over 25% would actually not make us house poor.

That is one reason I just asked for individual's personal guidelines.

I would keep it low. You do not want to be house poor. Also, what happens if someone becomes sick and can not work. I like 20% or less. Good Luck!

[MonkeyMama]

This is interesting.

The only thing the 30 year does is give you some reprieve should you fall on some hard times financially or need the extra $$ for another purpose.

Dawn

Exactly. That is what the 30 year has done for us. Just to be clear that we are not paying it down like a 15-year.

In a perfect world I'd love to have kept the 15 year loan (we'd almost be done with our mortgage!). But the economy has been pretty brutal and I am happy to have a modest house payment and to have other investments besides just a house.

Today's interest rates are an entirely different story. If we could have gotten a 15-year at 3% then maybe 15-years would have been the right choice. But unfortunately we weren't so lucky to have that option.