How much of a House can I afford?

[Singuy]

Rents rise just as houses do. When you are renting, you are on the wrong side of the math.

Talking about math, lets do some!

Based on TexasHusker's house of 257k and lets say he put 20% down
In the past 16 years, he paid 96k in property tax/insurances and 182k in interest(not sure if this is actually true or not but it's the only way I can fit a model of 1800/month mortgage payment based on his numbers).

So this leads to a total of $278,008 given away. In 16 years, he paid off 30% of his loan plus the 20% down. So his total equity is 128,500 PLUS his appreciation (400k-257k) which is a total of $271,500

So just based on this calculation, if Texas were to sell his house today, after realtor fees, he would of lost about 20k (278k interest/taxs - 271k equity - 25k realtor fees). You can argue that this is okay, because he lived in the house for free-ish.

So lets add a couple of more things to the equation.

1% maintenance cost/year: $41,120 in 16 years
Inflation: 2.5%

With inflation, did Texas' house actually appreciated as much as he thought? Not really! His house is worth 353k today after inflation(meaning he can't just go out and buy another 3500 squareft house for the same 257k today). So his true appreciation is only 47k.

So if we add everything back to the equation.

(47k appreciation + 128,500 equity) - ($278,008 taxes/interest + 41,120 maintenance+ 25k realtor fees) =
-168,628

So lets just say that you rent
In 2000, your rent would be 800 vs 1100 today(inflation).
In 16 years, you would of paid -$182,400
Lets say because your average rent was 950, you put what Texas would of paid on mortgage into the S&P since 2000. That's $1800-$950=850/month
Your S&P will have $186,161.65 after adjusted for inflation today. So in 16 years, you will have a positive $3,761 and Texas has a negative 168k. Remember, we are allocating 1800/month to either mortgage or rent plus S&P (or CDs, or whatever you choose).

You have to realize that buying a house as an investment(one that you will live in) is NOT really an asset but a liability UNLESS you are willing to buy a house with a mortgage that is close to or lower than rent. Texas paid a -168k in the last 16 years because he lives in a 3500 squareft house. If his house was half the size and spent only 100k in 2000 then it's a whole different story.

Unless you can buy a house for 1/2 market value, fix it up and enjoy the extra equity when you sell or buy a house in which mortgage is lower than rent, the math is never on your side. Buying a HUGE house at market value to live in is pretty much a luxury item. Don't be fooled by conventional thinking!

With the risk of being house poor and foreclosure due to the lost of a job or income, housing has always been a crappy investment in the U.S (one that you live in, not a rental). You can argue that in 2009, investing in housing is the right move. I agree, but at that time investing in anything(like stocks, S&P) would of yielded you a much higher return so houses were not the only golden goose.

My opinion, I would probably buy a manufacture house like a mobile home. New ones cost about 60k at 1400 squareft. This can bring down your living expenses way down so you can actually build wealth and not give it all away to property taxes/interests/hoa/etc etc. With the wealth you built, you can pay cash on fixer uppers at 50% of market value and get into the housing market this way.

[TexasHusker]

Yes, my home hasn't been an investment per se, but as you pointed out, I've lived in it for almost free. I could have lived in a 2000 sq ft house for almost free, but the 3500 sq ft one has been a lot more roomy.

Buy all you can afford.

[Singuy]

Yes, my home hasn't been an investment per se, but as you pointed out, I've lived in it for almost free. I could have lived in a 2000 sq ft house for almost free, but the 3500 sq ft one has been a lot more roomy.

Buy all you can afford.

I pointed out that you paid a 168k premium for your luxury living. If you were to live in a 1400 squareft house, you would of saved 168k(this is 168k worth of interest, taxes, fees..so I am NOT talking about the cost of the house you saved..I am just talking about money that was thrown away).

The beauty of rent is that you are more willing to live in a smaller space and make due. When you buy a house, you become emotional about it because it's more permanent. You begin picturing how your children will grow up here and how you want to see your unborn daughter walk down the spinning stair case for her prom. All of a sudden you end up buying too much house and spends WAY too much money on the "luxury" aspect of the house (aka more squareft).

Anyone can live with 1400 squareft..we all have been in apts before and survived. You just have to know that wanting a house that is bigger than this is a luxury..and you are definitely paying for it. It is not "free".

[TexasHusker]

If survival is your goal, a 1400 sq ft rental will suffice.

I'd rather live in my home with the spiral staircase.

To each his own.

[Jluke]

Talking about math, lets do some!

Thanks for running numbers like that. That is kind of what I did for myself when debating on paying aggressively on the mortgage.

In general, I think this is where people fail to realize the full cost of home ownership. They ignore the math b/c they just want to hear what they want to hear.

Example: I bought the house for 200k and sold it for 300k many years later. ignoring all of the interest, taxes, maintenance, etc. they believe they made 100k profit.

Owning a home can really set you back financially if you are not aware of the hidden costs.

To the OP, you need to know if one day you'll be making close to say 100k or if your salary is capped at some point and what that number might be.

[Singuy]

If survival is your goal, a 1400 sq ft rental will suffice.

I'd rather live in my home with the spiral staircase.

To each his own.

We want the Op to build wealth and not participate with the other 76% of Americans who lives paycheck to paycheck. The OP can "afford" a 350k house but if he is willing to work with a lower squareft and save the rest to get ahead in his 30s, then why not? If the op doesn't want a cheap house due to security reasons(poor neighborhood, bad schools, etc etc.), then perhaps renting is currently the way to go.

Not saying the OP shouldn't have a gigantic house..but it looks like it's not his time. Currently with his youth on his side, putting too much money on a house can be a mistake vs saving/investing.


If he bought a 350k house today with no money down, his chances of financial freedom to start a business, or pay cash for cheap real estate in his 30s will be slim to non. He and his wife will just slave away giving the bank a steady stream of income while living paycheck to paycheck trying to make ends meet.

[feh]

unless the young man is an incompetent, his income will rise significantly in the next 5-10 years

Assumptions can be very dangerous.

[TexasHusker]

We want the Op to build wealth and not participate with the other 76% of Americans who lives paycheck to paycheck. The OP can "afford" a 350k house but if he is willing to work with a lower squareft and save the rest to get ahead in his 30s, then why not? If the op doesn't want a cheap house due to security reasons(poor neighborhood, bad schools, etc etc.), then perhaps renting is currently the way to go.

Not saying the OP shouldn't have a gigantic house..but it looks like it's not his time. Currently with his youth on his side, putting too much money on a house can be a mistake vs saving/investing.


If he bought a 350k house today with no money down, his chances of financial freedom to start a business, or pay cash for cheap real estate in his 30s will be slim to non. He and his wife will just slave away giving the bank a steady stream of income while living paycheck to paycheck trying to make ends meet.

All kind of depends on your other debt. Our philosophy was "buy all you can afford" but no other debt. That left is plenty of $$$ to save for other priorities - wasn't a problem.

It could be that I was just extremely fortunate.

[TexasHusker]

Assumptions can be very dangerous.

All of our decisions are based upon assumptions.

How many people do you know that are making at age 35 what they did at age 25?

How many renters do you know that are paying at or less than what they did 10 years ago?

How many homeowners do you know who are upside down on a house that they bought 10 years ago?

A man's house is his castle. And if you're going to be a bear, you might as well be a grizzly.

[Singuy]

All of our decisions are based upon assumptions.

How many people do you know that are making at age 35 what they did at age 25?

How many renters do you know that are paying at or less than what they did 10 years ago?

How many homeowners do you know who are upside down on a house that they bought 10 years ago?

I think what Feh was alluding to is that assuming in an optimistic way can potentially be dangerous. People who over spend assumes optimistically. They assume that their job will always be there to pay off their gigantic mortgage, or they assume they will have a constant raise so everything will be fine.

Borrowing and getting into debt is the definition of assuming optimistically. When a business borrows for a loan, I'm pretty sure the CEO didn't assume the business is going to crash and burn. Same with the borrower of a mortgage, pretty sure that person didn't assume he'll end up getting laid off or anything.

[pflyers85]

Because, unless the young man is an incompetent, his income will rise significantly in the next 5-10 years, while his house payment is going to stay roughly static, save adjustments for property taxes and insurance.

Rents rise just as houses do. When you are renting, you are on the wrong side of the math.

He is also a young man who may be interested in starting a family soon. So while his income may rise so would his expenses when adding children to the picture.

[Fishindude77]

I sure see a whole lot of young families who are house and car poor. Have to have that nice modern house and new autos to keep up with the Jones.

Everything they take in is going out in mortgage and auto payments along with the upkeep and insurance on those items. Very little cash saved, and probably not putting much towards eventual retirement. The furnace poops out and they have to put it on a credit card. Vacations to keep up with the Jones go on the credit card. One of them loses their job, and all of a sudden things get real ugly.

My theory has always been to live well below your means, build a large cash reserve, and get to the point where you owe nothing and can make all of your purchases cash, rather than paying interest on them. At the same time, utilize a portion of cash reserves to invest in ventures that will generate additional income, further improving your situation.

[LivingAlmostLarge]

I guess buy all you can afford can work. Texas husker proved it right.

However lots on this board have seen it go the opposite way. Probably people on this board have lived it. Buy too much house, have no other debt then suddenly something happens. Disability, child with special needs, downsized and can't make same income, who knows. Stuff happens.

Truth is that sticking to general rules of thumb and buying an "affordable house" makes it more possible to NOT live paycheck to paycheck. To have an emergency fund. To just live.

I would argue sure buy the most expensive house you can at 25, after you've already ironed out a budget saving the most you can in a 401k and Roth IRA. Why?

Well why not start early with retirement savings. Then buy a house and then everything after that will be pure gravy. All extra raises from 25-35 could go straight to say 50% living and 50% saving.

But if the OP followed that rule and saved first, then bought the "most" house he could afford i doubt it would be much.

[Nutria]

Texas is wrong, wrong, wrong. What happens if you get RIFed 6 months after buying that "all you can afford" home? What if your SO needs/wants to stay home for a few years with the kids?

I don't know where you live, but many cities and towns have older neighborhoods with smallish fixer-up houses perfect as starter homes.

Live below your means, and if your fiance doesn't want to, then you pragmatically might should reconsider living and having children with her.

[cdodom]

Okay I appreciate all responses and Im definitely learning a lot about this home buying process.

I am a Native American and Belong to a tribe in Oklahoma. I found out from my mother that the HUD has a Section 184 loan program for Native Americans.
Luckily my tribe participates in the program.

here is a link of info if you would like to take a look.

Low Down Payment: 2.25% on loans over $50,000 and only 1.25% on loans under $50,000
Low Interest Rates: based on market rates, not on applicant’s Credit Scores
Manual Underwriting: The Program utilizes a hands-on approach to underwriting and approval opposed to automated decision-making tools.
Growing National Network of Approved Lenders: Our network of approved lenders includes national companies and local banks to suit your needs. Our Lenders have also been trained on the unique circumstances of Native homeownership.
Section 184 Upfront Loan Guarantee Fee and Annual Mortgage Insurance: A one-time 1.5% up front guarantee fee is paid at closing and can be financed into the loan. In addition, loans with a loan to value of 78% or greater will be subject to an annual .15% mortgage insurance premium.
Protection from predatory lending: Our Program monitors the fees our approved lenders can charge Native borrowers. Section 184 loans cannot be used for Adjustable Rate Mortgages (ARMs).
Knowledgeable Staff: Our staff understands the unique circumstances associated with lending on Native Lands and we work with borrowers to achieve home ownership and to avoid default and foreclosure.

the amount I can borrow in Utah county is 293k.

The house im looking at putting a offer on is 234k.