Affordability rules (Belmont: real estate, car insurance, daycare)

[robr2]

Originally Posted by jayrandom

When interest rates are this low the rules get a little funny. You can absolutely make a budget with 28% of your gross going to mortgage/insurance/taxes, but you either aren't saving a lot or are skimping in other areas of spending.

It's worth noting that a $1.2m house is going to have a pretty significant monthly tax bill (100 x mill rate / month), which makes this particular number a little high. A more realistic upper bound on that income will be in the $900k range, depending a bit on town.

As noted, if you do go to the full 28%, you may be skimping on other areas but people are willing to do so.

In my town, that $1.2m house will run about $13K in taxes and let's say another $2K for insurance. That would bring it to about 35% of gross income - a number I would be uncomfortable with.

But this is all speculation. I wonder how many people in the million dollar house market are only putting 20% down and stretching their budget?

[GeoffD]

Originally Posted by Aara5

Even at 900, maybe you can afford the house but you aren't doing much else but staying home in it! Interesting perspectives.

It depends on what you earn. Top-5% household income in Massachusetts is $266K. Inside the 495 belt, I'll bet it's over $300K. With $250K to $300K for household income, $20K in property taxes and $50K in mortgage isn't a crushing burden. AMT with $100K of Schedule A deductions might be ugly, though.

[timberline742]

Personally I won't take on a mortgage more than 3x my gross. That's where I'm coming from.

[BostonMike7]

Originally Posted by Dm84

along with a new 2% hurricane deductible, which is total nonsense in my opinion since I don't live near the ocean.

Got that one too this year. Within 5 miles of the ocean, you get the hurricane deductible.


And I live 4.9 miles from the ocean.

[Dm84]

Originally Posted by BostonMike7

Got that one too this year. Within 5 miles of the ocean, you get the hurricane deductible.


And I live 4.9 miles from the ocean.

I'm 20 miles away at a minimum! My insurer said they're applying it statewide in MA.

[NewfieMama]

Originally Posted by jayrandom

There's a reason it's the maximum. Just be aware before you make that commitment that you've chosen to splurge on your house and won't have the money to splurge on other stuff (like eating out regularly).

Without kids it's actually possible to do better than just getting by, but throw in daycare costs and the budget would become tight. If you are considering (or have) kids make sure to think about that in your budget. Massachusetts has some of the highest costs in the nation.

I completely agree with Jayrandom. Our mortgage is less than 2x our annual income. We have zero other debt, put 20% down and pay extra toward our principal every month, and I still scratch my head at how people who make $300K a year can afford a seven figure house (if they have kids) if they want to save any money at all. We only have 2 kids, but our daycare costs are the same as our mortgage + property taxes + insurance every month. Plus every year we spend at least 10% of the value of our home on maintenance. I'm really glad we were conservative in our house budget because it's so easy to stretch yourself too thin here.

[ECPCVC]

Originally Posted by NewfieMama

I completely agree with Jayrandom. Our mortgage is less than 2x our annual income. We have zero other debt, put 20% down and pay extra toward our principal every month, and I still scratch my head at how people who make $300K a year can afford a seven figure house (if they have kids) if they want to save any money at all. We only have 2 kids, but our daycare costs are the same as our mortgage + property taxes + insurance every month. Plus every year we spend at least 10% of the value of our home on maintenance. I'm really glad we were conservative in our house budget because it's so easy to stretch yourself too thin here.

It's great that you could do that, but this is the Boston area. If you have to commute to Boston everyday and want to send you kids to a decent school it is extremely hard to spend less than 2x or even 3x your income on your mortgage. If you have two kids in daycare ok, but most people will have a starter/rent during that time. Also, schools(town) aren't important until daycare years are over.

You don't know how people with a 300k income afford a million $ home? Pretty easily, I'd say.

[Shrewsburried]

Originally Posted by NewfieMama

Plus every year we spend at least 10% of the value of our home on maintenance.

I've seen many transplants underestimate the cost of maintenance on homes and vehicles in the Northeast. I have friends/family in the Southwest and southern Cali who seemingly do nothing to their homes beyond HVAC maintenance. Meanwhile, I've watched my father replace the same trimboards 4 times over before finally conceding defeat and replacing all the siding and trim with azek and cement composite. Our housing stock trends toward old and worn because, frankly, most middle class homeowners cannot financially keep up with the rate of decay.

[Parsec]

Originally Posted by ECPCVC

It's great that you could do that, but this is the Boston area. If you have to commute to Boston everyday and want to send you kids to a decent school it is extremely hard to spend less than 2x or even 3x your income on your mortgage. If you have two kids in daycare ok, but most people will have a starter/rent during that time. Also, schools(town) aren't important until daycare years are over.

You don't know how people with a 300k income afford a million $ home? Pretty easily, I'd say.

Agree w/this. You only need a certain amount of money to live comfortably. Let's say a family earning $300k lives off the same amount of money that a family earning $200k does. That extra $100k/year (or about $55k after tax or about $4600/mo) is all disposable income. Even if they saved half of it and used the other half towards their mortgage, that still results in an extra ~$400k mortgage which will easily get them a $1 mil house.

[NewfieMama]

I've been mulling over in my head how a family of 4 with 2 young kids could "easily" afford an $800k mortgage ($1M home with 20% down) on $300K/year. I plugged in a few numbers from the internet + our own budget and have this spreadsheet (which won't copy and paste well at all)--the starting amount $25K/month:

Item Monthly Expense Balance
Fed & State/local Taxes $7,500 $17,500
Social Security $1,100 $16,400
Medicare $350 $16,050
Mortgage (800K @ 4%) $3,800 $12,250
Property taxes $1,000 $11,250
Home Insurance $200 $11,050
Home Maintenance $650 $10,400
Daycare $3,000 $7,400
Retirement $2,000 $5,400
Health Insurance $600 $4,800
Life Insurance $200 $4,600
Car Insurance $200 $4,400
Heat $300 $4,100
Electricity $200 $3,900
Phone/TV $300 $3,600
Water $50 $3,550
Groceries $450 $3,100
Restaurant (1x per week) $200 $2,900
Meals @ work (~$10 day for both spouses) $200 $2,700
Vacation ($5K/year) $400 $2,300
College Savings $500 $1,800
Gym membership $100 $1,700
kids classes/lessons $150 $1,550
Clothes/shoes $200 $1,350
Beauty $200 $1,150
Household Items (non-grocery) $450 $700
Gas for cars $200 $500
House cleaner $250 $250
Entertainment $200 $50
Car repairs ($600/year) $50 $0

This means that a family of 4 with pretty typical expenses has NO savings at the end of the month. This also assumes that: 1.) the family has no debt at all, including car payments 2.) the family has no pets, which are an expense in and of themselves 3.) the family already has a fully-funded emergency account with 6 - 12 months of the household income set aside 4.) neither of the spouses spend money on designer shoes/bags or has any expensive hobbies 5.) both have reasonable commutes--when my husband and I both took the commuter rail + parking, it was over $500/month, but I didn't include commuting expenses (other than gas)

If the family wants to save for new furniture, new cars, home remodels (which is separate from maintenance), send kids to a private school etc., it has to come from somewhere. Either you give up family vacations, you eat into the kids' college accounts or your retirement. And don't forget, when you make $300K a year, you don't get the same tax credits that others get because you're hit with the alternative minimum tax.

There is no way to have an $800K mortgage on $300K a year and still feel comfortable (with kids)