Affordability rules (for rent, insurance, mortgage)

[Aara5]

What are some the affordability rules people use to determine what you can manage and what's a reach? I've heard 2.5 times your annual income, though that maybe be low in MA. Have you overextended and regretted it? Wished you took more of a risk? Let's hear it.

[Dm84]

I'm pretty sure many, if not most people who bought in the past few years are overextended.

I am technically not overextended but it always feels like I am. It's not the monthly payments that get me, it's all the maintenance and surprise repairs that increase the carrying cost. I just got my homeowner's insurance and the premium is skyrocketing by almost 15% along with a new 2% hurricane deductible, which is total nonsense in my opinion since I don't live near the ocean.

I don't know how people with less than $200k household income are buying $500k+ houses but it seems pretty common.

[jayrandom]

I've heard a factor as high as four. That's not really a great way of doing the calculation, though, because the cost of the house depends a lot on the mortgage rate you get. Make a conservative budget, figure out how much you can safely spend per month, and go from there. I'd seriously suggest going through that exercise and maybe even asking on the personal finance forum if you've budgeted realistically.

My wife and I are not overextended by most measures, but we're in a much more expensive house than I had hoped. Given our constraints and the market, it actually was the best we could have done in the past couple years (I keep checking because I'm a masochist). As prices have drifted up I have less regret over blowing our budget. Not because I think the value of my hose has gone up significantly, but because I knew we had to move soon and now worse houses are going for more.

[robr2]

General rule that gets tossed around is 28% of gross income for the mortgage and 32% for mortgage, taxes, and insurance. Given a $200K income, 28% comes out to $56K a year/$4600 a month. A $950,000 mortgage ($1.19 million house) works out to just under that amount at 4% and 30 years.

Personally, I would never do that but it's what is generally accepted.

[GeoffD]

Originally Posted by robr2

General rule that gets tossed around is 28% of gross income for the mortgage and 32% for mortgage, taxes, and insurance. Given a $200K income, 28% comes out to $56K a year/$4600 a month. A $950,000 mortgage ($1.19 million house) works out to just under that amount at 4% and 30 years.

Personally, I would never do that but it's what is generally accepted.

The old school 28% for mortgage, taxes, and insurance is the most I'd feel comfortable with and that would be much earlier in my career when I'm seeing frequent promotions and raises.

[Parsec]

General rules are stupid because not everyone spends the same amount of their disposable income on things like food and cars. Some people also save more money than others. The 28% and 32% rule above is what is commonly accepted as the maximum you can borrow from a reputable lender, but I still wouldn't go that high unless I was comfortable living paycheck to paycheck, not saving for college/retirement, buying unhealthy discount groceries, and never eating out.

Here's another way to think about what you can afford: What do you currently pay for rent and how much do you have saved for a down payment? Let's say you are currently paying $2000/mo in rent and have all your other finances in order including adequate retirement savings, etc. In theory you can spend $2000/mo on your mortgage, so now you work backwards. You also have $75,000 in savings, of which you are comfortable putting $60,000 towards your down payment. If you remember how to do algebra, you can figure out that you can afford a $360k house, assuming a 4% 30-year fixed mortgage, $100/mo for property insurance, and a $15 per thousand property tax rate. That's a $2000/mo payment on your $300k mortgage (including escrows) plus $60k down payment = $360k house.

[pennyone]

Originally Posted by robr2

General rule that gets tossed around is 28% of gross income for the mortgage and 32% for mortgage, taxes, and insurance. Given a $200K income, 28% comes out to $56K a year/$4600 a month. A $950,000 mortgage ($1.19 million house) works out to just under that amount at 4% and 30 years.

A 200K income for a 1.19 million house? You must be kidding.

[jayrandom]

Originally Posted by robr2

General rule that gets tossed around is 28% of gross income for the mortgage and 32% for mortgage, taxes, and insurance. Given a $200K income, 28% comes out to $56K a year/$4600 a month. A $950,000 mortgage ($1.19 million house) works out to just under that amount at 4% and 30 years.

Personally, I would never do that but it's what is generally accepted.

Originally Posted by pennyone

A 200K income for a 1.19 million house? You must be kidding.

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.

[Aara5]

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

[jayrandom]

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.

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.