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The old "standard" was about 25% of your monthly gross to cover your mortage payment including taxes and insurance, and that's still probably a good metric. Assuming a 20% down payment, a 4.5% interest rate, and $20k/year in taxes (which may be too low for many parts of NJ), that'd be about a $5,700 monthly payment, or $22,800/month gross (about $275k yearly salary).
In the height of the stupid lending, you probably could have qualified for a $1 million mortgage on a $50k salary, but those days are long gone.
there are also other unknowns that make this question hard to answer. how much are you saving for retirement? are you saving for kids' college? credit card debt? how are your insurance premiums? do you have an emergency fund? do you own a home right now with equity that could offset your mortgage for this $1M home?
even though conventional wisdom would agree with Bob, I personally would not buy a $1M with an income of $275K. Maybe $400K but even then I'd be pretty gun shy because who knows how long that gravy train would last. I'd probably buy something cheaper, sock the $$$ away and retire early.
All of these "calculators" i found online all worked out to about no more than 3x your yearly combined gross income (for me anyway). Ive seen some that push it more towards 4 but in my opinion, thats pushing it.
The old "standard" was about 25% of your monthly gross to cover your mortage payment including taxes and insurance, and that's still probably a good metric. Assuming a 20% down payment, a 4.5% interest rate, and $20k/year in taxes (which may be too low for many parts of NJ), that'd be about a $5,700 monthly payment, or $22,800/month gross (about $275k yearly salary).
I respectfully, but strongly disagree.
We act like this and then blame the banks and rating agencies for mortgage crises.
If I overspend in such a fashion and go bankrupt when things go belly-up, they are to blame? It is unbelievable that after all what happened, there are still people recommending such stuff.
It is suicidal for a $275k earner to buy a $1MM home with 20% down.
Here's what I think: for lower incomes / lower priced homes, 2.5 - 3 times gross income might suffice.
As we're talking about higher priced homes / higher property taxes, the ratio tends towards 1 - 1.5 times gross income for affordable home value estimate.
See my post #19 in the link below to see an example of costs in a $425k income earning scenario with a $900k home purchase budget (albeit with much lower property taxes):
And don't think you can afford more house because you can get a 3.5% mortgage - the current low rates are due to the recovery attempt from a disastrous recessionary economy, the costs of which US still hasn't started paying. But it (and by 'it', it mostly means you - the $1MM home buyer) shall have to pay up unless we want a catastrophic Greece - like scenario in the future. So, budget for way higher inflation, costs, income and property taxes in the future.
Last edited by ClearTheCobwebs; 11-28-2011 at 05:37 PM..
Thanks for the replies. I'm not commenting on our gross income but definitely appreciate the different perspectives. This is exactly what I was looking for!!! We are in debate mode...going back and forth. Our agent is in communication with the listing agent and will let us know if another family writes up an offer.
Forget gross income. Person A may have $1,000 of monthly expenses and person B may have $20,000 of monthly expenses. Does it make sense to think they can both afford the same house if they make the same gross income?
Figure out how much money you have after paying all your bills, spending money, etc. (include all saving/investing you need to do).
That is the monthly amount you can afford to spend on a house.
What if you buy your first house at the age of 40? Or your family gives you help for a downpayment?
It really isn't that hard to imagine.
My family (and my fiancee's) like many others, struggle to pay their own bills, never mind help with ours (we both come from families with two working parents).
And we'd like to own our own home before we're 40, especially with children - but even then, the idea of saving $75,000 in ten years still seems incredibly daunting!
But yeah, I'm sure it's possible, I just can't imagine many people buying homes today put 20% down. The real estate market would be virtually non existent!
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