What is the max home I can afford? (middle-class, mortgage)

[calicoastal]

I'd think a debt-to-income ratio (DTI) of 30% or less is safe. To calculate that, you take your PITI (principal, interest, tax, insurance, HOA fees) payment and divide it by your gross (before tax) income. With current interest rates, that puts you at around a $700k mortgage if there is no HOA. I would put (at least) 20% down to avoid paying mortgage insurance. This puts you at around $875k for your budget (if you have the 20% down). I'd be comfortable paying that on your salary.

In addition to the down payment I would want maybe 6 months of reserve. This should ease some of the stress you seem to be having. If something goes south, it gives you 6 months to adjust. Some banks require this anyway. In total, you'd need about $200k cash ($175k down, $25k reserve). Also, I believe there is some insurance you can get where in case of job loss, your mortgage will be covered for a period of time.

BTW, jumbo loan rates are actually lower than conventional these days, but qualifications are more strict. And rates have come down recently and are currently very low. This time of year tends to be slower in real estate so there may be some deals, but also less selection available.

Over time, your mortgage payment remains fixed, unlike rent, which over time will generally trend up because of inflation. Property tax will only go up 2%/yr max. And because you are leveraged in the house, you will get 5x the ROI on your down payment if you put 20% down, i.e. if the value of your house goes up 3%, you are getting a 15% return on your down payment. That's hard to match in the stock market or elsewhere. There is also the tax deductions to consider.

If you are getting a place with an HOA, then I'd lower your budget to fit the DTI ratio. For example, say the HOA is $500/mo. You'd need to lower your mortgage by $100k to keep a DTI of 30.

[mysticaltyger]

Originally Posted by calicoastal

Property tax will only go up 2%/yr max.

Eh, not really. They often ask the voters to pass special assessments for the schools, the library, seismic upgrades to public buildings, etc. They often pass. So I think you should count on property taxes going up a bit more than 2%.

[NoMoreSnowForMe]

Originally Posted by calicoastal

Also, I believe there is some insurance you can get where in case of job loss, your mortgage will be covered for a period of time.

I looked into this not too long ago for someone, and it turns out these are basically scams, that there is no such thing worth buying.

You can get a life insurance policy that will pay off your house if you die, though, if I remember correctly. Totally different, though.

[frugaltechie]

Thanks a lot guys. I have seen diametrically opposite response to my question here and it is only fair because each one has experienced differently. Someone said I was trying to find justification for not buying. That is not 'wholly' true. Agreed I am by nature very cautious and would rather live frugally than taking a risk that will drown me

Reality is that mostly people who have bought and lucked out say that it was a great decision to buy and those who didnt say they regret it. And those that didnt buy in 2006 peak say it was a good decision since prices tacked after that for 6 years. Hindsight is always 20/20. I will keep looking for a SFH/TH in the 750-900 range and when something comes up that we both instantly like and if it is in our budget, we will pounce on it. I am actually thinking of a larger downpayment (25%) to get a 7/1 or 5/1 ARM so that I can reduce my monthly mortgage.

Also, I wanted my wife to hear from strangers that a $1M house is at the UPPER limit for us and not *so* easy, which she had a hard time understanding since just about everyone we meet has a $1M+ home with fancy cars.

Please feel free to continue the discussion. Thanks everyone for your time and thoughts.

[NoMoreSnowForMe]

Originally Posted by frugaltechie

Thanks a lot guys. I have seen diametrically opposite response to my question here and it is only fair because each one has experienced differently. Someone said I was trying to find justification for not buying. That is not 'wholly' true. Agreed I am by nature very cautious and would rather live frugally than taking a risk that will drown me

Reality is that mostly people who have bought and lucked out say that it was a great decision to buy and those who didnt say they regret it. And those that didnt buy in 2006 peak say it was a good decision since prices tacked after that for 6 years. Hindsight is always 20/20. I will keep looking for a SFH/TH in the 750-900 range and when something comes up that we both instantly like and if it is in our budget, we will pounce on it. I am actually thinking of a larger downpayment (25%) to get a 7/1 or 5/1 ARM so that I can reduce my monthly mortgage.

Also, I wanted my wife to hear from strangers that a $1M house is at the UPPER limit for us and not *so* easy, which she had a hard time understanding since just about everyone we meet has a $1M+ home with fancy cars.

Please feel free to continue the discussion. Thanks everyone for your time and thoughts.

I would caution against the adjustable rate mortgages. They will end up biting you in the butt. Best to lock in the good rates we are experiencing now, and know they will never change.

I remember the horror stories of past times when people got priced out of their homes because of their ARMs.

http://www.businessweek.com/stories/...mare-mortgages

[nagleepark]

Originally Posted by frugaltechie

Also, I wanted my wife to hear from strangers that a $1M house is at the UPPER limit for us and not *so* easy, which she had a hard time understanding since just about everyone we meet has a $1M+ home with fancy cars.

You're not the only one! I've heard the same thing on a weekly basis for years and years. That's a whole conversation in itself.

[mysticaltyger]

Originally Posted by frugaltechie

Thanks a lot guys. I have seen diametrically opposite response to my question here and it is only fair because each one has experienced differently. Someone said I was trying to find justification for not buying. That is not 'wholly' true. Agreed I am by nature very cautious and would rather live frugally than taking a risk that will drown me

Reality is that mostly people who have bought and lucked out say that it was a great decision to buy and those who didnt say they regret it. And those that didnt buy in 2006 peak say it was a good decision since prices tacked after that for 6 years. Hindsight is always 20/20. I will keep looking for a SFH/TH in the 750-900 range and when something comes up that we both instantly like and if it is in our budget, we will pounce on it. I am actually thinking of a larger downpayment (25%) to get a 7/1 or 5/1 ARM so that I can reduce my monthly mortgage.

Also, I wanted my wife to hear from strangers that a $1M house is at the UPPER limit for us and not *so* easy, which she had a hard time understanding since just about everyone we meet has a $1M+ home with fancy cars.

Please feel free to continue the discussion. Thanks everyone for your time and thoughts.

The only thing I'd add is that most people who don't have to worry about skimping in retirement DID NOT take out the maximum mortgage they qualified for. You read this over and over again in pretty much all the retirement & wealth books, the classic one being The Millionaire Next Door. The financially well off almost always live a notch or two below where they're "supposed to" for their income/peer group. Sure, there will always be a few exceptions where people took out the max mortgage and weren't living on the financial edge their whole lives, but those people are the exception. The norm is that people who take out the big mortgage are pretty low in the savings/investment/retirement department.

[RecentGrad1]

Originally Posted by mysticaltyger

The only thing I'd add is that most people who don't have to worry about skimping in retirement DID NOT take out the maximum mortgage they qualified for. You read this over and over again in pretty much all the retirement & wealth books, the classic one being The Millionaire Next Door. The financially well off almost always live a notch or two below where they're "supposed to" for their income/peer group. Sure, there will always be a few exceptions where people took out the max mortgage and weren't living on the financial edge their whole lives, but those people are the exception. The norm is that people who take out the big mortgage are pretty low in the savings/investment/retirement department.

Precisely.

OP, tell your wife that those people who have $1M+ homes and fancy cars quite likely barely have a penny to their name, and are simultaneously locked into debt for the rest of their lives.

The Millionaire Net Door is excellent in that it talks about Under Accumulators of Wealth versus Prodigious Accumulators of Wealth, based on your level of income. Those people you see with fancy luxury items are also most likely to have far less than the national average of actual wealth based on their income.

Which would you prefer to have: perceived wealth or actual wealth?

[spicydreamt]

Originally Posted by RecentGrad1

Precisely.

OP, tell your wife that those people who have $1M+ homes and fancy cars quite likely barely have a penny to their name, and are simultaneously locked into debt for the rest of their lives.

The Millionaire Net Door is excellent in that it talks about Under Accumulators of Wealth versus Prodigious Accumulators of Wealth, based on your level of income. Those people you see with fancy luxury items are also most likely to have far less than the national average of actual wealth based on their income.

Which would you prefer to have: perceived wealth or actual wealth?

Some "fancy cars" can be leased, others were bought on IPO stocks or cash inheritance, some luxury cars are even gifts from parents. It can be unnerving to see a 20y old driving a Porsche, you can choose to rationalize it that way if that makes you feel better, but in reality some people have a huge headstart on others when it comes to cash and that's just how it is (and why material possessions will never make anybody happy)

[nagleepark]

Originally Posted by spicydreamt

Some "fancy cars" can be leased, others were bought on IPO stocks or cash inheritance, some luxury cars are even gifts from parents. It can be unnerving to see a 20y old driving a Porsche, you can choose to rationalize it that way if that makes you feel better, but in reality some people have a huge headstart on others when it comes to cash and that's just how it is (and why material possessions will never make anybody happy)

Some 20 year olds have monster incomes, too.