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House prices in the SF Bay Area are ridiculous. However, we decided to take the plunge instead of spending a lot on rental payments. At least build up equity on the house seems to be a good idea. House in Cupertino/Saratoga/West San Jose.
Question is : what to spend on the house?
My base pay is about $125k + about $15-20k in bonuses and stocks per year+ benefits.
My wife makes about $80-90k (no benefits, bonuses for now.)
So annual gross income is about $200K +/- 15k. No kids yet.
No car debts, student loans, credit cards, whatsoever. Good credit. We are both about age 30. So what is the max I can spend on mortgage payments? Some people say 35% of gross pay, some say 35% of take home pay. What are other people comfortable with? Should I go on a big down payment? Or just get a loan for 5/1 arm or 7/1 arm?
The number I hear quoted most often is a mortgage for no more than 2.5x your annual gross income, which would put you around $500k for the mortgage part. How much the house is worth total depends on how much down you have saved up, of course. The fact that you have absolutely no other debt means you could potentially afford more, but the fact that you said you don't have kids YET makes me consider the risk that your expenses will go up at the same time your income goes down at some point in the future, so those two sort of cancel each other out.
But I am a big big fan of spending less than you can actually afford. If you plan to have kids, and one of you will stop working at that time, figure what you can afford on one income. That may mean you have to save up for another year or so to have enough down for the payments to make sense.
I wouldn't probably do an arm, since I expect interest rates to rise sooner than later, so I would lock in now while they are still low.
Base it off your salary. That way, you can take your wife's income and spend it on other things (including extra payments if you want) that aren't huge fixed costs.
Now you haven't committed yourselves to having to both work if you have kids (but still an option), and aren't screwed if something happens with one of your jobs or either of your's health.
Also, with record low interest rate, isn't fixed >> ARM for the time being?
Base it off your salary. That way, you can take your wife's income and spend it on other things (including extra payments if you want) that aren't huge fixed costs.
Now you haven't committed yourselves to having to both work if you have kids (but still an option), and aren't screwed if something happens with one of your jobs or either of your's health.
Also, with record low interest rate, isn't fixed >> ARM for the time being?
Agreed. I'd go a little higher than just his to get into a 15 year loan though.
Base it off your salary. That way, you can take your wife's income and spend it on other things (including extra payments if you want) that aren't huge fixed costs.
Now you haven't committed yourselves to having to both work if you have kids (but still an option), and aren't screwed if something happens with one of your jobs or either of your's health.
Also, with record low interest rate, isn't fixed >> ARM for the time being?
I totally agree also. Many two income families over spent during the housing boom. Especially younger families under age 40.
If husband makes $150K and wife makes say $100K with no kids. They try to get the 600K home. And put very little down and still have a $540K mortgage.
Well life can change, kids etc or lost income. So like this poster said, base your mortgage off one income.
One of my brothers and his wife make a combine income of around $300K. They purchased a 1 million dollar home (they put 400K down) so their mortgage was $600K.
So income of 300K with two incomes easily can afford a 600K. But than they had two kids; his wife hurt her back during one of the pregnancies.
Plus child care expenses, decrease in income.
So he could still afford the mortgage based on his income alone while his wife worked part time for a couple of years until the kids got to pre school age.
If my brother would have put very little down on the million dollar home and been stuck with a 900K mortgage. He would not have been able to afford the 900K mortgage on one income alone.
But a 600K mortgage and will some overtime, he could afford that mortgage basically on one income while his wife recovered from her back injury and the kids got older.
And really this should serve as a prime example why a two income couple family should never stretch their limits to buy a home. Never assume both will continue to make the same money. One could get laid off, have kids, get injured etc.
For single income families like me with 2 kids and a non-working spouse (my wife could always get a job...she just decided to take these years off to raise the kids).
But anyways, for a single income like me (with 3 mouths to fee), I actually would not try to do anything more than 2X your pre tax income and you better have real emergency savings outside of your retirement.
Thanks! I have received some excellent advice!
The problem was that the realtors also try to egg you onto a higher bracket than you initially think of. I will think these things over slowly and come up with some numbers and then start looking at houses.
I totally agree also. Many two income families over spent during the housing boom. Especially younger families under age 40.
If husband makes $150K and wife makes say $100K with no kids. They try to get the 600K home. And put very little down and still have a $540K mortgage.
Well life can change, kids etc or lost income. So like this poster said, base your mortgage off one income.
One of my brothers and his wife make a combine income of around $300K. They purchased a 1 million dollar home (they put 400K down) so their mortgage was $600K.
So income of 300K with two incomes easily can afford a 600K. But than they had two kids; his wife hurt her back during one of the pregnancies.
Plus child care expenses, decrease in income.
So he could still afford the mortgage based on his income alone while his wife worked part time for a couple of years until the kids got to pre school age.
If my brother would have put very little down on the million dollar home and been stuck with a 900K mortgage. He would not have been able to afford the 900K mortgage on one income alone.
But a 600K mortgage and will some overtime, he could afford that mortgage basically on one income while his wife recovered from her back injury and the kids got older.
And really this should serve as a prime example why a two income couple family should never stretch their limits to buy a home. Never assume both will continue to make the same money. One could get laid off, have kids, get injured etc.
For single income families like me with 2 kids and a non-working spouse (my wife could always get a job...she just decided to take these years off to raise the kids).
But anyways, for a single income like me (with 3 mouths to fee), I actually would not try to do anything more than 2X your pre tax income and you better have real emergency savings outside of your retirement.
Agree 100%. Maxing out your housing costs over a 30 year commitment leaves you very little flexibility for the future. The tough part is that in the Bay Area even $200k income might not get you a great home, and $125k even less.
Be careful with expensive areas, especially ones that appear to be immune from the crash. Look at the historic pricing, it could just be that they are taking longer to fall. The last thing you want to do is get in a house still priced near bubble pricing with the short term low interest rates and the extension of FHA loan limit increase while the market continues to deflate.
Also don't look at renting as throwing away money. In many expensive areas it is much cheaper to rent than to buy. Of course this is highly dependent on the area. Good luck.
After that I would just crunch the number based on your own salary and go with that number or
somewhere inbetween.
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Property taxes
