Can I afford a $500,000 house?

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Former Usher
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Can I afford a $500,000 house?

Post by Former Usher »

Inspired by a similar thread (with twice the price), I thought I'd pose the question "Can I afford a $500,000 house?"

Our current house (3BR/3Bath) was recently assessed at $310,000. Current balance on mortgage is $240,000.

Assets:
Retirement: $600,000 (no pension)
Checking/savings: $70,000
529s: $40,000
Savings bonds: $15,000
Other taxable investment accounts: $20,000

Income:
Me: $120,000 salary, been at new job 6 months
Spouse: $60,000, self-employed for several years

Ages:
Me: early 40s
Spouse: late 40s
Children: 2 preteens

We like our neighborhood and love the schools, but would like a new house (4th bedroom, sunroom, 3rd garage stall, etc.). There's a narrow window of opportunity to build within our current neighborhood.
Last edited by Former Usher on Fri Mar 27, 2015 12:50 pm, edited 1 time in total.
mnsportsgeek
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Re: Can I afford a $500,000 house?

Post by mnsportsgeek »

I am no expert by any means, but I'd say probably not.

You don't even have enough for the down payment without raiding a good chunk of your cash pile.

Even if you are able to get a 20% down payment. Based on my very rough calculations, you take home about $5000 every two weeks after taxes if paid bi weekly (~$10,000 a month). Do you want to spend 20% of your take home pay on a 30 year mortgage or 30% on a 15 year mortgage?

I'd get a 400k house if I were you.
Liberty1100
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Re: Can I afford a $500,000 house?

Post by Liberty1100 »

If they are preteens, in just a couple of years they will be in college and you won't need the extra space of a $500,000. you have just started to make some progress paying down the principal of your mortgage. I would highly suggest you just stay with it, maybe make some improvements, and continue paying your mortgage. Once they are gone, you and your Spouse can settle down in nice place neary all paid for with the equity you have gained in your house.
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obgyn65
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Re: Can I afford a $500,000 house?

Post by obgyn65 »

Nope. Sorry.
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goblegoble
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Re: Can I afford a $500,000 house?

Post by goblegoble »

What did your gut say before posting?
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3CT_Paddler
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Re: Can I afford a $500,000 house?

Post by 3CT_Paddler »

Between your equity ($70k) and your savings (only use $30k), you can easily put down $100k. Your mortgage would be almost half of your gross pay... You definitely can afford that. Bogleheads are just a very conservative bunch.
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Re: Can I afford a $500,000 house?

Post by 3CT_Paddler »

PS Zillow says you can afford $930k... Which is nothing close to what I would recommend, but $500k is within reason.
lolbatross
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Re: Can I afford a $500,000 house?

Post by lolbatross »

Technically yes you can. IMHO you shounldnt. DW and I are in a similar financial situation but are 10 years younger and we wouldn't personally do it.
Topic Author
Former Usher
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Re: Can I afford a $500,000 house?

Post by Former Usher »

3CT_Paddler wrote:Between your equity ($70k) and your savings (only use $30k), you can easily put down $100k. Your mortgage would be almost half of your gross pay... You definitely can afford that. Bogleheads are just a very conservative bunch.
Happy to see a yes vote; it makes the discussion more interesting.

I'm a bit confused by "mortgage would be almost half of your gross pay." Can you clarify?
Bacchus01
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Re: Can I afford a $500,000 house?

Post by Bacchus01 »

Yes. I was at similar salary in 3010 and bought a house right at that number. Never a problem.
wilked
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Re: Can I afford a $500,000 house?

Post by wilked »

Unfortunately, not a good idea
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tainted-meat
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Re: Can I afford a $500,000 house?

Post by tainted-meat »

You can afford it, but I wouldn't buy it. Everyone values different things though :happy
rayson
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Re: Can I afford a $500,000 house?

Post by rayson »

IMO, you can afford the house. After a 20% down payment, you will be at 2.2x your gross household income. However, this will clearly increase your expenses - which possibly means less/no contributions to 529s and possibly delayed retirement. If you are okay with the tradeoffs, you can pull the trigger. Good luck!
midmoder
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Re: Can I afford a $500,000 house?

Post by midmoder »

When do you want to retire? If 55 or earlier, don't buy the big house.
Topic Author
Former Usher
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Re: Can I afford a $500,000 house?

Post by Former Usher »

goblegoble wrote:What did your gut say before posting?
I'd say my heart wants to do it, but my head is advising caution. My gut is staying out of this one.

I wouldn't want this to be my entry in a "biggest financial mistake" thread in the future.
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Former Usher
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Re: Can I afford a $500,000 house?

Post by Former Usher »

midmoder wrote:When do you want to retire? If 55 or earlier, don't buy the big house.
I'm hoping for early 60s but recognize that sometimes we don't get to work as long as we'd like to.
spth
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Re: Can I afford a $500,000 house?

Post by spth »

We did it with the exact same income in 2012 at age 32, 20% down, Mortgage, taxes, insurance $2900 per month. Gas and electricity bill $220/ month. Did not buy any new furniture, and income has subsequently increased slightly. We do public school. We still have much more money than we need. My job is stable. Is the $60000 self employeed income stable? Is that pretax? Do you expect your income to rise?
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Former Usher
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Re: Can I afford a $500,000 house?

Post by Former Usher »

spth wrote:We did it with the exact same income in 2012 at age 32, 20% down, Mortgage, taxes, insurance $2900 per month. Gas and electricity bill $220/ month. Did not buy any new furniture, and income has subsequently increased slightly. We do public school. We still have much more money than we need. My job is stable. Is the $60000 self employeed income stable? Is that pretax? Do you expect your income to rise?
Self-employment income is stable. Both numbers are pre-tax. Absent any promotions, I expect my income to keep pace with inflation.

I think my age may be the problem here. A 30-year loan would be quite affordable, but only half of it would be paid back in 20 years (when I'd like to retire).
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Crimsontide
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Re: Can I afford a $500,000 house?

Post by Crimsontide »

I don't think it would be a very good idea. Pre-teens become teens and as such very expensive. College is coming, cars, proms, weddings, etc...
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3CT_Paddler
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Re: Can I afford a $500,000 house?

Post by 3CT_Paddler »

Former Usher wrote:
3CT_Paddler wrote:Between your equity ($70k) and your savings (only use $30k), you can easily put down $100k. Your mortgage would be almost half of your gross pay... You definitely can afford that. Bogleheads are just a very conservative bunch.
Happy to see a yes vote; it makes the discussion more interesting.

I'm a bit confused by "mortgage would be almost half of your gross pay." Can you clarify?
Sorry... meant to say that their gross pay would be almost half of the mortgage.
flybynite
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Re: Can I afford a $500,000 house?

Post by flybynite »

I'd say it depends. The money, if you intend on paying for a good portion of your children's college or putting more towards retirement, may be better saved for that than invested in a monthly mortgage payment. Our situation was not that different, our 3BR/4BA townhouse is worth $375K, mortgage $150k left. We've going on 15 years here and constantly think about the freedom that's given us - like being able to fund 529 consistently from early ages which have now grown in value to over 250K (we have 4 kids). Glad I don't have the bigger mortgage, utilities, yard to take care of etc... but for some folks these things are more important.

Some other advantages are not having to plan downsizing in the next few years as the kid's start to head off to college or putting our children in a situation where it will be extremely hard for them to ever live in better digs than their parents over the course of their lives if they are more inclined towards more living space than us. Oh, did I forget more money for going out, travel, and other things? :beer
angelescrest
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Re: Can I afford a $500,000 house?

Post by angelescrest »

You already like your house and location. Don't do it. Plus, 6 months in isn't all that long into a job. What about the idea of paying off your current mortgage sooner than later,isn't that enticing? Would you rather retire early or work later and have a better house?
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Go Blue 99
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Re: Can I afford a $500,000 house?

Post by Go Blue 99 »

I think you'd be fine with those stats, especially if you are expecting any solid salary increases. But I'm also someone whose "biggest financial mistake" was not splurging for the nicer house.
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White Coat Investor
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Re: Can I afford a $500,000 house?

Post by White Coat Investor »

Former Usher wrote:Inspired by a similar thread (with twice the price), I thought I'd pose the question "Can I afford a $500,000 house?"

Our current house (3BR/3Bath) was recently assessed at $310,000. Current balance on mortgage is $240,000.

Assets:
Retirement: $600,000 (no pension)
Checking/savings: $70,000
529s: $40,000
Savings bonds: $15,000
Other taxable investment accounts: $20,000

Income:
Me: $120,000 salary, been at new job 6 months
Spouse: $60,000, self-employed for several years

Ages:
Me: early 40s
Spouse: late 40s
Children: 2 preteens

We like our neighborhood and love the schools, but would like a new house (4th bedroom, sunroom, 3rd garage stall, etc.). There's a narrow window of opportunity to build within our current neighborhood.
I'd say you're close, but not quite there. You've got $140K for a downpayment. That leaves a $360K mortgage, or 3X your salary. I usually recommend 2X, but you're not stretching that far.
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Re: Can I afford a $500,000 house?

Post by Michread »

Don't do it! Those preteens will be in college soon and then out the door. Then you'll be wanting a smaller place withing 10 yrs of moving into your more expensive place. You'll also probably be the biggest/most expensive house in the neighborhood.
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Theotree
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Re: Can I afford a $500,000 house?

Post by Theotree »

I wouldn't do it. Oh what I wouldn't give to go back to that smaller house with that smaller mortgage and smaller maintenance requirements.
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Former Usher
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Re: Can I afford a $500,000 house?

Post by Former Usher »

Michread wrote:You'll also probably be the biggest/most expensive house in the neighborhood.
That's not a concern. They are building about 20 new homes, and most of the existing homes in my neighborhood are worth 80-90% of that. I just happen to be on one of a handful of streets with smaller lots and smaller homes. I took the path of buying the cheap house in a nice neighborhood.
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Former Usher
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Re: Can I afford a $500,000 house?

Post by Former Usher »

EmergDoc wrote:
Former Usher wrote:Inspired by a similar thread (with twice the price), I thought I'd pose the question "Can I afford a $500,000 house?"

Our current house (3BR/3Bath) was recently assessed at $310,000. Current balance on mortgage is $240,000.

Assets:
Retirement: $600,000 (no pension)
Checking/savings: $70,000
529s: $40,000
Savings bonds: $15,000
Other taxable investment accounts: $20,000

Income:
Me: $120,000 salary, been at new job 6 months
Spouse: $60,000, self-employed for several years

Ages:
Me: early 40s
Spouse: late 40s
Children: 2 preteens

We like our neighborhood and love the schools, but would like a new house (4th bedroom, sunroom, 3rd garage stall, etc.). There's a narrow window of opportunity to build within our current neighborhood.
I'd say you're close, but not quite there. You've got $140K for a downpayment. That leaves a $360K mortgage, or 3X your salary. I usually recommend 2X, but you're not stretching that far.
"Close, but not quite there" sounds about right. I'm not sure I'd have quite that much money to put down because I'd lose close to $20,000 in the sales commission, there's no guarantee of selling at the assessed price, and I'd hate to wipe out all of my cash.
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Watty
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Re: Can I afford a $500,000 house?

Post by Watty »

3CT_Paddler wrote:Between your equity ($70k) and your savings (only use $30k), you can easily put down $100k. Your mortgage would be almost half of your gross pay... You definitely can afford that. Bogleheads are just a very conservative bunch.
+1

But you would be stretching a bit and might have to give really cut back on other things like vacations and go, cars, etc. Very roughly you would be spending an extra $20K a year on the more expensive house so the question is if that $20K is best spent on the house or other things.

In a number of posts and studies people have come to the conclusion it is better to buy experiences than stuff. I would put the larger house in the "stuff" category so you might compare that to how the money could be used to buy experiences with your kids while they are still living at home.

Building is usually one of the most expensive ways to buy a house and you will usually have to add in the cost or work of landscaping the yard. You mentioned that a lot of the other houses in your neighborhood were somewhere in between your house and the new homes. An alternative would be to buy one of the other bigger existing houses in that neighborhood, or a nearby one.

The kids are pre-teens now and as other people pointed out they will be going to college before too long but there will also be a time when they are still coming home for holidays and summers so there will be a longer window when larger house might be nice.
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vitaflo
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Re: Can I afford a $500,000 house?

Post by vitaflo »

Surprised with the "no" votes. My gut instinct when I read the OP was "pfft, you can easily afford that". There's good questions here about if you'd really want to given the age of your kids, etc, but if the question is just "can I afford it" then yes, you can.
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Re: Can I afford a $500,000 house?

Post by Random Musings »

Yes you can.

Just remember to consider closing costs on both transactions, increased property taxes most likely, bigger mortgage payment. Just means you will have to work a little longer to achieve your goals.

Plus more house to clean.

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4th and Inches
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Re: Can I afford a $500,000 house?

Post by 4th and Inches »

You can afford it. You just can't go juggling two large car payments, expensive hand bags or a trip to Europe with the currently discounted Euro. Moderation, compromise and common sense will go a long way. Many on here are hyper conservative so take their comments that make YOU seem crazy with a grain of salt.
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Former Usher
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Re: Can I afford a $500,000 house?

Post by Former Usher »

boroc7 wrote:You already like your house and location. Don't do it. Plus, 6 months in isn't all that long into a job. What about the idea of paying off your current mortgage sooner than later,isn't that enticing? Would you rather retire early or work later and have a better house?
That's certainly part of the trade-off, isn't it?

Just to be clear, we don't "like" our current house. Neighborhood and schools, yes. House, no. We'd sold our old house to move to a better school district, and the new (our current) house was what might be described as the least-bad option we could agree on as time ran out.

I really appreciate everyone's discussion on this. I'm reading the collective opinions as being that it's not without risks and trade-offs, but not completely crazy either.
rgs92
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Re: Can I afford a $500,000 house?

Post by rgs92 »

Of course you can afford it (and probably more if you don't have a lavish lifestyle) imho.
$400K 30-year-fixed-rate mortgage = $2,000/month + $1000 property taxes and insurance = $3,000/month from $15,000/month gross income?
You are in like Flint. Just go buy it and make yourself happy. It's a totally responsible thing to do.
If I had 4 people in a household, I'd need 4000 square feet to stay sane. I grew up in a 1 bedroom apt with my parents and sister and it was pretty darn awful and there is no reason to put yourself through that in your financial situation.
It's not like you want a Rolls Royce or some depreciating asset. Even these days, a house should keep up with inflation. I know it's not like 30 years ago when real estate was zooming, but it's still a decent long-term source of equity and reasonable appreciation, probably better than most fixed income investments. I wouldn't consider it risky at all in your situation.
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Re: Can I afford a $500,000 house?

Post by angelescrest »

rgs92 wrote:Of course you can afford it (and probably more if you don't have a lavish lifestyle) imho.
$400K 30-year-fixed-rate mortgage = $2,000/month + $1000 property taxes and insurance = $3,000/month from $15,000/month gross income?
You are in like Flint. Just go buy it and make yourself happy. It's a totally responsible thing to do.
If I had 4 people in a household, I'd need 4000 square feet to stay sane. I grew up in a 1 bedroom apt with my parents and sister and it was pretty darn awful and there is no reason to put yourself through that in your financial situation.
It's not like you want a Rolls Royce or some depreciating asset. Even these days, a house should keep up with inflation. I know it's not like 30 years ago when real estate was zooming, but it's still a decent long-term source of equity and reasonable appreciation, probably better than most fixed income investments. I wouldn't consider it risky at all in your situation.
Lol. 1 bd apt vs 4000 sq ft. Tons of variables in between! Homes have plenty of expenses and taxes go up too.

The op sounds sensible. I'm sure you know what you're doing. But it does sound like you've already bought a couple of times, not sure if there is a pattern here to be mindful of. I'm not overly conservative, but 2000 sq ft is good anywhere in the world. If the home just makes you unhappy, then you can buy something else and feel good about it. Hopefully you feel good about it longer than a few years.
Steven28
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Re: Can I afford a $500,000 house?

Post by Steven28 »

wait until you are in the job 12 - 18 months first. you are vulnerable right now. see how it works out first.
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William4u
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Re: Can I afford a $500,000 house?

Post by William4u »

Unless there is a significant and pressing problem that would be solved by buying, I'd stick with the current house and reassess when the kids are out of the house.
delamer
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Re: Can I afford a $500,000 house?

Post by delamer »

What about adding on to your current house? You might not get everything you want, but something like a sunroom would be more affordable than going the route of buying a new home.

You'd save selling costs, plus moving costs and hassles.
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Re: Can I afford a $500,000 house?

Post by denovo »

3CT_Paddler wrote:Between your equity ($70k) and your savings (only use $30k), you can easily put down $100k. Your mortgage would be almost half of your gross pay... You definitely can afford that. Bogleheads are just a very conservative bunch.

Right. And I think people are misinterpreting the question? Can OP afford it (clearly yes) , is it a good idea, perhaps not (but not because of affordability)
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Pizzasteve510
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Re: Can I afford a $500,000 house?

Post by Pizzasteve510 »

My opinion is yes. I would factor in whether it is a good time to buy in your local market. If an opportunity is there for value go for it. I wouldn't buy just because the money was burning a hole in the banks vault.

Make some aggressive offers and see if you can get a deal. Nothing like shopping for a home when you are ready to walk if the price isn't right. I've saved quite a bit by buying with agents and projecting willingness to walk. (Hint: they lobby the seller to accept the low offer if they think you are unbending). However if your market is a sellers (like where were I live), you might consider waiting.
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sunny_socal
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Re: Can I afford a $500,000 house?

Post by sunny_socal »

OP, you sound like me and my wife from a few years ago. We ended up with the bigger house and I have no regrets. Happy wife, happy life! :sharebeer

Here in CA the question is not "can I afford a $500k house", but "can I find a $500k house?" The only way to get into a bigger house is to buy something and then upgrade when the time is right. Equity has risen much faster through market forces versus saving for down payments the old fashioned way.

But now we're definitely done moving. It's time to focus on paying it off.
wilked
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Re: Can I afford a $500,000 house?

Post by wilked »

The other thing you have to consider is the price you are talking for what you are getting.

Another garage stall? A sunroom? Find the southern-facing room and maybe bump out some bay windows, can completely open up a room.
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Former Usher
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Re: Can I afford a $500,000 house?

Post by Former Usher »

I just wanted to follow-up with a conclusion. I'm sorry to say that we will not be buying another house. I locked-in a rate to refinance today, so at least I can spend less money on interest for our current house.

Thank you all for your replies. For me it was an interesting and thought provoking discussion.
AWH_CPA
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Re: Can I afford a $500,000 house?

Post by AWH_CPA »

Do it. You are well on your way to retirement. LIke someone else said, Bogleheads are overly conservative. Principal and interest on a 15 year $400,000 mortgage at 3.25% is 2800 a month. Or $1850 for 3.75% for 30 years. That is well below what you two can afford.

You're monthly take home is probably in the neighborhood of $11,500 if i'm doing my math right. I would say that is much lower than average for housing costs.
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