How Much Housing Payment Can a Boglehead Afford?

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steadyeddy
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How Much Housing Payment Can a Boglehead Afford?

Post by steadyeddy » Tue Nov 22, 2016 5:37 pm

We get a lot of questions on this forum that boil down to, "Can I afford this home?" I recently read one such thread where the original poster intended to take out a mortgage of ~2.5x annual income. Many responses advised this was too risky and a smaller mortgage should be pursued. Frankly, I was surprised. And as someone who plans to buy a larger home someday, this is something I've had on my mind, and I would like further discussion.

I've heard many rules of thumb for home affordability. A mortgage of two times income, home price of three times income, payments no more than 36% of gross income, payments no more than 25% of net income, and even home price no more than 1/2 net worth! Obviously there are many different opinions on this issue. And because factors such as cost of living, tax rates, insurance costs, HOA, mortgage insurance, maintenance costs, etc. can all impact affordability, these rules of thumb are often unclear.

I think total monthly payment vs. gross income is the most universal way to frame the issue. Framing it this way also allows renters to have a guide. With that said, what do you propose is the maximum monthly housing payment a Boglehead should consider at any given income level? I imagine the numbers will not be linear since discretionary income increases with gross income, but then things like progressive income tax rates also have to be taken into account. I'll provide an example of what I'm looking for, though I haven't given much thought to these particular numbers:

Code: Select all

Gross Income          Maximum Monthly Housing Payment
$10,000                  $0
$30,000                  $500
$50,000                  $700
$75,000                  $1,100
$100,000                 $1,600
$150,000                 $3,500
$200,000                 $5,500
$300,000                 $8,000
$500,000                 $20,000
Please feel free to specify whatever reasoning you desire for how you arrived at your numbers, but please state numbers in terms of gross income to maximum monthly housing payment if possible. Thanks in advance!

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by Grt2bOutdoors » Tue Nov 22, 2016 5:48 pm

20 percent of gross income or no more than 28 percent, preferably between 25 and 27 percent of net take home monthly pay. All inclusive costs of principal, interest, hoa, insurance, taxes, utilities including your cable and phone bill and water/heating. This calculation would then permit a healthy level of savings and investment to support you in retirement and in case of job loss.
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Re: How Much Housing Payment Can a Boglehead Afford?

Post by randomguy » Tue Nov 22, 2016 5:55 pm

It is too individualized of a number to come up with a useful rule. I think top down budgeting like this doesn't work well. I work the other way. If I am paying 3k in rent and have 2k discrentionary money left at the end of the month, I can spend 5k on house. Now if I want to or if a bank will loan me the money are different issues. If with the same income I have 500 left (I am leasing a 911), I can only afford 3.5k. Same income. Different amounts. If I want to spend more on housing I need to figure out where that money comes from (less savings, less recreational spending,...).

And you need to look at your alternative. If you are renting for 4k/month and can buy (all inclusive) for 3k/month, does it really matter if 3k is 25% of your income or 35%? Obviously that goes the other way also.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by dsmil » Tue Nov 22, 2016 7:25 pm

I think the best thing to do is just put the payment into a budget and see what happens. Generally, higher income people can afford a higher percentage of income going to housing because after paying for housing, they are left with more money.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by KlangFool » Tue Nov 22, 2016 7:40 pm

steadyeddy wrote: With that said, what do you propose is the maximum monthly housing payment a Boglehead should consider at any given income level?
steadyeddy,

Unless you are a real estate agent and you make money when someone buys the house, why does the maximum monthly payment has anything to do with income?

My goal in life is not to make real estate agent rich.

I save 1/3 of my gross income. Then, I look for housing that met my minimal requirement. After that, I decide whether rent or buy makes the most financial sense.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by KlangFool » Tue Nov 22, 2016 7:47 pm

OP,

It is very simple. Most rule of thumbs and ratios out there are pushed by people with self-interest. Their goal is to get people to buy as much house as possible. Everyone except the house buyers makes money when someone buys a house.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by Raladic » Tue Nov 22, 2016 7:52 pm

This is very area specific.
If you live in a HCOL area, you may very well have to spend more than a prescribed formula, unless you want to do a 1-2 hour commute each way.

Just as KlangFool said - you should get something that meets your housing needs and makes financial sense in terms of rent-vs-buy, but forcing a "Thou shall not spend more than x" doesn't work across the country..

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by Rodc » Tue Nov 22, 2016 8:35 pm

At an annual salary of $300,000, after taxes, health insurance, saving for retirement, saving for college, FICA, etc you might clear $15,000 a month and you have $8,000 towards mortgage. No thanks!

How did you come up with these numbers?

I think you have to look at your own needs and wants and make a budget to see what is comfortable. Factor in some margin of error if you can, because unemployment happens. And your next job may pay less. If you live in a VHCOL area you might not get much comfort, but see what you can do. Much better than a rule of thumb and not difficult.

Then see what a bank will lend you and take the smaller number.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by Dottie57 » Tue Nov 22, 2016 8:50 pm

Rodc wrote:At an annual salary of $300,000, after taxes, health insurance, saving for retirement, saving for college, FICA, etc you might clear $15,000 a month and you have $8,000 towards mortgage. No thanks!

How did you come up with these numbers?

I think you have to look at your own needs and wants and make a budget to see what is comfortable. Factor in some margin of error if you can, because unemployment happens. And your next job may pay less. If you live in a VHCOL area you might not get much comfort, but see what you can do. Much better than a rule of thumb and not difficult.

Then see what a bank will lend you and take the smaller number.

I agree with Rodc. I also think you should start with your priorities. For most of my life it was retirement savings of 15%. Then emergency fund, food, utilities, car and housing - which are more lifestyle. I didn't grow up rich or poor. Just comfortable. Don't look to maximize house , but go for comfortable house AND payment.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by steadyeddy » Tue Nov 22, 2016 8:51 pm

Grt2bOutdoors wrote:20 percent of gross income or no more than 28 percent, preferably between 25 and 27 percent of net take home monthly pay. All inclusive costs of principal, interest, hoa, insurance, taxes, utilities including your cable and phone bill and water/heating. This calculation would then permit a healthy level of savings and investment to support you in retirement and in case of job loss.
Thank you. Do you feel those percentages still hold true at higher income levels?

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by steadyeddy » Tue Nov 22, 2016 8:53 pm

KlangFool wrote:
steadyeddy wrote: With that said, what do you propose is the maximum monthly housing payment a Boglehead should consider at any given income level?
steadyeddy,

Unless you are a real estate agent and you make money when someone buys the house, why does the maximum monthly payment has anything to do with income?

My goal in life is not to make real estate agent rich.

I save 1/3 of my gross income. Then, I look for housing that met my minimal requirement. After that, I decide whether rent or buy makes the most financial sense.

KlangFool
I don't understand how a maximum payment would not have anything to do with income. It's self evident.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by steadyeddy » Tue Nov 22, 2016 8:55 pm

Raladic wrote:This is very area specific.
If you live in a HCOL area, you may very well have to spend more than a prescribed formula, unless you want to do a 1-2 hour commute each way.

Just as KlangFool said - you should get something that meets your housing needs and makes financial sense in terms of rent-vs-buy, but forcing a "Thou shall not spend more than x" doesn't work across the country..

I think I disagree. A maximum number should still exist. Perhaps the manhattan resident spends the maximum and the St. Louis resident does not, but there must be a maximum. I am asking for yours.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by KlangFool » Tue Nov 22, 2016 8:58 pm

steadyeddy wrote:
I don't understand how a maximum payment would not have anything to do with income. It's self evident.
steadyeddy,

Why? Are you a real estate agent? If it is self-evident, it should be easy enough for you to explain to us.

I may choose to pay more or less for housing. It has absolutely nothing to do with my income.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by Grt2bOutdoors » Tue Nov 22, 2016 8:58 pm

steadyeddy wrote:
Grt2bOutdoors wrote:20 percent of gross income or no more than 28 percent, preferably between 25 and 27 percent of net take home monthly pay. All inclusive costs of principal, interest, hoa, insurance, taxes, utilities including your cable and phone bill and water/heating. This calculation would then permit a healthy level of savings and investment to support you in retirement and in case of job loss.
Thank you. Do you feel those percentages still hold true at higher income levels?
Yes, a higher income level may require even more savings. Assume you are saving for retirement, a lower income worker may find at full retirement age social security replaces 40% of final average pay, whilst the higher income worker finds FRA social security replaces only 18% of final pay. If the higher income worker needs 60% of final pay to retire, the only source to make up for the 42% shortfall in replacement income will come from their own savings. Do not assume a current high income earner will always earn at the same or higher level, the street is littered with plans that went awry - job loss, under employment, disability, early retirement. Use the two levers you have to maximize your options - time and rate of savings. Save, save early and often.
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Re: How Much Housing Payment Can a Boglehead Afford?

Post by steadyeddy » Tue Nov 22, 2016 8:59 pm

Rodc wrote:At an annual salary of $300,000, after taxes, health insurance, saving for retirement, saving for college, FICA, etc you might clear $15,000 a month and you have $8,000 towards mortgage. No thanks!

How did you come up with these numbers?

I think you have to look at your own needs and wants and make a budget to see what is comfortable. Factor in some margin of error if you can, because unemployment happens. And your next job may pay less. If you live in a VHCOL area you might not get much comfort, but see what you can do. Much better than a rule of thumb and not difficult.

Then see what a bank will lend you and take the smaller number.
Everybody's different, but $7k a month in discretionary income after all those things sounds great to me!

I'm asking the question because I don't quite know what is comfortable. I would have thought a mortgage of 2.5x income in a low interest rate environment would be comfortable, but that poster got shouted down. Now I'm trying to understand what is comfortable if not that. Any further input in appreciated!

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by KlangFool » Tue Nov 22, 2016 9:01 pm

steadyeddy wrote:
Raladic wrote:This is very area specific.
If you live in a HCOL area, you may very well have to spend more than a prescribed formula, unless you want to do a 1-2 hour commute each way.

Just as KlangFool said - you should get something that meets your housing needs and makes financial sense in terms of rent-vs-buy, but forcing a "Thou shall not spend more than x" doesn't work across the country..

I think I disagree. A maximum number should still exist.
steadyeddy,

Yes, but it has nothing to do with our income level. It has to do with our housing requirement.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by KlangFool » Tue Nov 22, 2016 9:04 pm

steadyeddy wrote:
I'm asking the question because I don't quite know what is comfortable. I would have thought a mortgage of 2.5x income in a low interest rate environment would be comfortable, but that poster got shouted down. Now I'm trying to understand what is comfortable if not that. Any further input in appreciated!
steadyeddy,

When you asked the wrong question, you will never get the right answer! We buy or rent a house to live. It starts with our housing requirement. Not on how much to pay. Only a sales person think like this. He / she wants you to spend as much as possible.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by Grt2bOutdoors » Tue Nov 22, 2016 9:07 pm

steadyeddy wrote:
Rodc wrote:At an annual salary of $300,000, after taxes, health insurance, saving for retirement, saving for college, FICA, etc you might clear $15,000 a month and you have $8,000 towards mortgage. No thanks!

How did you come up with these numbers?

I think you have to look at your own needs and wants and make a budget to see what is comfortable. Factor in some margin of error if you can, because unemployment happens. And your next job may pay less. If you live in a VHCOL area you might not get much comfort, but see what you can do. Much better than a rule of thumb and not difficult.

Then see what a bank will lend you and take the smaller number.
Everybody's different, but $7k a month in discretionary income after all those things sounds great to me!

I'm asking the question because I don't quite know what is comfortable. I would have thought a mortgage of 2.5x income in a low interest rate environment would be comfortable, but that poster got shouted down. Now I'm trying to understand what is comfortable if not that. Any further input in appreciated!
The other poster was not shouted down, they had posted on multiple different threads the same question. Going to sink all their assets into this new house. What did the new house solve for that the current house did not? Oh, it had extra space and it also cost $1.1 million and they were assuming they would make partner in 10 years, that may or may not reach fruition. Lot's of what ifs.
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Re: How Much Housing Payment Can a Boglehead Afford?

Post by steadyeddy » Tue Nov 22, 2016 9:09 pm

KlangFool wrote:
steadyeddy wrote:
I don't understand how a maximum payment would not have anything to do with income. It's self evident.
steadyeddy,

Why? Are you a real estate agent? If it is self-evident, it should be easy enough for you to explain to us.

I may choose to pay more or less for housing. It has absolutely nothing to do with my income.

KlangFool
I am not a real estate agent. Please do not troll this thread.

Since a maximum payment has no relation to income, could I support a payment of 200% of income? Of course not.

I would simply like to know the maximum percentage you would feel comfortable spending. I welcome your opinion on this. If you prefer not to answer, please feel free to remain silent.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by steadyeddy » Tue Nov 22, 2016 9:10 pm

Grt2bOutdoors wrote: The other poster was not shouted down, they had posted on multiple different threads the same question. Going to sink all their assets into this new house. What did the new house solve for that the current house did not? Oh, it had extra space and it also cost $1.1 million and they were assuming they would make partner in 10 years, that may or may not reach fruition. Lot's of what ifs.
Ah, I guess I did not understand the context. Thank you!

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by Rodc » Tue Nov 22, 2016 9:14 pm

steadyeddy wrote:
Rodc wrote:At an annual salary of $300,000, after taxes, health insurance, saving for retirement, saving for college, FICA, etc you might clear $15,000 a month and you have $8,000 towards mortgage. No thanks!

How did you come up with these numbers?

I think you have to look at your own needs and wants and make a budget to see what is comfortable. Factor in some margin of error if you can, because unemployment happens. And your next job may pay less. If you live in a VHCOL area you might not get much comfort, but see what you can do. Much better than a rule of thumb and not difficult.

Then see what a bank will lend you and take the smaller number.
Everybody's different, but $7k a month in discretionary income after all those things sounds great to me!

I'm asking the question because I don't quite know what is comfortable. I would have thought a mortgage of 2.5x income in a low interest rate environment would be comfortable, but that poster got shouted down. Now I'm trying to understand what is comfortable if not that. Any further input in appreciated!
The challenge I think is it is out of balance for most people to have a gold plated house ($8000 a month) and a brass plated lifestyle otherwise. So you want a house that in "grandness" is about the same as your cars, your vacations, your hobbies, your charitable giving, etc. Paying more than half your take home salary does not provide that balance. That said, some years ago saw a map where folks were paying more than half takehome in mortgage in the newspaper. The point was that in poor neighborhoods in Boston people had to pay that much if they ever wanted to own. But in my HCOL leafy Boston burb the fanciest neighborhood in town was lit up on that map! Shocked me. Why pay 50% of your money to buy a luxury two million dollar (now much more) 4000-5000 sqft house when you could comfortably but a perfectly nice one million dollar 2500-3000 ft house with 4 or 5 bedrooms? But not everyone thinks like me, obviously!

Also likely difficult to build a really solid emergency fund when mortgage is that fraction of take home pay.

Moreover when you commit to that high a percentage of your income, you get totally locked into making that much money. I have seen people do that and ruin their lives because they hate their job but can't bring themselves to downsize their career to do something they liked that paid less. Watched a girlfriend's father do that and vowed I would not. So going to the absolute limit when you do not have to makes no sense to me. If you really want a house and you have very little money you do not have much choice. But if you have a lot of money the max should be something very comfortable that preserves options. IMHO
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by *3!4!/5! » Tue Nov 22, 2016 9:18 pm

steadyeddy wrote:
KlangFool wrote:
steadyeddy wrote: With that said, what do you propose is the maximum monthly housing payment a Boglehead should consider at any given income level?
steadyeddy,

Unless you are a real estate agent and you make money when someone buys the house, why does the maximum monthly payment has anything to do with income?

My goal in life is not to make real estate agent rich.

I save 1/3 of my gross income. Then, I look for housing that met my minimal requirement. After that, I decide whether rent or buy makes the most financial sense.

KlangFool
I don't understand how a maximum payment would not have anything to do with income. It's self evident.
Yes, it is completely self-evident to every single person who has ever visited this forum
bogleheads.org

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by emoore » Tue Nov 22, 2016 9:19 pm

For me I feel most comfortable with my PITI under 20% of my gross income. I'd go up to 25% if I had to but then it would be more difficult to max out my retirement.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by sambb » Tue Nov 22, 2016 9:21 pm

The questions posed are difficult to answer. let me throw out some philosophical questions that may affect home affordability.
1. Do you intend to buy nice cars also>
2. do you intend to save for kids colelge also?
3. do you have any debt already>
4. Do you need to live close to work
5. what about school district
6. do you need a larger home
7. do you want to spend on this as a splurge and save in other areas
8. are you in a good housing market
9. how is your job prospects for future raises
10. what about the taxes and maintenance

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by qwertyjazz » Tue Nov 22, 2016 9:33 pm

Housing for most people on this forum is a relative luxury and should be juggled with other luxuries. So as KlangFool correctly points out, decide your total spending then decide how much should be housing.
Now if I lived in the North Pole and needed shelter to survive, I would spend whatever multiple of my salary was required to survive and then hope to make more money later. So a reasonable Boglehead could spend 10 times their annual salary on shelter if needed. But if it is a luxury, then you cannot answer the question in isolation.
Take another less extreme example - less extreme to some at least. If I lived in NYC then I might not have a car, so housing would be what I would spend on car and house elsewhere perhaps.

IOW figure out how you value various luxuries and how much you want to save for future neccesities or luxuries.
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Re: How Much Housing Payment Can a Boglehead Afford?

Post by dsmil » Tue Nov 22, 2016 9:41 pm

Again, I like budgets rather than ratios, but 30% of gross income seems to be at the top of what usually works for us when looking for a new home.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by KlangFool » Tue Nov 22, 2016 9:43 pm

*3!4!/5! wrote: Yes, it is completely self-evident to every single person who has ever visited this forum
bogleheads.org
*3!4!/5!,

If that is true, it should easy enough for you to explain this to us.

KlangFool

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by investorguy1 » Tue Nov 22, 2016 9:44 pm

The median household income is something like $55,000. In many places you can't get a two bedroom for less than $1,000. So I'd say for many people on the low end they will probably end up spending more. Assuming someone could live on $55,000 than someone earning $500,000 could spend the rest on housing if he wanted to.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by qwertyjazz » Tue Nov 22, 2016 9:56 pm

steadyeddy wrote:
KlangFool wrote:
steadyeddy wrote:
I don't understand how a maximum payment would not have anything to do with income. It's self evident.
steadyeddy,

Why? Are you a real estate agent? If it is self-evident, it should be easy enough for you to explain to us.

I may choose to pay more or less for housing. It has absolutely nothing to do with my income.

KlangFool
I am not a real estate agent. Please do not troll this thread.

Since a maximum payment has no relation to income, could I support a payment of 200% of income? Of course not.

I would simply like to know the maximum percentage you would feel comfortable spending. I welcome your opinion on this. If you prefer not to answer, please feel free to remain silent.
Rereading thread
Check out life cycle investment theory
In college one year I spent like 10000% percent on housing (made a couple of bucks on a single day)
Some years in grad school I made no income so that is an impossible calculation
This thread helps me realize how important it is to not take any part of my finances in isolation in not only a given year but throughout my life
Thank you for this delightful thought process. I some times get too lost on agonizing over individual decisions.

Good luck on whatever heuristic you choose
QJ
G.E. Box "All models are wrong, but some are useful."

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by Dottie57 » Tue Nov 22, 2016 9:57 pm

KlangFool wrote:
steadyeddy wrote:
Raladic wrote:This is very area specific.
If you live in a HCOL area, you may very well have to spend more than a prescribed formula, unless you want to do a 1-2 hour commute each way.

Just as KlangFool said - you should get something that meets your housing needs and makes financial sense in terms of rent-vs-buy, but forcing a "Thou shall not spend more than x" doesn't work across the country..

I think I disagree. A maximum number should still exist.
steadyeddy,

Yes, but it has nothing to do with our income level. It has to do with our housing requirement.

KlangFool
Your housing costs DO have a lot to do with income level. You spend well within your income!

I think OP should stop thinking MAX amount and settle on a number which allows for LBYM.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by qwertyjazz » Tue Nov 22, 2016 10:00 pm

KlangFool wrote:
*3!4!/5! wrote: Yes, it is completely self-evident to every single person who has ever visited this forum
bogleheads.org
*3!4!/5!,

If that is true, it should easy enough for you to explain this to us.

KlangFool
I think factorial is being sarcastic. I am not sure that every person who has visited this forum could explain or do anything.
Now I am sure that everyone reading this would agree with me :)
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Re: How Much Housing Payment Can a Boglehead Afford?

Post by *3!4!/5! » Tue Nov 22, 2016 10:07 pm

The stuff about real estate agents is non sequitur.

Actuaries would be a good place to start. You need to calculate what kind of payment a person could reasonably be expected to be able to maintain over a period of time.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by avalpert » Tue Nov 22, 2016 10:12 pm

steadyeddy wrote:I think total monthly payment vs. gross income is the most universal way to frame the issue. Framing it this way also allows renters to have a guide. With that said, what do you propose is the maximum monthly housing payment a Boglehead should consider at any given income level?
As others have pointed out, you are asking the wrong question from the wrong frame so the answers are not going to be helpful.

If you want the direct answer to your question it is 100% of income + whatever credit you can get is the maximum and then we can adjust down to the right level based on competing needs and the real estate market your are in.

But it is triviallay easy to show that monthly payment vs gross income is not a good way to frame the issue. Suppose you have to people each earning $100k and both with $100k in a 401k and $50 in a bank. One thinks it is a good idea to cash out their 401k and put $150k towards a house, the other thinks that is a bad idea and will only put $50k. The one who is cashing out their 401k can buy more house for the same monthly payment - but is their ability to afford it any different?

Housing costs need to be accurately understood (and they are not just monthly PITI costs when you own) and need to be considered in the context of your total expenses, desires and markets. Rules of thumb are always poor substitutes for actual situational analysis.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by HornedToad » Tue Nov 22, 2016 10:12 pm

The ratio is hard. For me, $3k mortgage payment at $150k seems MUCH easier than $6k at 300k salary. But that could be due to more expensive vacations, healthier eating, decorating costs, redoing the backyard, kids, higher taxes, etc etc.

The ratio gives estimate but is not perfect.

I think if you are under 15% gross you are very comfortable.
Under 20% gross you'll generally be ok.
Under 25% you make a few minor sacrifices
Under 30% you have to watch your budget and be conscious
Under 35% you are tight
Under 40% you are in trouble

But that will change depending on how you like to spend your money, if you have kids, and other considerations.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by delamer » Tue Nov 22, 2016 10:30 pm

In my youth, I applied for a FHA loan as a single woman. If I recall the basics correctly, they were not interested in what percentage of my income the loan was or any similar metric. What they did care about was how much money I'd have to live on each month made the mortgage payment. That was was how I was qualified -- could I pay for food, transportation, taxes, etc. after I took care of PITI?

I thought that was a very sensible approach. And it definitely influenced how I viewed the affordability of future home purchases.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by Slacker » Tue Nov 22, 2016 11:46 pm

HornedToad wrote:The ratio is hard. For me, $3k mortgage payment at $150k seems MUCH easier than $6k at 300k salary. But that could be due to more expensive vacations, healthier eating, decorating costs, redoing the backyard, kids, higher taxes, etc etc.

The ratio gives estimate but is not perfect.

I think if you are under 15% gross you are very comfortable.
Under 20% gross you'll generally be ok.
Under 25% you make a few minor sacrifices
Under 30% you have to watch your budget and be conscious
Under 35% you are tight
Under 40% you are in trouble

But that will change depending on how you like to spend your money, if you have kids, and other considerations.
I personally feel very comfortable right now with our situation of being at 8.5% of gross for housing costs (rent + renter's insurance).

We were at around 14.25% (PITI + HOA) and that didn't feel nearly as comfortable when you take out all of the taxes (state, fed, ss, medicare) and retirement savings (IRAs x 2, 401Ks x 2, HSAs x 2, taxable) plus all of the costs associated with setting up a brand new house (landscaping, patio, furniture, appliances, decorations, solar panels).

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steadyeddy
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Re: How Much Housing Payment Can a Boglehead Afford?

Post by steadyeddy » Tue Nov 22, 2016 11:52 pm

It's clear I did a horrible job asking my question, so I'd like to start over. I'm not asking for the answer, but rather your answer.

What percentage of your income would you feel comfortable spending on a home? What is the tipping point where you would begin feeling uncomfortable?

Let's assume there are a wide variety of housing options available at different price points so you get to choose how much of your income to allocate to housing.

I'm so grateful for those of you that have engaged in the discussion despite my poor wording.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by randomguy » Wed Nov 23, 2016 12:15 am

steadyeddy wrote:It's clear I did a horrible job asking my question, so I'd like to start over. I'm not asking for the answer, but rather your answer.

What percentage of your income would you feel comfortable spending on a home? What is the tipping point where you would begin feeling uncomfortable?

Let's assume there are a wide variety of housing options available at different price points so you get to choose how much of your income to allocate to housing.

I'm so grateful for those of you that have engaged in the discussion despite my poor wording.
I allocate the least amount needed to get me the housing I want. That has varied from 5% to 30% of household income over the years as the cost of what I want and what I want changes. For most people there is a basic level of what they want. If it requires 30% of your salary to get you a 2 bedroom home for your family of 3 most people will spend that versus living in a studio that is 20%. Once you get to some minimum then you can debate if you would rather have granite counter tops or 10k more in retirement savings.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by KlangFool » Wed Nov 23, 2016 8:44 am

steadyeddy wrote:
What percentage of your income would you feel comfortable spending on a home? What is the tipping point where you would begin feeling uncomfortable?
steadyeddy,

http://www.investopedia.com/terms/p/pay ... o-infinite

1) Many of us save using the "Pay Yourself First" method. I live on my 1/3 of my gross income. housing expense including mortgage is part of that. So, I would never be uncomfortable to begin.

2) At this moment, 1/3 of my living expense is on housing. This has nothing to do with maximum, minimum, or whatever. It satisfies my housing requirement and it is cheaper to buy. So, the number is 1/6 at this moment. But, the number could be lower if I could get a better deal.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by KlangFool » Wed Nov 23, 2016 8:46 am

randomguy wrote:
steadyeddy wrote:It's clear I did a horrible job asking my question, so I'd like to start over. I'm not asking for the answer, but rather your answer.

What percentage of your income would you feel comfortable spending on a home? What is the tipping point where you would begin feeling uncomfortable?

Let's assume there are a wide variety of housing options available at different price points so you get to choose how much of your income to allocate to housing.

I'm so grateful for those of you that have engaged in the discussion despite my poor wording.
I allocate the least amount needed to get me the housing I want. That has varied from 5% to 30% of household income over the years as the cost of what I want and what I want changes. For most people there is a basic level of what they want. If it requires 30% of your salary to get you a 2 bedroom home for your family of 3 most people will spend that versus living in a studio that is 20%. Once you get to some minimum then you can debate if you would rather have granite counter tops or 10k more in retirement savings.
+1. Same concept in my case except it needs to fit within 1/3 of my gross income.

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saladdin
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Re: How Much Housing Payment Can a Boglehead Afford?

Post by saladdin » Wed Nov 23, 2016 9:09 am

Easy question. My answer: What payment can I make if the only job I could get is deliver pizzas?

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by lthenderson » Wed Nov 23, 2016 9:15 am

We currently spend 0.5% of of our gross income on our mortgage. I would be comfortable spending 0.75%. As I've come to realize through this thread, housing where I live is extremely cheap compared to other parts of the country. If I spent more of my gross income, I would be forever stuck with the house because no one else would be able to afford to buy it from me due to us living in the most expensive part of town. This greatly affect my comfort on how much to spend.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by Rodc » Wed Nov 23, 2016 9:30 am

steadyeddy wrote:It's clear I did a horrible job asking my question, so I'd like to start over. I'm not asking for the answer, but rather your answer.

What percentage of your income would you feel comfortable spending on a home? What is the tipping point where you would begin feeling uncomfortable?

Let's assume there are a wide variety of housing options available at different price points so you get to choose how much of your income to allocate to housing.

I'm so grateful for those of you that have engaged in the discussion despite my poor wording.
Every extra dollar spent makes me more less comfortable, even is the difference is super tiny. Where is the absolute threshold? Reminds me of this: how many grains of sand make a pile of sand? One grain is not a pile. Two grains is not a pile. One million grains is I presume a pile. If I add one grain at a time, when exactly did it become a pile? This is similar. This is why hypothetical rules of thumb have so little value.

Answer is very specific to my exact situation and likely of little value to anyone else.

And has changed over time as I near retirement.

I am comfortable with my payment well below 10%. I could move very easily and make it 0% with cash in pocket by moving one town over. For now my comfort is such I have no interest in doing so. Since I have zero need for a more expensive house, and I am nearing retirement, I would not be comfortable paying any more. It also helps that if I really wanted to I could just pay off the mortgage, but the rate is so low I prefer to keep the liquidity and prefer to keep the money invested in stocks and bonds.

When I first bought the house I was below, but not super below, what the bank would give. Guideline was something like 20% house, 33% total, and I had very little if any other debt at the time. I was not comfortable at 20%. I do not recall now just what the percent was. As stated above, I wanted wiggle room in case I wanted to change jobs to some I liked more, but paid less.

Later wife wanted a big expensive house, but I was not comfortable with something that absolutely required us both working full time and full income. Over time the wisdom of that choice became very explicit, as my wife ran into some employment difficulties and was very happy to be able to take a half time job she likes.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by warowits » Wed Nov 23, 2016 9:40 am

As much as some people on here seem to hate it, housing expense is wrapped up in our concept of class and self worth. There is also the very real fact that when evaluating a housing payment you should also keep in mind the rent you will have to pay if you don't buy. Also looking at it as a multiple of your yearly salary ignores interest rates, which makes no sense unless you are paying cash for the home.

To answer your question I am currently at about 20% of gross take home. When I got the house it was close to 35%. I would be very cautious about buying a new home at 35% of my current income, but also would say to a young person starting out 35% is okay. Being house poor sucks, but buying a cheap house you will just want to upgrade 5 years later doesn't make a lot of sense either.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by grettman » Wed Nov 23, 2016 9:46 am

I make a $160K a year. If I had a $3.5K mortgage as your table suggests, I would have to stop funding our IRAs and of course there wouldn't be any taxable investing opportunities. So while technically it is affordable, the cost to my futre self would be too great for me to carry it. It should be noted that I have no car payments and I dine out once a week with the wife at cheapo places so my budget doesn't have a lot of fat.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by bigred77 » Wed Nov 23, 2016 9:54 am

OP,

Our PITI + HOA fee is right at about 20% of gross income. I pay extra on the mortgage to bring my actual payment up to about 28% of gross. We still save 25%+ for retirement (although technically I don't fill up ALL available tax advantaged space available to me).

I'm comfortable with the above ratios, although it sometimes it feels a little tight because a portion of our gross income is "lumpy" where we get stock vesting and/or bonuses. I always know I can cut back on prepaying the mortgage if I need to and just wait for the next vesting date if things get too tight.

I personally would never want to go above 33% of gross income (if I could help it, if I lived in the Bay Area I'm sure I would exceed this just like most others). If my salary was very high (300k, 400k, 500k+) and I had a lot of disposal income that I could technically allocate to housing expense I still wouldn't do it because I perceive that compensation as hard to find and hard to replace if something unexpected happens. I would actually be trying to bring my housing ratios down as my salary level increased.

Not saying I wouldn't ever buy luxury housing, but you better be able to plunk down a large amount of cash to do it IMO. I liken it to the fact that I like luxury cars, but if I could only put down 20% and was financing the rest then I would be sticking with the Toyota dealership.
Last edited by bigred77 on Wed Nov 23, 2016 9:57 am, edited 1 time in total.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by qwertyjazz » Wed Nov 23, 2016 9:56 am

21% of gross now on housing and it will drop to 10% of gross when pay off mortgage (HOA and taxes) - can afford it but hate spending it
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Re: How Much Housing Payment Can a Boglehead Afford?

Post by knpstr » Wed Nov 23, 2016 10:00 am

I prefer having "rules" on net income or take home pay, since debt service risk relates to ones cash flow. Your gross pay doesn't matter as much (other than how it relates to your net).

I think if your mortgage payment is no more than 25% of your take home pay, you very likely made a reasonable purchase. Particularly if that mortgage payment is based on a 15-year note.

I would agree that it is hard to give a rule of thumb. But I think the above: 25% of net on a 15-year, is a conservative approach. You really shouldn't run into trouble following that rule. Your house payment shouldn't end up as a burden.

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Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by KlangFool » Wed Nov 23, 2016 10:05 am

warowits wrote:As much as some people on here seem to hate it, housing expense is wrapped up in our concept of class and self worth. There is also the very real fact that when evaluating a housing payment you should also keep in mind the rent you will have to pay if you don't buy. Also looking at it as a multiple of your yearly salary ignores interest rates, which makes no sense unless you are paying cash for the home.
warowits,

<<housing expense is wrapped up in our concept of class and self worth. >>

I spend less on housing in order to avoid living in a neighborhood with people like that. All my peers live in a bigger and more expensive houses.

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Re: How Much Housing Payment Can a Boglehead Afford?

Post by Wellfleet » Wed Nov 23, 2016 10:06 am

saladdin wrote:Easy question. My answer: What payment can I make if the only job I could get is deliver pizzas?
That's a good point. I was running the numbers and it would be tight for my family if we had to get by on lower paying partners income but in case of higher paying partners job loss. However there should be emergency funds and unemployment and then hopefully at least a minimum wage job to tide us over.

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