Have any of you overextended on housing? What were your experiences?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
TomCat96
Posts: 1040
Joined: Sun Oct 18, 2015 12:18 pm

Have any of you overextended on housing? What were your experiences?

Post by TomCat96 »

I'm looking for a house right now, but I'm finding myself subjectively drawn to push for a nicer home out of my comfortable price range.
One of my motivations is that I find my savings ever competing with the rising cost of housing. I live in the DC metro area.

Mathematically, it seems like one should go for more affordable housing. But as an emotional creature, I just don't see myself being happy pursuing a property I don't really want, and paying numerous transaction costs while I'm at it, only to wait years more to trade up.

To those who "overextended" (Mortgage > 25% month income) on housing, I'd like to inquire as to your subjective experiences, possible regrets, and other advice. Did any of you find yourselves in this position, and if so and you chose to take the plunge regardless, did you come to regret your decision, or were you happy with it?
Wellfleet
Posts: 562
Joined: Sun Jan 26, 2014 8:18 pm

Re: Have any of you overextended on housing? What were your experiences?

Post by Wellfleet »

I'm interested in this topic too. One camp is firmly in the limit home cost to 2.5 gross income, another camp in recent threads suggested what's another $50-150k over 30 years....Another camp said to move to a LCOL if you can't afford housing in your area and another camp said relocating is very hard don't do it. :confused :sharebeer
KlangFool
Posts: 18197
Joined: Sat Oct 11, 2008 12:35 pm

Re: Have any of you overextended on housing? What were your experiences?

Post by KlangFool »

TomCat96 wrote:I'm looking for a house right now, but I'm finding myself subjectively drawn to push for a nicer home out of my comfortable price range.
One of my motivations is that I find my savings ever competing with the rising cost of housing. I live in the DC metro area.

Mathematically, it seems like one should go for more affordable housing. But as an emotional creature, I just don't see myself being happy pursuing a property I don't really want, and paying numerous transaction costs while I'm at it, only to wait years more to trade up.

To those who "overextended" (Mortgage > 25% month income) on housing, I'd like to inquire as to your subjective experiences, possible regrets, and other advice. Did any of you find yourselves in this position, and if so and you chose to take the plunge regardless, did you come to regret your decision, or were you happy with it?
TomCat96,

1) I live in DC Metro / Northern VA area.

<<To those who "overextended" (Mortgage > 25% month income) on housing, >>

2) Many of my peers are like that. And, many of them lost their houses when they lose their jobs.

3) I go out lunch regularly while they have to pack their lunch. Financially, I am still better of than they do.

<<I just don't see myself being happy pursuing a property I don't really want,>>

4) Just look around you at all those "House Poor" people. You will find them whining about how to pay their mortgages when there is another round of laid off. Rent. Don't buy.

5) No, I do not envy them. I feel sorry for them.

KlangFool
jjface
Posts: 3088
Joined: Thu Mar 19, 2015 6:18 pm

Re: Have any of you overextended on housing? What were your experiences?

Post by jjface »

We felt over extended with our first house. We had several bad experiences with rentals and just felt a strong need to buy to stay in the area. We had to borrow from family to buy the house (as a bank wouldn't lend what we needed due to our income level). The house was one of the lowest cost houses in the area so we didn't have the choice to go cheaper which would have been better overall if it was possible. I was on a trainee salary that was due to rapidly rise in the future and I was 99.9% confident that would happen. We paid market interest on the loan from family and could manage to keep our expenses at our income level with effort.
Never again will I sacrifice liquidity for owning a house. I felt like we existed for several years and missed out on doing much due to always having to scrape by. One bad turn of events needing cash and we would have struggled. We even made money on the house when we sold it after 3 years but it was a relief to be rid of it. I would have taken a loss.

I think that everyone needs some breathing room. Consider having a large emergency fund if you want to push the house purchase. Also if you want more house you will have to cut down somewhere else. Make sure you are happy with the trade off.
Last edited by jjface on Mon Apr 25, 2016 2:17 pm, edited 1 time in total.
cheapindexer
Posts: 42
Joined: Tue Feb 02, 2016 2:33 pm

Re: Have any of you overextended on housing? What were your experiences?

Post by cheapindexer »

overextending on housing was probably the worst financial decision of my life.

First "real" doctor job in 2006. Buy a house, sign a contract with a hospital.

Shortly thereafter, hospital merges with another hospital and closes the cancer center.

Take a huge hit after finally giving up on the place after a miserable commute for 3 years to the next closest cancer center.

We still had student loans, to buy a house under those circumstances ( student loans, didn't know if job would be good, etc) was not wise.

We even rented for a while after we moved to get to know our new area. We were even happier in humbler houses. Being house poor stinks, and living in a house that requires lots of maintenance stinks even more. WE got to learn our new area and took our time buying this time. :D
User avatar
Svensk Anga
Posts: 736
Joined: Sun Dec 23, 2012 5:16 pm

Re: Have any of you overextended on housing? What were your experiences?

Post by Svensk Anga »

I think our first house qualifies. We bought about all the house we could afford on my income alone. My wife was working at the time, but the plan was for her to stay home with the kids until they were in school. She had nil income for nine years, starting three years after we bought.

I am happy with the decision. It was tight for a while. Drove older cars. Wrecked one and limited the replacement budget to the amount of the insurance check. Took low-budget vacations. Most meals at home. No lawn service, DIY maintenance. In other words, we had to pursue a lot of frugal methods to make it work. Still we kept up 401k contributions at least to the match. If we got in a bind, the thought was those could be suspended for a while and/or wife goes back to work. I think the frugal habits developed in this period were vital to us being able to retire early.

We stayed in that house for 18 years. It got ever more affordable as time went on. One, we refinanced from 12% to 8% four years in. Two, I experienced some real salary growth, so there was more breathing room. Inflation was running 4-5%, so even cost-of-living raises would have made the fixed rate mortgage more affordable. Finally, my wife started working again, and at better than her old job.

We did finally upgrade but by then my salary was substantially higher in real terms, my wife was working, and real estate prices had been flat in real terms in our area for years. The upgrade was easily affordable.

If it had been living on the edge for the duration of a 30-year mortgage, I would have been much less pleased with it. Your prospects for salary growth seem to be key. I don't see much refinance opportunity down the pike. :D There may not even be much inflation to ease the mortgage burden. Could there be a second income in your future?
User avatar
queso
Posts: 904
Joined: Thu Jan 07, 2016 3:52 pm

Re: Have any of you overextended on housing? What were your experiences?

Post by queso »

I live in the same area (NoVA). I overextended on my first home (approx. 5x HHI) when I was single and it was really scary. I did an 80/10/10 with 10% down and a crazy high interest rate for the other 10% to avoid PMI. I made it work and had some career success that made it more palatable, but it was still a scary time. Fast forward 5 years and I ended up selling the place and moving into a larger home with my wife. Although larger, we used a lot more common sense than I did when I bought the first home and we only went 2x HHI and a 15 year mortgage. Having done both, I would never overextend again. It was just too stressful especially being the only occupant/breadwinner. As our incomes have increased over the years we have kicked around "trading up" like everyone seems to do around here, but it's really nice living in such an affordable place so I don't think we will. If anything I'd like to stay put and then downsize when we retire and sell our fully paid off NoVA house.

Good luck. The housing market around here is a bit...nuts. :D
gouverneur
Posts: 94
Joined: Sat Apr 23, 2016 10:25 am

Re: Have any of you overextended on housing? What were your experiences?

Post by gouverneur »

Another DC/NoVa resident here, would also be interested in hearing from people in high COL areas.

We're in a very similar boat to the OP with a slight twist. Right now the homes we'd be interested in are around the 600k mark (the price of a fairly small 2 bedroom in Alexandria). We have ample income under the 2.5x rule right now but one or both of us might move to jobs that pay less such as federal government in the future, perhaps even the very near future (<1 year). If we both made the move then we'd perhaps be at 3.33x with housing costs being 35%+ of our post tax and post tax-advantaged savings income, i.e., our cash flow.

Still thinking through what to do. Moving further reduces housing cost but probably necessitates other costs (car, parking) and commute time, which is a lot of lost value over the years.
User avatar
Sheepdog
Posts: 5650
Joined: Tue Feb 27, 2007 3:05 pm
Location: Midwest, retired 1998 at age 65

Re: Have any of you overextended on housing? What were your experiences?

Post by Sheepdog »

I, nor my spouse, would ever overextend on a house. That was never in our nature. We were very happy living in a modest home in a safe neighborhood. It was debt intolerance mainly. We could entertain in a smaller home as well as in a large home. Our children were happy in our modest neighborhood in good school districts. Frugal, yes. Successful, yes. Happy, yes.
Time is the school in which we learn, time is the fire in which we burn.~ Delmore Schwartz
User avatar
William4u
Posts: 1401
Joined: Fri Jun 01, 2012 3:02 pm

Re: Have any of you overextended on housing? What were your experiences?

Post by William4u »

The best financial decision of our life together was for us to UNDERBUY our house. When we bought, it was about 1x our income. Now it is even less (our income had gone up faster than the value of the home). It has given our family great flexibility to do a great many things. Sure, we have the smallest and cheapest house among our peers, but we also have much more financial flexibility. Essentially, it means our income after expenses is significantly higher than our peers.

Property taxes and homeowners insurance and repairs and utilities add up, and are all proportional to the house value. If you drive down the home value, you drive down many recurring costs.
DVMResident
Posts: 1496
Joined: Mon Aug 01, 2011 8:15 pm

Re: Have any of you overextended on housing? What were your experiences?

Post by DVMResident »

I'll share our non-traditional tactic for consideration.

2012. We purchased a house that was 4.6x our combined income with 10% down, far above the recommended 2-3x. Rents were rising fast as were RE prices (most home selling way over list). Usually, the PITI would have been 30.7% of our gross. We knew it was stretch-and to compensate we purchased a very small house with a back rental. Paying the down was painful and it took us 3 years to save that. Leveraging 9:1 is scary. However with the rental, PITI minus rental income (taxes accounted for) was $400~500/mo less than a 2-bedroom apartment (not to mention the difficulty of finding a place that takes dogs).

Fast-forward to 2016. The price has skyrocketed along with the rest of the market. Nominal equity is up ~4x our down payment. PMI has come off due the rise in price (not all PMIs allow market value to count as equity). The rental income is up. The spread between the net cost of the house vs current price of a 2-bedroom apartment has increased to a $1.4k/mo. We could not afford to purchase the house today. We've moved, but kept the house as a rental. So, it's worked out for us.

The partial rent model has worked out for us really well. Both the wife and I are quite happy. We plan to buy another mixed primary residence/rent 2 or 3-unit property, e.g. duplex, in a more expensive area than our income affords us alone
Last edited by DVMResident on Mon Apr 25, 2016 5:02 pm, edited 2 times in total.
User avatar
FelixTheCat
Posts: 1915
Joined: Sat Sep 24, 2011 12:39 am

Re: Have any of you overextended on housing? What were your experiences?

Post by FelixTheCat »

cheapindexer wrote:overextending on housing was probably the worst financial decision of my life.
+1

Money was so tight that it caused a lot of unnecessary stress. I would never put myself in that position again.
Felix is a wonderful, wonderful cat.
alfaspider
Posts: 3066
Joined: Wed Sep 09, 2015 4:44 pm

Re: Have any of you overextended on housing? What were your experiences?

Post by alfaspider »

You need to think about your personal situation. Rules of thumb are just that, and may not reflect how your financial situation factors. We bought our first home at a bit over 3x income and with an 80/10/10 because we didn't have 20% yet. Some might consider this "too much house" under the 2.5x income rule: But there were mitigating factors:

[*]My spouse was a student at the time but had a job offer in-hand that was about to nearly double our income. The start-date for the job was 8 months out, so the lender didn't consider it in the lending criteria.

[*] My compensation was heavily weighted towards benefits, so it was a bit bigger than appeared from just citing the dollar amount. I have a defined contribution pension, very generous 401k match, good health plan, stock grants that hadn't vested, etc.

[*]Both of us were early in our careers and had good growth potential for income.

[*] Buying a cheaper house meant accepting a much longer commute and being much farther away from family. We went for location rather than size.

[*]The interest rate on the 10% of the 80/10/10 wasn't terrible (around 5%).

[*]We buying in a rapidly gentrifying neighborhood that was clearly right at the critical mass stage. The house was a rare remodeled well-kept original with new high-end construction all around. We saw double digit appreciation in the first year, refinanced with a deemed 25% equity after 13 months of ownership, so no more 80/10/10.

After all that, we are now in a house that is comfortably below our means. Of course, all of this could have gone south. My spouse could have lost the offer, I could have lost my job, the gentrification could have halted. But we took a calculated risk and it worked out.
delamer
Posts: 10590
Joined: Tue Feb 08, 2011 6:13 pm

Re: Have any of you overextended on housing? What were your experiences?

Post by delamer »

Obviously, the degree of overextension is important -- 30% of income is a different animal than 50%.

Also consider how much flexibility you have in your overall financial situation. When we bought our first house, I wasn't working so I knew that in a worse-case scenario (like my husband losing his job) I could go back to work. For our second house, I was working part-time and the full-time option was available if we needed the income.

Other commitments like student loans, saving for a child's education, commuting costs, or retirement savings need to be addressed. People with high levels of those have less leeway than those with low levels, in terms of housing affordability.
michaeljc70
Posts: 7240
Joined: Thu Oct 15, 2015 3:53 pm

Re: Have any of you overextended on housing? What were your experiences?

Post by michaeljc70 »

I've always spent way less than I could buying a home.

I think you have to balance not getting what you want and the (obviously) high transaction costs of upgrading in the not to distant future with the stress and financial ruin overbuying can bring.

If you cannot get what you want in a home without overbuying, you cannot afford what you want! That being said, if I and/or my significant other were on a pretty clear and solid path of escalating incomes with our jobs, I definitely would take that into account.
quantAndHold
Posts: 5144
Joined: Thu Sep 17, 2015 10:39 pm

Re: Have any of you overextended on housing? What were your experiences?

Post by quantAndHold »

I overextended on two different houses. Once was a stupid mistake. I was house poor for years, stuck with the house because it was underwater, then eventually sold it for a loss. The other time was the best financial decision of my life. I quickly got on the right side of being overextended because interest rates dropped, and then made pots of money in home price appreciation.

The difference? On the first one, I bought at the top of the market, right before a crash. The second one, I bought during the unwinding after the same crash, when prices were much lower.

I personally wouldn't overextend myself right now.
Yes, I’m really that pedantic.
afan
Posts: 5281
Joined: Sun Jul 25, 2010 4:01 pm

Re: Have any of you overextended on housing? What were your experiences?

Post by afan »

People in expensive areas may have to stretch the usual suggestions for housing budgets. Same in NYC, SF, etc.

But being as conservative as you can will pay off long term. As you have noticed, real estate goes up AND DOWN and being stuck underwater is not a fun place to be.

Even worse if you cannot afford your mortgage. The typical American lives in a house much bigger and fancier than most people, even of the same means. My real suggestion is to temper your expectations, think about what else you could do with the money, find your real priorities, stop watching house hunting shows, and stay within your means.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
pennywise
Posts: 819
Joined: Sat May 31, 2014 6:22 am

Re: Have any of you overextended on housing? What were your experiences?

Post by pennywise »

queso wrote: As our incomes have increased over the years we have kicked around "trading up" like everyone seems to do around here, but it's really nice living in such an affordable place so I don't think we will.
We have the same experience and perspective. We bought a reasonable house we could afford in a nice, though not nicest, suburban area and paid off the mortgage pretty quickly, then stayed in it. At some points over the years I wished/hoped for a bigger or more luxurious house but my husband 'stayed the course' and in the end was extremely wise to have persuaded me to remain where we are.

The space that was a bit tight for a family of 4 is ample for a couple, and we have done many updates that make our home very comfortable and inviting--if I want more luxury, we can easily do more upgrades that will still be far cheaper than buying another more pricey house. And because our house is located close to downtown and development in SoFla has been feverish, what was once an ok area is now HIGHLY desirable with the accompanying increase in property values. The peace of mind in not being chained to a big mortgage is incalculable.
Jeff P
Posts: 165
Joined: Tue Aug 11, 2015 10:07 am

Re: Have any of you overextended on housing? What were your experiences?

Post by Jeff P »

I put an offer in for a house before I learned whether or not I passed the bar. So that was an overextension.

But I passed and two years later my wife finished school and now the mortgage seems pretty low. (we also got 2.75% for 30 years so I suppose timing was right for that.)
mw1739
Posts: 736
Joined: Mon Mar 21, 2011 5:44 pm

Re: Have any of you overextended on housing? What were your experiences?

Post by mw1739 »

I leveraged up 3 years ago, buying a house that was at the time about 36% of my income. We were willing to do this because my career and income is still in the upward trajectory and we have a decent sized taxable account that is nearly sufficient to payoff the mortgage. Now the mortgage is about 20% of my income and is much more comfortable. If I hadn't had the liquidity I did, I doubt I would have been ok with that much debt.
auggiedoggies
Posts: 147
Joined: Tue Sep 30, 2014 10:16 pm

Re: Have any of you overextended on housing? What were your experiences?

Post by auggiedoggies »

I'm not sure if the wife and I overextended or not, but I know that some people would say that we did. Our total housing payment is just under 3x our gross income. It's a pretty big step up from what our first house was, however we absolutely love it. Huge yard (and I actually enjoy the yard work) amazing location/schools, very big and open kitchen/eating/family room, which we love for entertaining. It's great, and we would certainly do it again. Still able to stash away ~20-30% of our gross in investments each month, and we love our life. Plus, we're young and marketable (27 and 26, I'm finishing MBA from a top 25 that work is paying for) and expect some solid income growth. We both have stable jobs, and we live in an area with tons of great job prospects.
DVMResident
Posts: 1496
Joined: Mon Aug 01, 2011 8:15 pm

Re: Have any of you overextended on housing? What were your experiences?

Post by DVMResident »

michaeljc70 wrote:I think you have to balance not getting what you want and the (obviously) high transaction costs of upgrading in the not to distant future with the stress and financial ruin overbuying can bring.
+1 There is wisdom in avoiding the "penny wise, pound foolish" mentality. A small stretch can be a good move if it'll prevent needing/wanting to future upgrade and saves in other areas (e.g. short commutes, good schools, etc.).
joebh
Posts: 1708
Joined: Mon Mar 02, 2015 3:45 pm

Re: Have any of you overextended on housing? What were your experiences?

Post by joebh »

I'm way too conservative to have overextended on my housing. But I had a good friend who did just that years ago.

During a period of rapidly increasing housing prices, he and his wife purchased a McMansion that could only be afforded using both salaries.

And then they got pregnant. Unfortunately, they were both of the opinion in those days that one of the parents should stay home with the child until it was of school age - that was what they did with their prior two children.

They were under sever financial stress; so much so that it impacted their personal and professional lives and they ended up going bankrupt and getting divorced.

Both husband and wife are still in terrible shape financially >20 years later.

Overextending is always bad, IMHO.
anoop
Posts: 1848
Joined: Tue Mar 04, 2014 1:33 am

Re: Have any of you overextended on housing? What were your experiences?

Post by anoop »

I would not recommend doing it unless you know with near certainty that your income will be increasing very significantly over the next few years.

Otherwise, there are tons of expenses that come with home ownership and once the honeymoon phase is gone, you will find it's not all that you made it out to be.
CWhea1775
Posts: 50
Joined: Thu Jan 28, 2016 3:45 pm

Re: Have any of you overextended on housing? What were your experiences?

Post by CWhea1775 »

Have never over-extended but have been through several boom and bust cycles and have both made and lost money on principal residences when moving. Main lesson is to never let a house own you. If you are extremely confident that you will be able to stay in the house, rent, or otherwise survive a downturn without being forced to sell at a loss (or worse) than you might consider it, but then would you really be "over-extended"? If there is even a small possibility that a change in circumstances would cause you to be unable to afford the place then it is a very risky move.
Emerson
Posts: 15
Joined: Sat Apr 23, 2016 2:49 am

Re: Have any of you overextended on housing? What were your experiences?

Post by Emerson »

Please don't do this. If the real estate market tanks in the area of the country you are in and you need to sell you may wind up regretting this for decades. I used to live on the East Coast and had to move during a down cycle.
EXH
Posts: 55
Joined: Thu Mar 31, 2016 7:21 pm

Re: Have any of you overextended on housing? What were your experiences?

Post by EXH »

More details would be helpful - what's your income (and how reliable is it?) and what is the housing price range and what are your normal base expenses? I'm in the Bay Area so bought a very modest house at 2.5X income, which was really the cheapest price point we could find in an area we wanted to live. We are still able to pay it off on a 15 year mortgage, and have plenty of extra money left over to max out retirement, and live a lifestyle that is relatively frugal but very comfortable for us. We certainly could have done a 30 year mortgage on a much more expensive house and lived comfortably, but preferred the flexibility of the "cheaper" house (outrageous by most other standards given it's small footprint!). It was also important to me to feel comfortable being able to pay the mortgage on my salary alone as DH has the less stable job - this would certainly be over 2.5X salary by a decent margin, but doable for 6-12 months without stretching us too much. I know lots of people who have had to go over the 2.5X income limit recommendation to live in their preferred neighborhood - some are quite comfortable and others feel stretched due to children and student loans.
Dandy
Posts: 6384
Joined: Sun Apr 25, 2010 7:42 pm

Re: Have any of you overextended on housing? What were your experiences?

Post by Dandy »

I passed on the opportunity to move up from a modest to much nicer home. Never regretted it. Was able to fully fund retirement and have my kids graduate with neither them or us having any debt, had great family vacations each year which we all treasure. Paid off my mortgage early and it was a real comfort when I lost jobs at age 52 and then again at age 60 for good in 2008. Also, was a comfort when my wife had a serious illness and I had enough insurance and assets to make sure she had the best care available.

I often wonder how different my finances would have been if I had chosen to move to a more expensive house. My nature being a bit too frugal and a bit of a worrier I may have enjoyed life less not more. That wouldn't be the case for everyone.

A nicer house usually means a bigger house. If so, the down payment and mortgage is only part of the ongoing expense difference. Heating, cooling and furnishing expenses tend to be greater. Need a new roof or driveway re done - usually bigger and costs more. Landscaping you will want to keep it somewhat in line with the other better houses near by. Home insurance? Taxes?

Many people overextend at the beginning it just seems to be part of the home buying experience. But, think it through before you sign.
Cras108er
Posts: 45
Joined: Sun Jan 03, 2016 6:34 am

Re: Have any of you overextended on housing? What were your experiences?

Post by Cras108er »

Won't say I have ever overextended on a house, but have lived without financial margin before. I won't say it's the worst feeling in the world (I've lost a child before, and suspect having a terminal diagnosis is t fun either) but, it is a miserable way to live. To me, it's the same thing. If you can't afford to buy, I'd say wait and save up a little more money. I might push to 30% of my income for housing, but not too much beyond that.
Ron Ronnerson
Posts: 1767
Joined: Sat Oct 26, 2013 6:53 pm
Location: Bay Area

Re: Have any of you overextended on housing? What were your experiences?

Post by Ron Ronnerson »

We purchased our home 6 years ago. Combined with property taxes and HOA, we were definitely above 25% of income at the time for housing. However, we live in a VHCOL area and housing is by far the biggest expense around here. We knew we had enough to cover all our expenses because our spending in non-housing categories was reasonably low in terms of percentage of income. I would look at the big picture of all expenses rather than just particular categories. Of course, this should be within reason; for instance, you might be able to get away with spending a third of your income on housing but I wouldn't recommend half by any means.

For us, 6 years later, purchasing our home turned out to be a great thing. Renting a much smaller place would cost more now than what we pay for our home. We refinanced 3 years ago and got the mortgage rate lowered 2% from what it was when we purchased. We also made a lump-sum payment at the time of refinancing to bring our housing costs down even more. When the downturn ended, both our pay as well as the house value went up rapidly. We do love our home and neighborhood and are glad we purchased but don't discount the fact that luck played a factor in our case.
Norton79
Posts: 14
Joined: Tue Apr 26, 2016 8:02 am

Re: Have any of you overextended on housing? What were your experiences?

Post by Norton79 »

We technically "over extended" on our first house, but it didn't feel like it to us. Admittedly dual income, no kids and just starting our careers at the time. Mortgage was initially 30 - 35% take home. The key was an expectation of a steadily rising income. After 5 years mortgage payments was well under wraps. If you can service the loan now, consider your situation 5 - 10 years from now. Salary, kids, interest rates plus job reliability etc. In my opinion, you should extend yourself on the first house (taking into account the above factors). Having said that, there are so many things to consider in making this decision. My wife and i had already invested in our post grad education and between us we had at least one dependable job (her teaching). If the mortgage limits your ability to invest in your earnings capacity, I'd suggest weighing that up also. Our next mortgage will hurt a little to get the house we want (and I'm not expecting my salary to rise as much now), but I'm mid career and the trade-off between mortgage and retirement is a little more clear than when we started out in our 20s. Just don't forget to contribute a healthy (15%) to your retirement every year.
dcd72
Posts: 42
Joined: Fri Apr 10, 2015 7:45 am

Re: Have any of you overextended on housing? What were your experiences?

Post by dcd72 »

I am also in the DC metro area, and it is easy to get rolled into over-extending, given the dynamic pressures of commute time, schools, and the dramatically escalating price of close-in properties. When it was time for us to move from the city (within the last year), we ultimately decided to extend more than we initially intended because of our hours and the commute time. Our monthly PITI is 20% of monthly income, and 41% of take-home. (These numbers do not include deferred income, which is significant). Our mortgage is 2.5 HHI, and the value of our house is roughly 3.6 HHI. We feel a little over-extended sometimes, but that's a function of how incredibly low our costs were before the move, not a real financial crunch. Some things to consider:

- All the ratio measures are of limited utility. Price of home as a multiple of HHI doesn't take into account the size of your down payment, and its effect on your monthly nut. Monthly payment as a percentage of your monthly income doesn't take into account the size of your monthly income. If you're making $10,000 per month, 50% as a housing payment is unacceptable high; if your monthly income is $40,000, a 50% housing payment is a huge number, but there's enough left over to comfortably live and sage (not advising that, but it does matter in the calculus). A detailed budget is much more useful than back-of-the-napkin calculations.

- Advice from people who don't live in a HCOL area is of limited utility. People who live in an area of the country where you can live in a nice neighborhood in a good school district and pay $250,000 for a 4 BR 2.5 BA home are both lucky and unlikely to understand that their experience is utterly irrelevant to yours.

- Similarly, people who bought 20 years ago before the current price explosions in this area can give advice on neighborhoods, but hearing them say that they live in close-in Bethesda or Arlington and their housing payment is only 13% of their HHI is not helpful and irritating.

- In the end, it's a balance, and you have to decide what you're comfortable with. If you want to minimize your commute, you'll have to sacrifice size of home, and pay a little more.
User avatar
Tamarind
Posts: 2250
Joined: Mon Nov 02, 2015 2:38 pm

Re: Have any of you overextended on housing? What were your experiences?

Post by Tamarind »

I did and it worked for me, but do not recommend that you do as the reasons you are citing are not good ones IMO.

I chose to overextend to purchase a SFD home 6 years ago. HCOL for around here but the folks in the Bay Area would pay more for their down payments.... I could only have afforded a townhouse or condo, at much higher price per square foot, by following the rules of thumb here. I did not want to move ever again. The house I bought was one of the most expensive in a very modest neighborhood in the right location. It was in decent shape but not attractive. No "high end" finishes at all. Bought for 5x my annual gross at the time, parents helped with 20% down, 15 year mortgage. Initially the mortgage with taxes and insurance was 50% of my monthly take-home.

Over the first 3 years I rented out rooms and worked side jobs to be able to keep up and still max an IRA each year. It was especially rough after I lost my job. New career is much more stable and doubled my income. Now the house payment is high by Bogleheads standards but not uncomfortable. I can save 20% of gross while paying it and will hopefully live here the rest of my life. I've put a lot of sweat into the house and am planning a major renovation for after the mortgage is done that will turn it from a perfectly good home into my dream home. It still won't have granite counters, but a gas range is on the list. :)

So my story is a lucky success, but the reasons you over extend matter a lot. Don't do it to buy a nicer house with the things you see on home shows. Do it if it's the only way to find the housing you really need. Also consider the likelihood that your income will increase so that you are no longer overextended, versus the likelihood you will lose your income. If you have no reason to expect a major bump in pay, I think you'll come to regret the choice to sink so much of your money into one purchase.
User avatar
lthenderson
Posts: 5292
Joined: Tue Feb 21, 2012 12:43 pm
Location: Iowa

Re: Have any of you overextended on housing? What were your experiences?

Post by lthenderson »

Our house mortgage is less than 10% our monthly income. I've watched so many people over extend themselves which not only strains their budgets for decades, but also makes for a hard time selling when the time comes because the number of people willing to over extend themselves is more limited. Because we have such a small mortgage, we are able to withstand hard times easily and of course, invest even more money than our peers.
corysold
Posts: 892
Joined: Mon Mar 24, 2014 12:58 pm

Re: Have any of you overextended on housing? What were your experiences?

Post by corysold »

With any housing decision, you need to be prepared to live with the consequences for a number of years depending on the market. While that might mean getting in trouble in you buy too much, we are wishing we had bought more house 9 years ago.

We bought what we could afford thinking we might upgrade down the road when the kids got to school and didn't worry so much about school district and yard size etc. at the time.

Then prices went down 40% by us and have only climbed back a little since then. So we are in the spot of being a house that is too small with no yard in a bad school district.

Our mortgage is low relative to income so we are trying to save our way out of the issue, but better planning 9 years ago of "What if we can't sell in 7 or 8 years" would have been prudent.
User avatar
Meaty
Posts: 796
Joined: Mon Jul 22, 2013 7:35 pm
Location: Texas

Re: Have any of you overextended on housing? What were your experiences?

Post by Meaty »

TomCat96 wrote:I'm looking for a house right now, but I'm finding myself subjectively drawn to push for a nicer home out of my comfortable price range.
One of my motivations is that I find my savings ever competing with the rising cost of housing. I live in the DC metro area.

Mathematically, it seems like one should go for more affordable housing. But as an emotional creature, I just don't see myself being happy pursuing a property I don't really want, and paying numerous transaction costs while I'm at it, only to wait years more to trade up.

To those who "overextended" (Mortgage > 25% month income) on housing, I'd like to inquire as to your subjective experiences, possible regrets, and other advice. Did any of you find yourselves in this position, and if so and you chose to take the plunge regardless, did you come to regret your decision, or were you happy with it?
I opted for a house/mortgage at 1.25 my annual income. I think it's pretty conservative but I have huge liquidity each month that I can allocate to more productive assets while still living in a nice home
"Discipline equals Freedom" - Jocko Willink
Hulu
Posts: 205
Joined: Wed Oct 22, 2014 7:55 pm

Re: Have any of you overextended on housing? What were your experiences?

Post by Hulu »

My first house was worth 8x my income. But it was off market and 10% less than other MLS comps. I missed out on living where more single people lived but kept the house through a downturn and made a lot. Turned that into early financial independence. So my suggestion would be to find a below market price whether or not you stretch for it.

Whether to stretch depends on your ability not to have to lose or sell it. Dual income? Family can help in emergency? Higher income potential? Can you quickly cut your expenses?
User avatar
Go Blue 99
Posts: 949
Joined: Thu Oct 09, 2008 3:42 pm

Re: Have any of you overextended on housing? What were your experiences?

Post by Go Blue 99 »

We overextended on our townhouse purchase. When we bought mortgage was about 40% of net income. But we were early in our careers so expected increases. We have since doubled our income, and refi'd to a much lower payment. But even at 40%, we were not stressed. We were still able to save, go on nice vacations, etc. I just wouldn't recommend it long term.

Our neighborhood is super hot, and knowing what I know now, I wish we had overextended even more and bought a single family home. Those have appreciated a huge amount in our area.

I think your income has a lot to do with it. If you are spending 35% but making $10k net, you still have $6500 for your other expenses. But 35% of $4k net is of course going to be another story.
dsmil
Posts: 734
Joined: Tue Sep 08, 2009 10:51 am

Re: Have any of you overextended on housing? What were your experiences?

Post by dsmil »

Our PITI is 25% of gross income and our home price is 3x of our gross income, and we do not feel overextended at all. The home price to income ratio doesn't take into account the size of the down payment, or the fact that the low interest rate environment makes more expensive homes more affordable. The PITI to gross income ratio seems more appropriate, but families who otherwise live frugally and have high incomes can sometimes afford to push the limits a little on housing because of the amount of money that is left over after the housing payment.
hamiltop
Posts: 16
Joined: Sun Dec 28, 2014 11:40 am

Re: Have any of you overextended on housing? What were your experiences?

Post by hamiltop »

We live in a HCOL area and rolled the dice a bit. Let me paint the picture:

$1900 rent for a 2 BR apartment in an area we didn't really like all that much with a shift in commute (used to be 10 min, became an hour). Rent was below market and likely to jump to $2300. This was on ~$145k salary.

Bought a home with 10% down on the opposite side of town, LPMI ARM 5/1 loan. This means instead of paying mortgage insurance, we took a higher interest rate. To get the rate back down to normal territory, we made it a 5/1 ARM. Ended up at a similar rate to a 30 yr fixed.

Did the "trash money" math. PITI came to $3600/month (~30% of gross). $2700 of that was interest and taxes, $800 was equity, $100 was insurance. That $2700 was tax deductible and with a conservative 25% marginal tax rate that's effectively ~$2000/month. So total monthly dollars in the trash was $2100. Add in higher maintenance, an HOA, etc. I came to the conclusion that it was equivalent to $2500/month rent. Since we were banking $1000/month towards a down payment already, it put us in roughly the same ballpark as if we had stuck around and weathered the rent increase.

Last year the home had appreciated ~10% so we refinanced into a 30 yr fixed (which was the plan all along). I also got a raise (well... a raise, then I switched jobs for another bump), which puts our PITI at 25% of gross income. Things are comfortable. Last year I maxed out my 401k and still had extra to stash away, we took vacations, etc.

It was a bit stressful being on a 5/1 ARM at a higher rate, knowing that if the market crashed we'd be stuck. Also, we threw every penny we had at the down payment. Luckily, I had a nice windfall from an acquisition at work last year, all of which I put into a rainy day fund (it was not necessary to afford our lifestyle). Now things are comfortable.

It was a gamble, but sometimes I feel that's the only way to get ahead in a HCOL area.
sbaywriter
Posts: 146
Joined: Wed Mar 30, 2016 10:00 pm

Re: Have any of you overextended on housing? What were your experiences?

Post by sbaywriter »

Posting because I understand your emotional reaction to the idea of spending a huge amount of money on a place you don't really like. in 1999 I was looking for a place to buy in the SF Bay area. I had always rented, but always rented a house, or more recently, part of someone else's house, partly because I had a dog. When I came into a lump sum of some extra money I decided to buy.

But as a first time home buyer and used to low rent, I was being conservative, and found the only houses in my intended price range were dumps in bad areas and the condos were depressing. I couldn't see spending what felt like a huge amount of money for a depressing place.

So I started looking at locations further away and found a place in an unusual condo development that had some small but standalone units with tiny yards, in a beautiful area in the hills. It was much more than I planned to pay. But I knew I would never find another place so perfect for me, so I went for it.

But I also had some extra money tucked away in CDs in case I got laid off. Which I did in 2001 and lived off that money and unemployment for the 2 years it took me to find another permanent job.

I think being a first time home buyer in a rising market is going to be stressful regardless and that you will always have to stretch beyond your comfort zone.
bigred77
Posts: 2042
Joined: Sat Jun 11, 2011 4:53 pm

Re: Have any of you overextended on housing? What were your experiences?

Post by bigred77 »

When my wife and I went from a condo to a SFH we put 10% down on a house 3.6 times our gross income. It felt like we were overextending ourselves at the time. It was our ideal location, 1 mile from my office, and zoned to one of the very few good inner city elementary schools.

3 years later we've refinanced and our incomes grew a little bit. PITI is now roughly 25% of our gross and it feels OK. My big concern is we want my wife to stay home when we have children in about 2 years (knock on wood) and I feel like we may be stressed when we get to that point unless my salary grows a pretty good clip. We may have to reduce our savings rate down to 15% or so for the first few years of raising children, which would be worth it to me to have my wife stay home.

We lucked out in that we experienced some really great appreciation in the 3 years we've been here. We could no longer afford to buy into our neighborhood today (or at least I wouldn't be willing to stretch it that far). Sometimes you just have to make the best decisions you can and see where the chips fall.
nannid
Posts: 44
Joined: Wed May 26, 2010 7:44 am

Re: Have any of you overextended on housing? What were your experiences?

Post by nannid »

Buying a house is extremely stressful especially in a market where inventory is really low and you have to make quick decisions and prices have risen so much in the last 3 years ( like mine )

I kept getting out-bid during my search so I just "over-extended" myself. Mainly, for school district :(

I am just 2 days away from closing and cannot stop stressing out because I always expect the worst to happen.
Right now , it is right around 25% of take home pay ( with just taxes deducted ) and just about what I pay in rent.
But , I don't expect any salary increases and in fact , will have to take a 10-15% pay cut if I lose this job .

.

A lot depends on your personal , financial situation..take some time to make sure you won't stress out immediately after the over-extended purchase though !
Post Reply