I recently made a thread about the idea of me buying a home. If you're really bored and in the mood, you can read all the details here (more important details on page 2) viewtopic.php?f=2&t=220495
However I have a different question. Basically, I'm renting a home now that will be about $2,500/month after an upcoming lease renewal. I'm considering buying a $800,000 home and trying to understand the "true cost"
I'm going to quote someone from the other thread and basically ask you guys if his math checks out? Because if it does, this person is saying I'll gain $3,333~ish in net worth every month if I buy the home. It would probably cost me $4,500 or so/month out of pocket, but honestly that means my true cost would be about $1,167/month. That's HALF what I'm paying in rent. Of course a lot of that "net worth" I can't touch for a long time and there are some assumptions but still, if it's even CLOSE to accurate I'd be extremely happy and excited to buy.
That sounds too good to be true.
Does his logic add up?
Even at your lower expected income, you're well within lenders' guidelines and common sense for the debt-to-income ratio for buying the home.
Lenders typically will allow up to 28% of your gross income toward the total housing expenses including the mortgage plus taxes and insurance. And all of your debt obligations including consumer debts, student loans, etc. along with the housing expenses can typically be up to about 36% of your income before they start looking more closely at your budget.
With substantial property taxes and a lot of interest to deduct, you'll also get a substantial reduction in your income taxes. You'll be able to reduce your taxes in the 33% bracket on all of the amount by which the taxes and interest cause you to go over the standard deduction.
- For a home selling for $800,000 with 20.% down ($160,000) the balance would be $640,000. Perhaps 1.5% closing costs ($9,600) makes a total of $169,600 due at closing.
At perhaps 4.25% for 30 years the payment for P&I would be $3148 per month. Adding perhaps 1.5% of the home's value for taxes and insurance ($1000 escrow per month) would give you a total payment of $4,482 per month.
Allowing perhaps 1.% of the home's value for annual maintenance and repair expenses, would add another $667 per month you'd need to be able to set aside. That's a total of about $5,148 per month to own the home, and that's before you heat it cool it and furnish it.
At about 28% debt to income ratio for the home, and if the lender does not count the maintenance allowance, that would require an income of about $16,006 per month, $192,075 per year to qualify for the loan. At a more conservative 25% of income that a lot of folks recommend, you'd need to have at least $215,124 per year income.
The interest on $640,000 at 4.25% for 30 years will be $26,991 in the first 12 months. That's $2,249 per month. The interest alone is about as much or more as I seem to recall seeing that you're paying for rent (in another thread).
Property taxes at perhaps 1.% of the value of the home will be around $667 per month.
Insurance at a wild guess of 0.5% of the value of the home would be $333 per month, making the total out of pocket every month about $4,148 per month just to own the home.
If you had enough other deductions and could deduct all the taxes and interest at 33% federal and 0% state rates for the $34,991 in taxes and interest, you'd save $11,547 in taxes.
So your net cost of payments, taxes, and insurance for the home from month to month would be about around $3,186 per month.
While you will be paying that out of pocket, bear in mind that you are also building your net worth in the form of reduced debt on the principal balance on the mortgage, plus getting the leveraged appreciation on the full value of the house even though you're starting out with a little over 20% of it as your initial 'investment'.
Even in the first year when the ratio of interest to principal in each payment of an amortized loan is high because of the large unpaid balance, you'll reduce your debt by about $10,790 in the first 12 months. That effectively reduces your rent by about $899 per month -- although it's not something you can put your hands from month to month.
If the home is appreciating at only the historical national average of about 5% you'll also have an increase in value of around $40,000 in the first year alone.
That's $3333 per month gain in your net worth. Again, you can't touch it or spend it from month to month or year to year, but it can go a long way toward offsetting the long-term cost of owning the home.
You do take a lot more risk, because there's always a chance that you might have to sell at some time in the future at the same time the housing market was down -- like what happened to a lot of people in the crash of 2008/2009.
There's also a big problem that if you suffer a substantial cut in pay, you'll lose a lot of the tax deduction. Then you'll be paying the higher costs of the bigger mortgage payment and more of the actual costs for property taxes and interest and a time when you are much less able to afford it.
However, you don't suffer the loss if you are not forced to sell, and you have to pay rent to live somewhere anyway. So in the long run -- and assuming a normal housing market -- your cost of owning the home would not really be very much at all, even compared to renting a home that is of considerably less value.
That's because you're building equity in the form of reduced debt and getting leveraged appreciation and tax breaks or yourself instead of being the OP of Other Peoples' Money fame -- who provide the OPM to build the wealth and equity or the landlord.
I'm single, no kids yet, expecting marriage within ~1.5-2 years and kids within 3-4. Long term buy. No debt, portfolio of about $520,000, expected income of $240,000/year give or take a tiny bit. WA State.