How much worth house should one buy?

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jrk
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Joined: Mon Mar 13, 2017 9:29 pm

How much worth house should one buy?

Post by jrk » Wed Oct 04, 2017 9:19 pm

I understand that many factors such as income, debt, expenses, market, family size play a role in how much worth house one should buy but is there a general rule or a common sense rule that monthly house payment shouldn't exceed certain % of the gross house hold income? What is the safest margin to be in - 30%, 40%, 50% or more?

THanks!

KlangFool
Posts: 6710
Joined: Sat Oct 11, 2008 12:35 pm

Re: How much worth house should one buy?

Post by KlangFool » Wed Oct 04, 2017 9:32 pm

jrk wrote:
Wed Oct 04, 2017 9:19 pm
I understand that many factors such as income, debt, expenses, market, family size play a role in how much worth house one should buy but is there a general rule or a common sense rule that monthly house payment shouldn't exceed certain % of the gross house hold income? What is the safest margin to be in - 30%, 40%, 50% or more?

THanks!
jrk,

The common sense approach that everyone ignores is to buy as little house as possible. In fact, for most people, it does not make any sense to buy a house.

My rules:

1) The PITI of the house you buy should be 20% to 30% lower than the house that you are renting.

2) Your net worth excluding the house should be at least 2.5 to 3 times the price of the house.

KlangFool

emoore
Posts: 302
Joined: Mon Mar 04, 2013 8:16 pm

Re: How much worth house should one buy?

Post by emoore » Wed Oct 04, 2017 10:31 pm

jrk wrote:
Wed Oct 04, 2017 9:19 pm
I understand that many factors such as income, debt, expenses, market, family size play a role in how much worth house one should buy but is there a general rule or a common sense rule that monthly house payment shouldn't exceed certain % of the gross house hold income? What is the safest margin to be in - 30%, 40%, 50% or more?

THanks!
Standard is 28%

Slacker
Posts: 294
Joined: Thu May 26, 2016 8:40 am

Re: How much worth house should one buy?

Post by Slacker » Wed Oct 04, 2017 10:32 pm

KlangFool wrote:
Wed Oct 04, 2017 9:32 pm
jrk wrote:
Wed Oct 04, 2017 9:19 pm
I understand that many factors such as income, debt, expenses, market, family size play a role in how much worth house one should buy but is there a general rule or a common sense rule that monthly house payment shouldn't exceed certain % of the gross house hold income? What is the safest margin to be in - 30%, 40%, 50% or more?

THanks!
jrk,

The common sense approach that everyone ignores is to buy as little house as possible. In fact, for most people, it does not make any sense to buy a house.

My rules:

1) The PITI of the house you buy should be 20% to 30% lower than the house that you are renting.

2) Your net worth excluding the house should be at least 2.5 to 3 times the price of the house.

KlangFool
The most important piece of advice I need is:

How did you get your wife to agree with your very conservative (yet sensible) approach? :P

jrk
Posts: 8
Joined: Mon Mar 13, 2017 9:29 pm

Re: How much worth house should one buy?

Post by jrk » Thu Oct 05, 2017 5:55 am

KlangFool wrote:
Wed Oct 04, 2017 9:32 pm
jrk wrote:
Wed Oct 04, 2017 9:19 pm
I understand that many factors such as income, debt, expenses, market, family size play a role in how much worth house one should buy but is there a general rule or a common sense rule that monthly house payment shouldn't exceed certain % of the gross house hold income? What is the safest margin to be in - 30%, 40%, 50% or more?

THanks!
jrk,

The common sense approach that everyone ignores is to buy as little house as possible. In fact, for most people, it does not make any sense to buy a house.

My rules:

1) The PITI of the house you buy should be 20% to 30% lower than the house that you are renting.

2) Your net worth excluding the house should be at least 2.5 to 3 times the price of the house.

KlangFool
We own (mortgage) the house we live in now and are looking to size up. If we buy another house, the net worth is going to go into negatives because of the new jumbo mortgage. Is it even possible to keep the NW b/t 2.5 to 3 % of the house value?

Thanks.

saveinvestbecomefree
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Re: How much worth house should one buy?

Post by saveinvestbecomefree » Thu Oct 05, 2017 6:10 am

I agree with Klangfool here. Buying as little house as possible is the best financial decision, and depending on the local market, renting can be the best choice. Houses are a lifestyle expense, not a great investment. Housing generally (with a few local market exceptions) just keeps up with inflation. If you truly factor in all the costs, then it doesn't even do that. We've always kept our housing a very low % of our income/net worth and invested the difference......it's really paid off. We were financially free at 40. Current NW (not including the paid off house) is 6x our house value. We only have that number because we invested instead of sinking our income into big mortgage payments and home maintenance.

Good luck with convincing your wife :happy . The numbers are one thing. Emotions are another.

Bacchus01
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Joined: Mon Dec 24, 2012 9:35 pm

Re: How much worth house should one buy?

Post by Bacchus01 » Thu Oct 05, 2017 6:36 am

We spend 8.7% of gross income on mortgage and taxes

It was about 13.3% when we bought it and I thought that was a lot.

Dottie57
Posts: 2091
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Re: How much worth house should one buy?

Post by Dottie57 » Thu Oct 05, 2017 7:12 am

Keep your housing cost low. Be happy with less. Housing is a cost not an investment and can be a money pit.

My investments are over 8 times the cost of my home.

dsmil
Posts: 514
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Re: How much worth house should one buy?

Post by dsmil » Thu Oct 05, 2017 7:22 am

I prefer putting the housing costs into your budget and seeing how it looks. But if a rule of thumb is to be used, I think PITI (plus HOA if applicable) as a % of gross income is a decent place to start, and maybe make 25% your ceiling. I would also note that people with higher incomes can push the limits on that ratio more than people with lower incomes, since there is more money left over after the housing payment. We've ranged from 18-25% in our current home (been here 5 years) and have never felt overextended.

KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: How much worth house should one buy?

Post by KlangFool » Thu Oct 05, 2017 7:26 am

Slacker wrote:
Wed Oct 04, 2017 10:32 pm
KlangFool wrote:
Wed Oct 04, 2017 9:32 pm
jrk wrote:
Wed Oct 04, 2017 9:19 pm
I understand that many factors such as income, debt, expenses, market, family size play a role in how much worth house one should buy but is there a general rule or a common sense rule that monthly house payment shouldn't exceed certain % of the gross house hold income? What is the safest margin to be in - 30%, 40%, 50% or more?

THanks!
jrk,

The common sense approach that everyone ignores is to buy as little house as possible. In fact, for most people, it does not make any sense to buy a house.

My rules:

1) The PITI of the house you buy should be 20% to 30% lower than the house that you are renting.

2) Your net worth excluding the house should be at least 2.5 to 3 times the price of the house.

KlangFool
The most important piece of advice I need is:

How did you get your wife to agree with your very conservative (yet sensible) approach? :P
Slacker,

I have no job security. I was unemployed for more than 1 year a few times. We need to be able to "Sleep Well At Night" (SWAN).

KlangFool

fourwheelcycle
Posts: 199
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Re: How much worth house should one buy?

Post by fourwheelcycle » Thu Oct 05, 2017 7:31 am

KlangFool wrote:
Wed Oct 04, 2017 9:32 pm
Your net worth excluding the house should be at least 2.5 to 3 times the price of the house.
When my wife and I built our current home 40 years ago it cost about twice our joint income at the time ($72K vs. $36K). Our savings at that time, only a few years after we began working, was about 70% of the value of the house and we put 40% of our savings into the downpayment for the construction loan/mortgage.

Our oldest son and his wife bought their first house a few years ago, also only a few years since they had begun working. Although otherwise debt free, their savings at the time was less than the value of the house and they also put a large share of their savings into the mortgage.

I think savings equal to 2.5 to 3 times house value is a reasonable conservative guideline once people get established in their careers, but I do not think it is a reasonable guideline for young couples who are just starting out. In many cities and suburbs it is hard to find a good house of even modest size for less than $300K, and most couples' net worth excluding their home equity does not exceed $750K until well into their careers.

KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: How much worth house should one buy?

Post by KlangFool » Thu Oct 05, 2017 7:35 am

jrk wrote:
Thu Oct 05, 2017 5:55 am
KlangFool wrote:
Wed Oct 04, 2017 9:32 pm
jrk wrote:
Wed Oct 04, 2017 9:19 pm
I understand that many factors such as income, debt, expenses, market, family size play a role in how much worth house one should buy but is there a general rule or a common sense rule that monthly house payment shouldn't exceed certain % of the gross house hold income? What is the safest margin to be in - 30%, 40%, 50% or more?

THanks!
jrk,

The common sense approach that everyone ignores is to buy as little house as possible. In fact, for most people, it does not make any sense to buy a house.

My rules:

1) The PITI of the house you buy should be 20% to 30% lower than the house that you are renting.

2) Your net worth excluding the house should be at least 2.5 to 3 times the price of the house.

KlangFool
We own (mortgage) the house we live in now and are looking to size up. If we buy another house, the net worth is going to go into negatives because of the new jumbo mortgage. Is it even possible to keep the NW b/t 2.5 to 3 % of the house value?

Thanks.
jrk,

1) Yes, it is possible. I follow my own rules.

2) The PITI is based on 20% down and 30 years mortgage.

<<Is it even possible to keep the NW b/t 2.5 to 3 % of the house value? >>

3) It is 2.5 to 3 times the purchase price of the house. So, if you are buying a 400K house, you need to have a net worth of at least 1 million.

4) It is possible for people that

A) Choose to buy as little house as possible

B) Rent instead of buying until their net worth is larger.

Most of my peers bought a bigger house (500K to 600K) with less financial wealth. Their kid's go to college with student loans. Some of them lose their houses when they lost their jobs. They drive used cars and packed their lunches. They are "House Poor".

You choose to spend most of your money in the house. Nobody force you to. It is your choice.

KlangFool

KlangFool
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Re: How much worth house should one buy?

Post by KlangFool » Thu Oct 05, 2017 7:43 am

fourwheelcycle wrote:
Thu Oct 05, 2017 7:31 am
KlangFool wrote:
Wed Oct 04, 2017 9:32 pm
Your net worth excluding the house should be at least 2.5 to 3 times the price of the house.
When my wife and I built our current home 40 years ago it cost about twice our joint income at the time ($72K vs. $36K). Our savings at that time, only a few years after we began working, was about 70% of the value of the house and we put 40% of our savings into the downpayment for the construction loan/mortgage.

Our oldest son and his wife bought their first house a few years ago, also only a few years since they had begun working. Although otherwise debt free, their savings at the time was less than the value of the house and they also put a large share of their savings into the mortgage.

I think savings equal to 2.5 to 3 times house value is a reasonable conservative guideline once people get established in their careers, but I do not think it is a reasonable guideline for young couples who are just starting out. In many cities and suburbs it is hard to find a good house of even modest size for less than $300K, and most couples' net worth excluding their home equity does not exceed $750K until well into their careers.
fourwheelcycle,

Why do you think it is reasonable for young couples to buy a house?

You are assuming the stability of jobs, location, and marriage that do not exist for many young couples. Let's not even start with the financial part.

Two of my nieces were divorced 2 years after they were married and bought a house.

<<In many cities and suburbs it is hard to find a good house of even modest size for less than $300K, and most couples' net worth excluding their home equity does not exceed $750K until well into their careers.>>

This is a trap and financial disaster that most people locked in. In my industry, due to age discrimination, pay stay stagnant and no job security after 40. But, in the early and mid 30, people hit their earning peak. They optimistically believe that the pay will increase and their job is secured. So, they buy a big house. Then, at 40 and later, they are laid off and they lose their houses.

KlangFool

Wellfleet
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Re: How much worth house should one buy?

Post by Wellfleet » Thu Oct 05, 2017 7:52 am

KlangFool wrote:
Wed Oct 04, 2017 9:32 pm


My rules:

1) The PITI of the house you buy should be 20% to 30% lower than the house that you are renting.

2) Your net worth excluding the house should be at least 2.5 to 3 times the price of the house.

KlangFool
I like your rules but how do you reconcile differences in rentals versus houses? The apartment we rented is not comparable to the house we purchased. It was cheap but the schools were bad and it was not in a family friendly neighborhood and lacked some of the activities we like to do. Would your rule encourage comparing the PITI of a comparable rental house to the house we purchased?

KlangFool
Posts: 6710
Joined: Sat Oct 11, 2008 12:35 pm

Re: How much worth house should one buy?

Post by KlangFool » Thu Oct 05, 2017 7:59 am

Wellfleet wrote:
Thu Oct 05, 2017 7:52 am
KlangFool wrote:
Wed Oct 04, 2017 9:32 pm


My rules:

1) The PITI of the house you buy should be 20% to 30% lower than the house that you are renting.

2) Your net worth excluding the house should be at least 2.5 to 3 times the price of the house.

KlangFool
I like your rules but how do you reconcile differences in rentals versus houses? The apartment we rented is not comparable to the house we purchased. It was cheap but the schools were bad and it was not in a family friendly neighborhood and lacked some of the activities we like to do. Would your rule encourage comparing the PITI of a comparable rental house to the house we purchased?
Wellfleet,

You need to separate 2 different decisions:

1) Where to live?

2) Either rent or buy to live in that location.

If this apartment is not good enough for you to live, you should move. At the new location, you could either rent an apartment (A) or buy something (B). You should compare what you rent versus buy at that location.

I was comparing renting or buying a townhouse. My peers were renting townhouses. Then, they use renting a single family home versus buying a single family home to justify their purchase decision.

KlangFool

Leemiller
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Re: How much worth house should one buy?

Post by Leemiller » Thu Oct 05, 2017 8:09 am

I like the guideline of keeping all fixed expenses, so that would include housing, transportation, food, and childcare, below 50% of net take home. Then you have 25% or so for fun & the same for savings. We bought a home with a mortgage about 2x income in case one of us decided to take a lower paying salary. Since my husband and I both make enough for our minimum expenses we could have spent more, but didn't.

fourwheelcycle
Posts: 199
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Re: How much worth house should one buy?

Post by fourwheelcycle » Thu Oct 05, 2017 8:20 am

KlangFool wrote:
Thu Oct 05, 2017 7:43 am
Why do you think it is reasonable for young couples to buy a house?
My parents and my wife's parents had a house and a dog and a yard. My wife and I have had a house and a dog and a yard. Our oldest son and his wife have a house and a dog and a yard. Even our younger son and his wife, who are still renting due to their highly moveable careers, have a dog and aspire to own a house and a yard.

I'm not saying it's right, but we are following a traditional American path. I remember when a couple on our (rural New England) street took jobs in NYC and moved to a high rise downtown apartment building with their seven year old child. My wife and I were quite surprised, but it made us realize not all people are stuck on a house and a dog and a yard.

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Toons
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Re: How much worth house should one buy?

Post by Toons » Thu Oct 05, 2017 8:23 am

The ability to take out a 15 year mortgage should be High on the Priority List. :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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JupiterJones
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Re: How much worth house should one buy?

Post by JupiterJones » Thu Oct 05, 2017 8:29 am

Personally, I go by what I call the "Burger King Rule": The monthly payment should be low enough that, if my wife and I both lost our jobs and had to go work at fast food restaurants, we could still pull it off.

(Note that this doesn't really say anything about the size or value of the house. Just the amount that you borrow to get the house.)
Stay on target...

learning_head
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Re: How much worth house should one buy?

Post by learning_head » Thu Oct 05, 2017 9:12 am

KlangFool wrote:
Wed Oct 04, 2017 9:32 pm
My rules:

1) The PITI of the house you buy should be 20% to 30% lower than the house that you are renting.

2) Your net worth excluding the house should be at least 2.5 to 3 times the price of the house.

KlangFool
IMO, comparing mortgage payment to rent is comparing apples and oranges. Mortgage is just a loan for your equity. Rent is a throw away money to live somewhere for a period of time. Rent should be compared to throw away money expenses when owning a house, including
- insurance
- property taxes
- maintenance (estimates I've seen are ~2% of house cost)
- extra utility payments (e.g. because house is larger or because some utilities might be included in rent)
- mortgage (after-tax) interest and other fees (not mortgage itself), for minimally required mortgage

(By "minimally required" mortgage, I mean mortgage that you MUST get because you don't have enough funds for full house price - could be $0 or more.)

Whether you buy house for cash or decide to use a larger than minimally-required mortgage is then a separate financial decision; e.g. based on whether you want to get a loan in order to invest more in the markets / retirement accounts / somewhere else

So, going back to OP question, I would
(a) first, locate minimal residence you are willing to live in that is comfortable enough
(b) compare rent vs house-ownership expenses per above to see how big (if any) the difference is
(c) if house ownership with above comparison comes out much ahead, be more likely to buy a house
(d) only at that point, consider how much cash flow (now including both mortgage + all other expenses listed above) you can afford - that depends on job stability, etc, but clearly 30% is safer than 40% is safer than 50% (taking numbers from the OP) - that's just a personal decision. Safest is clearly to buy for cash and enjoy savings computed above over rent.

P.S. If can't buy for cash, I like the above mentioned "Burger King Rule" for job-stability by JupiterJones

technovelist
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Re: How much worth house should one buy?

Post by technovelist » Thu Oct 05, 2017 9:16 am

It would have shortened my life expectancy due to stress if I had had to borrow 2.5x my income to "buy" a house.
And the first house I "bought" was in a HCOL area, namely Long Island, NY.
I recommend either renting or buying the least expensive house that you can get your wife to agree to. :D

We borrowed about 1x times my income to buy my current house.

I paid it off earlier this year and have never regretted that decision.
Last edited by technovelist on Thu Oct 05, 2017 9:17 am, edited 1 time in total.
In theory, theory and practice are identical. In practice, they often differ.

SQRT
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Re: How much worth house should one buy?

Post by SQRT » Thu Oct 05, 2017 9:16 am

Depends heavily on the location. California vs Alabama? And your stage of life ie just starting out (will be a very high percentage) vs retired (probably a much lower percentage). The FIRE chat room did a survey and found many retirees are in the 15-20% of net worth range. Two ways of looking at it as well. Monthly cost as a percentage of income and total purchase price as a percentage of net worth. Cost makes more sense early in one’s life while total price makes more sense at later stages. One size does not fit all, although there would certainly be limits to affordability that shouldn’t be breached. Mostly expressed as % of income.

Jags4186
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Re: How much worth house should one buy?

Post by Jags4186 » Thu Oct 05, 2017 9:34 am

jrk wrote:
Wed Oct 04, 2017 9:19 pm
I understand that many factors such as income, debt, expenses, market, family size play a role in how much worth house one should buy but is there a general rule or a common sense rule that monthly house payment shouldn't exceed certain % of the gross house hold income? What is the safest margin to be in - 30%, 40%, 50% or more?

THanks!
I think you should be conservative with what you buy, but being as conservative as some of the other posters here suggest is unreasonable IMO.

The number 1 thing you should consider is what do you need, not what do you want. What you want makes you spend every penny the bank is willing to loan you.

You should work backwards from your income to find out what you can afford:

Gross income - savings - taxes - living expenses = house affordability. Most people can figure out savings pretty easily.

If you make $100,000 year gross and want to save 30%, you need to save $30,000 a year. Assuming two earners that’s $30,000 total split between two 401ks. $70k left

Taxes: you should do a proforma, but lets just lop off 20% of what’s left to account for your taxes: $56,000 left

Living expenses: say it costs you $2500/mo to buy groceries, pay for car insurance, fill up the gas tank, pay the electric bill, go on vacation, buy Christmas gifts. That’s $30,000 and you’re left with $26,000.

Home affordability: You have $26,000 that needs to cover the PITI + maintenance. Look at your property tax rates. If you have 2% property taxes and 2% maintenance costs that lets you buy about a $320k house assuming you have 20% down on a 4% 30 year mortgage.

The most important thing to consider though is your living expenses. Most people underestimate and most people don’t look too far ahead. My wife and I are starting to look at homes but we also know we will soon have kids. I need to figure in another $1500/mo or so for daycare + college savings + 1,000,000 diapers into my “living expenses”. You’ll also need to consider less regular expenses like new cars. I buy my cars outright and keep until about 120-150k miles which is about 6 years of driving. I know I need to come up with $15k + my trade in every 6 years.
Last edited by Jags4186 on Thu Oct 05, 2017 9:38 am, edited 2 times in total.

KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: How much worth house should one buy?

Post by KlangFool » Thu Oct 05, 2017 9:35 am

fourwheelcycle wrote:
Thu Oct 05, 2017 8:20 am
KlangFool wrote:
Thu Oct 05, 2017 7:43 am
Why do you think it is reasonable for young couples to buy a house?
My parents and my wife's parents had a house and a dog and a yard. My wife and I have had a house and a dog and a yard. Our oldest son and his wife have a house and a dog and a yard. Even our younger son and his wife, who are still renting due to their highly moveable careers, have a dog and aspire to own a house and a yard.

I'm not saying it's right, but we are following a traditional American path. I remember when a couple on our (rural New England) street took jobs in NYC and moved to a high rise downtown apartment building with their seven year old child. My wife and I were quite surprised, but it made us realize not all people are stuck on a house and a dog and a yard.
fourwheelcycle,

Average American has an average saving rate of 0%. And, average American lives paycheck to paycheck. It only takes a short period of unemployment to lose the house and everything else.

Given that historically, there is at least one US recession every 10 years since 1836, average American does not get to keep their houses with a yard.

Many of my family members are millionaires. We aspire to be wealthy. We started out poor and starving. Feeding our family is more important than any house.

KlangFool

KlangFool
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Re: How much worth house should one buy?

Post by KlangFool » Thu Oct 05, 2017 9:43 am

learning_head wrote:
Thu Oct 05, 2017 9:12 am
KlangFool wrote:
Wed Oct 04, 2017 9:32 pm
My rules:

1) The PITI of the house you buy should be 20% to 30% lower than the house that you are renting.

2) Your net worth excluding the house should be at least 2.5 to 3 times the price of the house.

KlangFool
IMO, comparing mortgage payment to rent is comparing apples and oranges. Mortgage is just a loan for your equity.
learning_head,

I disagreed. My peers are paying 25% income tax plus state income tax on every extra dollar that they spent on the mortgage versus rent. Those are throwaway money. That is one of the reason that they cannot save money. Meanwhile, my effective tax rate is less than 5%. My effective tax rate at early retirement is probably at that rate too.

What equity? Folks upsize to a bigger house whenever they have a bit more money. They pay more tax and more mortgage interest. Then, everything goes to hell in a recession like 2008/2009. House under water. They have no job. And, they lose everything.

KlangFool

travellight
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Re: How much worth house should one buy?

Post by travellight » Thu Oct 05, 2017 9:59 am

Jags4186 wrote:
Thu Oct 05, 2017 9:34 am
jrk wrote:
Wed Oct 04, 2017 9:19 pm
I understand that many factors such as income, debt, expenses, market, family size play a role in how much worth house one should buy but is there a general rule or a common sense rule that monthly house payment shouldn't exceed certain % of the gross house hold income? What is the safest margin to be in - 30%, 40%, 50% or more?

THanks!
I think you should be conservative with what you buy, but being as conservative as some of the other posters here suggest is unreasonable IMO.

The number 1 thing you should consider is what do you need, not what do you want. What you want makes you spend every penny the bank is willing to loan you.

You should work backwards from your income to find out what you can afford:

Gross income - savings - taxes - living expenses = house affordability. Most people can figure out savings pretty easily.

If you make $100,000 year gross and want to save 30%, you need to save $30,000 a year. Assuming two earners that’s $30,000 total split between two 401ks. $70k left

Taxes: you should do a proforma, but lets just lop off 20% of what’s left to account for your taxes: $56,000 left

Living expenses: say it costs you $2500/mo to buy groceries, pay for car insurance, fill up the gas tank, pay the electric bill, go on vacation, buy Christmas gifts. That’s $30,000 and you’re left with $26,000.

Home affordability: You have $26,000 that needs to cover the PITI + maintenance. Look at your property tax rates. If you have 2% property taxes and 2% maintenance costs that lets you buy about a $320k house assuming you have 20% down on a 4% 30 year mortgage.

The most important thing to consider though is your living expenses. Most people underestimate and most people don’t look too far ahead. My wife and I are starting to look at homes but we also know we will soon have kids. I need to figure in another $1500/mo or so for daycare + college savings + 1,000,000 diapers into my “living expenses”. You’ll also need to consider less regular expenses like new cars. I buy my cars outright and keep until about 120-150k miles which is about 6 years of driving. I know I need to come up with $15k + my trade in every 6 years.
very sensible approach. Looks like the calculations end up being about 3x annual earnings. 320k mortgage is about $1500/month. I think that translates to about 22.5% of income monthly.

technovelist
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Re: How much worth house should one buy?

Post by technovelist » Thu Oct 05, 2017 10:11 am

KlangFool wrote:
Thu Oct 05, 2017 9:43 am
learning_head wrote:
Thu Oct 05, 2017 9:12 am
KlangFool wrote:
Wed Oct 04, 2017 9:32 pm
My rules:

1) The PITI of the house you buy should be 20% to 30% lower than the house that you are renting.

2) Your net worth excluding the house should be at least 2.5 to 3 times the price of the house.

KlangFool
IMO, comparing mortgage payment to rent is comparing apples and oranges. Mortgage is just a loan for your equity.
learning_head,

I disagreed. My peers are paying 25% income tax plus state income tax on every extra dollar that they spent on the mortgage versus rent. Those are throwaway money. That is one of the reason that they cannot save money. Meanwhile, my effective tax rate is less than 5%. My effective tax rate at early retirement is probably at that rate too.

What equity? Folks upsize to a bigger house whenever they have a bit more money. They pay more tax and more mortgage interest. Then, everything goes to hell in a recession like 2008/2009. House under water. They have no job. And, they lose everything.

KlangFool
But other than that it is a great idea? :D
In theory, theory and practice are identical. In practice, they often differ.

learning_head
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Re: How much worth house should one buy?

Post by learning_head » Thu Oct 05, 2017 10:13 am

KlangFool wrote:
Thu Oct 05, 2017 9:43 am
learning_head wrote:
Thu Oct 05, 2017 9:12 am
KlangFool wrote:
Wed Oct 04, 2017 9:32 pm
My rules:

1) The PITI of the house you buy should be 20% to 30% lower than the house that you are renting.

2) Your net worth excluding the house should be at least 2.5 to 3 times the price of the house.

KlangFool
IMO, comparing mortgage payment to rent is comparing apples and oranges. Mortgage is just a loan for your equity.
learning_head,

I disagreed. My peers are paying 25% income tax plus state income tax on every extra dollar that they spent on the mortgage versus rent. Those are throwaway money. That is one of the reason that they cannot save money. Meanwhile, my effective tax rate is less than 5%. My effective tax rate at early retirement is probably at that rate too.

What equity? Folks upsize to a bigger house whenever they have a bit more money. They pay more tax and more mortgage interest. Then, everything goes to hell in a recession like 2008/2009. House under water. They have no job. And, they lose everything.

KlangFool
Mortgage is clearly a loan to get house equity. Once you pay it off or buy house for cash, you own the house. Whether that house loses value is irrelevant. Just like if you bought any other asset that is risky.

Regarding paying extra income tax instead of potentially shielding it in tax-advantaged accounts, it's a fair point and can be added to throw-away money list I mentioned (just like I mentioned the after-tax mortgage interest there). That does not change overall point.

msk
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Re: How much worth house should one buy?

Post by msk » Thu Oct 05, 2017 10:17 am

My own rules have been (I am now 73 retired at 55) and currently living in an absurdly large, 14,000 sq ft house:

Save and invest at least 30% of your income (Income = job income(s) + investment incomes)
Never buy a car (or cars) costing more than 6 months income
Never buy a house that costs more than 3x single-earner's income or 2.5x dual earners' income
Treat the repayment of equity in a mortgage as part of your savings and investing

It's not very important how you pay (mortgage, car lease, whatever), you will be able to retire early and live luxuriously but within your means. Basically you hit the above ceilings when you are young, but as your investments grow, you will find yourself under-spending unless something nasty happens along the way. No need for detailed calculations and no need to be too stingy as you progress in life. Life is to be enjoyed when you are still able to. You could also fall dead by tonight. Renting is almost invariably more economical than buying a house, but YOLO, you only live once.

KlangFool
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Re: How much worth house should one buy?

Post by KlangFool » Thu Oct 05, 2017 10:20 am

learning_head wrote:
Thu Oct 05, 2017 10:13 am
KlangFool wrote:
Thu Oct 05, 2017 9:43 am
learning_head wrote:
Thu Oct 05, 2017 9:12 am
KlangFool wrote:
Wed Oct 04, 2017 9:32 pm
My rules:

1) The PITI of the house you buy should be 20% to 30% lower than the house that you are renting.

2) Your net worth excluding the house should be at least 2.5 to 3 times the price of the house.

KlangFool
IMO, comparing mortgage payment to rent is comparing apples and oranges. Mortgage is just a loan for your equity.
learning_head,

I disagreed. My peers are paying 25% income tax plus state income tax on every extra dollar that they spent on the mortgage versus rent. Those are throwaway money. That is one of the reason that they cannot save money. Meanwhile, my effective tax rate is less than 5%. My effective tax rate at early retirement is probably at that rate too.

What equity? Folks upsize to a bigger house whenever they have a bit more money. They pay more tax and more mortgage interest. Then, everything goes to hell in a recession like 2008/2009. House under water. They have no job. And, they lose everything.

KlangFool
Mortgage is clearly a loan to get house equity. Once you pay it off or buy house for cash, you own the house. Whether that house loses value is irrelevant. Just like if you bought any other asset that is risky.

Regarding paying extra income tax instead of potentially shielding it in tax-advantaged accounts, it's a fair point and can be added to throw-away money list I mentioned (just like I mentioned the after-tax mortgage interest there). That does not change overall point.
learning_head,

Really? That is 20% to 30% on top of the mortgage payment. It is a significant number. Hence, the PITI need to be 20% to 30% lower than rent.

Keep it simple. Look at the big significant number. All other extra stuff that you mentioned does not come anywhere close this factor.

KlangFool

KlangFool
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Re: How much worth house should one buy?

Post by KlangFool » Thu Oct 05, 2017 10:21 am

msk wrote:
Thu Oct 05, 2017 10:17 am
My own rules have been (I am now 73 retired at 55) and currently living in an absurdly large, 14,000 sq ft house:

Save and invest at least 30% of your income (Income = job income(s) + investment incomes)
Never buy a car (or cars) costing more than 6 months income
Never buy a house that costs more than 3x single-earner's income or 2.5x dual earners' income
Treat the repayment of equity in a mortgage as part of your savings and investing

It's not very important how you pay (mortgage, car lease, whatever), you will be able to retire early and live luxuriously but within your means. Basically you hit the above ceilings when you are young, but as your investments grow, you will find yourself under-spending unless something nasty happens along the way. No need for detailed calculations and no need to be too stingy as you progress in life. Life is to be enjoyed when you are still able to. You could also fall dead by tonight. Renting is almost invariably more economical than buying a house, but YOLO, you only live once.
msk,

Is that 30% before-tax income (gross) or 30% after-tax income (take-home)?

KlangFool

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randomizer
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Re: How much worth house should one buy?

Post by randomizer » Thu Oct 05, 2017 10:24 am

We chose a house that accounts for about a third of our net worth. Our payments run at about 20% of our take-home income. Didn't do any fancy maths to arrive at those figures. It just "felt right" after pondering it for a while.

KlangFool
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Re: How much worth house should one buy?

Post by KlangFool » Thu Oct 05, 2017 10:25 am

Folks,

A) Most people will overspend on a house and many will lose their houses in a recession.

B) People with good net worth will pick up houses at a good price.

It is your choice to be (A) or (B). Most people will choose (A).

KlangFool

open_circuit
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Re: How much worth house should one buy?

Post by open_circuit » Thu Oct 05, 2017 10:31 am

I'm not fully comfortable with our PITI at ~19% of take home. Expenses with a house can be very bursty. We had to replace a furnace and water heater this year. These are substantial expenses that should be budgeted for beyond PITI, and can substantially increase your housing outflow in a given year.

Our previous house put us below 13% take home PITI. We endeavor to never spend more on a house than a single income can support comfortably.

rgs92
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Re: How much worth house should one buy?

Post by rgs92 » Thu Oct 05, 2017 10:36 am

Isn't buying a better house (or a better area) better than, say, buying a vacation or a better car?
At least the house has equity and (on average) some modest appreciation.

If the choice was between a better house and travel (or a high end car or expensive restaurant meals), I think it is far better to use the money for a house from a financial perspective (and, depending on your preference, a more enjoyable way to spend the money).

At least from that perspective, I disagree with the advice to buy as little house as you need unless you don't spend much at all on luxury items (which usually depreciate all the way to zero).

I also disagree with a set percentage of income for housing. If you have or make a lot of money, I see nothing wrong with using a higher percentage for housing if you want a better place to live. It's your discretionary money, so do what you want with it. Better real estate is not exactly wasting it or tossing down the drain. There are far worse things to do with your money.

IMHO a priority list (personally, not to be presumptuous):
1: stock/bond portfolio.
2: house.
3: car.
4: assorted luxury things (travel/restaurants/high-end consumer goods).
Last edited by rgs92 on Thu Oct 05, 2017 10:46 am, edited 1 time in total.

KlangFool
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Re: How much worth house should one buy?

Post by KlangFool » Thu Oct 05, 2017 10:43 am

rgs92 wrote:
Thu Oct 05, 2017 10:36 am
Isn't buying a better house (or a better area) better than, say, buying a vacation or a better car?
At least the house has equity and (on average) some modest appreciation.

If the choice was between a better house and travel (or a high end car), I think it is far better to use the money for a house from a financial perspective (and, depending on your preference, a more enjoyable way to spend the money).

At least from that perspective, I disagree with the advice to buy as little house as you need unless you don't spend much at all on luxury items (which usually depreciate all the way to zero).
rgs92,

<<Isn't buying a better house (or a better area) better than, say, buying a vacation or a better car?>>

1) Why do you need to buy in order to live in a particular location? You could rent. This is a common lie that people tell to themselves in order to overspend on a house.

2) Why do you need to spend the money?

A) It is not between a house, vacation, and car. It is between spending, saving, and investing.

B) Why do you need to spend now? I am living paycheck to paycheck now. All my annual savings are going towards my children's college education. But, with my net worth at 20 times my current annual expense, I can coast towards my early retirement with portfolio growth.

KlangFool

learning_head
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Re: How much worth house should one buy?

Post by learning_head » Thu Oct 05, 2017 10:47 am

KlangFool wrote:
Thu Oct 05, 2017 10:20 am
learning_head wrote:
Thu Oct 05, 2017 10:13 am
KlangFool wrote:
Thu Oct 05, 2017 9:43 am
learning_head wrote:
Thu Oct 05, 2017 9:12 am
KlangFool wrote:
Wed Oct 04, 2017 9:32 pm
My rules:

1) The PITI of the house you buy should be 20% to 30% lower than the house that you are renting.

2) Your net worth excluding the house should be at least 2.5 to 3 times the price of the house.

KlangFool
IMO, comparing mortgage payment to rent is comparing apples and oranges. Mortgage is just a loan for your equity.
learning_head,

I disagreed. My peers are paying 25% income tax plus state income tax on every extra dollar that they spent on the mortgage versus rent. Those are throwaway money. That is one of the reason that they cannot save money. Meanwhile, my effective tax rate is less than 5%. My effective tax rate at early retirement is probably at that rate too.

What equity? Folks upsize to a bigger house whenever they have a bit more money. They pay more tax and more mortgage interest. Then, everything goes to hell in a recession like 2008/2009. House under water. They have no job. And, they lose everything.

KlangFool
Mortgage is clearly a loan to get house equity. Once you pay it off or buy house for cash, you own the house. Whether that house loses value is irrelevant. Just like if you bought any other asset that is risky.

Regarding paying extra income tax instead of potentially shielding it in tax-advantaged accounts, it's a fair point and can be added to throw-away money list I mentioned (just like I mentioned the after-tax mortgage interest there). That does not change overall point.
learning_head,

Really? That is 20% to 30% on top of the mortgage payment. It is a significant number. Hence, the PITI need to be 20% to 30% lower than rent.

Keep it simple. Look at the big significant number. All other extra stuff that you mentioned does not come anywhere close this factor.

KlangFool
Highlighted statement in your response is very much FALSE.

It all depends on particular situation.

For one thing, it could also be $0, if all tax-advantaged accounts are already filled / taken care of.

Next, it's not necessarily 20-30%. Note: saving tax money in traditional 401k / IRA is NOT necessarily "free" money to the full extent of tax savings, because you DO increase your tax liability later when getting that money back. People may or may not be able to make that withdrawal at 0% and in many cases they won't be able to.

Next, even for a couple that say could contribute $36k extra toward 401k instead of $0 due to mortgage payment, and if we take your 20-30% estimate for savings, that saves $7-10k/year at the most for both people (half that for a single person). In HCOL areas that may not be big money compared to other mentioned costs.

Finally, what you are talking about is really an opportunity cost, which actually is not quite the same as other things I mentioned.

It's like saying how much do you save if you pay $12000/year in rent vs $22000/year on rent. Most people would say $10,000, but you are saying it's more than that because you could actually make money on that $10k by depositing into tax-advantaged accounts and thus saving on taxes. It's a valid point to consider and by same token you could include all the interest / dividends / investment gains you could make on that money, etc... but that's a different comparison than what people normally do when comparing true costs of option A vs option B.
Last edited by learning_head on Thu Oct 05, 2017 10:56 am, edited 2 times in total.

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lthenderson
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Re: How much worth house should one buy?

Post by lthenderson » Thu Oct 05, 2017 10:49 am

My rule of thumb is to calculate:

A) How much could I conservatively afford to pay each month for a house on one salary.
B) How much the bank will loan me divided in half.

I then take the lesser of those two numbers and that is how much I spend on a house... or as little as possible to meet my needs.

During the last recession, I saw numerous friends lose their houses and much more by buying more house than they needed because the bank and everyone else was telling them they could afford it with THEIR salaries. Problem was many of them lost one of their salaries or both and suddenly it wasn't affordable anymore.

rgs92
Posts: 1363
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Re: How much worth house should one buy?

Post by rgs92 » Thu Oct 05, 2017 10:53 am

Thanks for the good questions KlangFool (as usual).

I don't need to spend it, but if I enjoy a better house, I think it's a reasonably smart thing to do with the money as opposed to things like travel which become worthless as soon as you come home. And the house just keeps on giving in terms of enjoyment for many people, while travel is gone in an instant beyond some photos.

Good luck with your kids. That is very kind of you to make such a sacrifice to support their education (my parents weren't in a position to do that so I had to do it myself with scholarships and small loans).
Good luck to you also and keep up the good work with the insightful and intriguing posts.
Cheers.
Last edited by rgs92 on Thu Oct 05, 2017 10:55 am, edited 1 time in total.

msk
Posts: 448
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Re: How much worth house should one buy?

Post by msk » Thu Oct 05, 2017 10:54 am

KlangFool wrote:
Thu Oct 05, 2017 10:21 am
msk wrote:
Thu Oct 05, 2017 10:17 am
My own rules have been (I am now 73 retired at 55) and currently living in an absurdly large, 14,000 sq ft house:

Save and invest at least 30% of your income (Income = job income(s) + investment incomes)
Never buy a car (or cars) costing more than 6 months income
Never buy a house that costs more than 3x single-earner's income or 2.5x dual earners' income
Treat the repayment of equity in a mortgage as part of your savings and investing

It's not very important how you pay (mortgage, car lease, whatever), you will be able to retire early and live luxuriously but within your means. Basically you hit the above ceilings when you are young, but as your investments grow, you will find yourself under-spending unless something nasty happens along the way. No need for detailed calculations and no need to be too stingy as you progress in life. Life is to be enjoyed when you are still able to. You could also fall dead by tonight. Renting is almost invariably more economical than buying a house, but YOLO, you only live once.
msk,

Is that 30% before-tax income (gross) or 30% after-tax income (take-home)?

KlangFool
30% of after tax would do fine but of course you have to take advantage of all the tax measures available to you along the way. In my life history it was 30% after-tax from around age 30 but after a decade of saving and investing it quickly becomes a moot point because your investments move forward very rapidly and you end up saving more than 30%, simply because your yardsticks for cars and housing do not explode that much.

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Clever_Username
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Re: How much worth house should one buy?

Post by Clever_Username » Thu Oct 05, 2017 11:05 am

Well, this thread is worrying (for me). On one hand, the greater Los Angeles area is a bit expensive for housing ... on the other hand, my Vanguard account (where most of my non-house-related net-worth lives) is about 50% of the purchase price of my home. On the other hand, it seems a lot of people here have that ratio in the other direction. On yet another hand (and I don't have enough hands for all of these), I might be a good bit younger than the rest of the data points posted here.

But the housing payments fit comfortably into my budget and the house has the features I want that, while I might have been able to get from renting, I really don't have to worry on it going forward.
"What was true then is true now. Have a plan. Stick to it." -- XXXX, [i]Layer Cake[/i]

delamer
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Re: How much worth house should one buy?

Post by delamer » Thu Oct 05, 2017 11:10 am

When my husband and I bought our first house together, I was not working (by choice). When we bought our second house, to move to a better school district, I was working just three days a week (and we still bought a house that cost only 80% of the maximum we could qualify for).

I always felt that my ability to make more money was the best cushion we had against financial problems.

So my advice is to make sure you have your own cushion when you buy. That might mean that you still can save 25% of your income or that you can afford the mortgage on two minimum wage jobs or that you have 3 years of PITI in the bank or etc.

Also, think hard about your job security and your willingness/ability to stay in the house for an extended period.

Mortgage lenders have rules about how much they are willing to lend. But always remember that those rules are in place to protect them, not you.

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Re: How much worth house should one buy?

Post by 3CT_Paddler » Thu Oct 05, 2017 11:13 am

The number should definitely be less than the bank will loan you.

Dave Ramsey has a good rule of thumb... PITI less than 25% of your net pay (post-tax).

Texanbybirth
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Re: How much worth house should one buy?

Post by Texanbybirth » Thu Oct 05, 2017 11:37 am

This is a timely thread. I was just looking at "dream" homes this morning that would cost 50% more than our current home. Although they have some of the amenities we'd prefer (a jetted tub in the master, acreage, one more bedroom), there was no reason for me to look this morning other than an almost unexplainable "itch". (PITI is currently 34% of monthly take home, sounds like that would make some here nervous but it doesn't feel too bad to us.)

This thread has killed that expensively stupid/stupidly expensive wish. Thanks a lot people. :D

new2bogle
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Re: How much worth house should one buy?

Post by new2bogle » Thu Oct 05, 2017 12:01 pm

KlangFool wrote:
Thu Oct 05, 2017 10:43 am

1) Why do you need to buy in order to live in a particular location? You could rent. This is a common lie that people tell to themselves in order to overspend on a house.
One very good reason is school districts. Recently, a group of "concerned" citizens in our school district managed to change school boundaries so that the better elementary school did not have "apartment complex" students (i.e., lower income families). There are very few homes to rent in the school district, certainly not enough if every apartment complex renter wanted to make the change from apt to rental house.

ohmygodabear
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Re: How much worth house should one buy?

Post by ohmygodabear » Thu Oct 05, 2017 12:29 pm

new2bogle wrote:
Thu Oct 05, 2017 12:01 pm
KlangFool wrote:
Thu Oct 05, 2017 10:43 am

1) Why do you need to buy in order to live in a particular location? You could rent. This is a common lie that people tell to themselves in order to overspend on a house.
One very good reason is school districts. Recently, a group of "concerned" citizens in our school district managed to change school boundaries so that the better elementary school did not have "apartment complex" students (i.e., lower income families). There are very few homes to rent in the school district, certainly not enough if every apartment complex renter wanted to make the change from apt to rental house.
This is a point for renting, isn't it? A group of citizens changed the rules, and anyone who owns property outside of that district just lost some value and has to face a large transaction cost to move. A renter has a lot less friction to moving to a better school district, even if it's still a pain.

If those people had owned their units, they would still have been cut out of the district. The real problem for them is that they lived in the wrong place.

Threads like this always make me more comfortable with my choice to rent. Helps me sleep at night knowing I can always walk away if the neighborhood changes.

alfaspider
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Re: How much worth house should one buy?

Post by alfaspider » Thu Oct 05, 2017 12:52 pm

I think a "rule of thumb" is a good starting point, but at the end of the day you need to assess your particular situation.

Job security is likely a big factor. Things look very different if you are federal judge (guaranteed employment for life so long as you avoid committing any serious crimes or ethical violations) as compared to a temporary contract worker, even at the same salary level. It can be hard to predict your future job security, but your industry and specific position can help at least make an educated guess. Some industries have rampant age discrimination (i.e. tech), others don't (i.e. law). Things are also different if you have a spouse. My personal rule of thumb was to buy a house that we could comfortably afford on either of our salaries- that way a lay-off or disability wouldn't create housing insecurity.

Rent vs buy is mostly a business decision some housing markets tend to favor one over the other. The NYT calculator is pretty decent: https://www.nytimes.com/interactive/201 ... lator.html, though you may need to tweak for various factors. There are of course the intangible aspects of each that are hard to put a price on.

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Sandtrap
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Re: How much worth house should one buy?

Post by Sandtrap » Thu Oct 05, 2017 12:55 pm

jrk wrote:
Wed Oct 04, 2017 9:19 pm
I understand that many factors such as income, debt, expenses, market, family size play a role in how much worth house one should buy but is there a general rule or a common sense rule that monthly house payment shouldn't exceed certain % of the gross house hold income? What is the safest margin to be in - 30%, 40%, 50% or more?

THanks!
Housing expense, whether renting or buying, should be minimized as much as possible without sacrificing livability.
If one can eliminate car payments, house payments, credit card payments, and the payment mentality in general, all the better.
This is one approach amongst as many as there are people.
But, an option.
Not a financial expert - just a retired businessman hacking out of a sand trap -- again.

cusetownusa
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Re: How much worth house should one buy?

Post by cusetownusa » Thu Oct 05, 2017 1:01 pm

3CT_Paddler wrote:
Thu Oct 05, 2017 11:13 am
The number should definitely be less than the bank will loan you.

Dave Ramsey has a good rule of thumb... PITI less than 25% of your net pay (post-tax).
I believe he also says on a 15 year loan.

avalpert
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Re: How much worth house should one buy?

Post by avalpert » Thu Oct 05, 2017 1:03 pm

rgs92 wrote:
Thu Oct 05, 2017 10:53 am
Thanks for the good questions KlangFool (as usual).

I don't need to spend it, but if I enjoy a better house, I think it's a reasonably smart thing to do with the money as opposed to things like travel which become worthless as soon as you come home. And the house just keeps on giving in terms of enjoyment for many people, while travel is gone in an instant beyond some photos.
While keeping in mind that everybody's utility curves are different - the science suggests that in general people value fleeting experience more than physical objects that last longer - contrary to the common assumption you voice here.

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