Mortgage as percentage of take-home pay

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cashisking500
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Mortgage as percentage of take-home pay

Post by cashisking500 » Wed Dec 06, 2017 11:41 am

I'm currently having this debate with a friend. I've always subscribed to the rule that your mortgage should be no more than 25% of your take-home pay. Are you comfortable going up to 25 or 30% of take-home pay for a mortgage? What do the Bogleheads say? Mine is currently between 18 and 19% on a 20-year mortgage.

Disclaimer: I know there are certain areas of the country where keeping your mortgage at 25% is impossible (i.e. California)

snowox
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Re: Mortgage as percentage of take-home pay

Post by snowox » Wed Dec 06, 2017 11:44 am

Depending on some variables 25 would be my max but could see as high as 30 but no higher than that.

TheHouse7
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Re: Mortgage as percentage of take-home pay

Post by TheHouse7 » Wed Dec 06, 2017 11:47 am

We lived with 36% for a short time and I started freaking out. Had to get 10+ ot per week :oops:
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.

raamakoti
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Re: Mortgage as percentage of take-home pay

Post by raamakoti » Wed Dec 06, 2017 12:02 pm

NE Ohio - currently - mortgage + local taxes = 24.61% of net pay.

GAAP
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Re: Mortgage as percentage of take-home pay

Post by GAAP » Wed Dec 06, 2017 12:05 pm

My personal limit is more around total housing costs, not just the mortgage.

Depending on where you live -- or in California, how long you've been there -- property taxes may or may not be a significant part of your budget.

Home repair costs are also highly variable, depending on house age, location, construction, etc.

RW-Expat
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Re: Mortgage as percentage of take-home pay

Post by RW-Expat » Wed Dec 06, 2017 12:09 pm

Until it was paid off ours for P&I, additional principle and taxes averaged about 28% of take home pay a year.

Chicagoland

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flamesabers
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Re: Mortgage as percentage of take-home pay

Post by flamesabers » Wed Dec 06, 2017 12:28 pm

I see it as more of a guideline then as an unbreakable rule. For instance, it shouldn't be used as a rationale for buying a more expensive house then what is sensible for you. Also, if you're suddenly unemployed, had your hours cut, or otherwise working a temporary job, then obviously your mortgage will represent a greater portion of your take-home pay.

CMD1
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Re: Mortgage as percentage of take-home pay

Post by CMD1 » Wed Dec 06, 2017 12:32 pm

We rent in a HCOL area (not CA or NY) and pay 46% of take home pay on rent. That take home pay is net of retirement contributions however so the true percentage would be less, either way it is super high but the best we can do in this market where rents are up 50-75% in the last 5 years, even so it means fitting a family of four in a 2 bedroom house.

Every time I look at buying I realize the ratios are that much worse than they are for renting.

Tamales
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Re: Mortgage as percentage of take-home pay

Post by Tamales » Wed Dec 06, 2017 12:33 pm

This seems to follow the mindset of buying a car based on minimizing the monthly payment. You can tweak loan parameters to get any answer you want, but to what end? Think long term not short term.

Is it better to be at 10% of THP for 30 years or 30% of THP for 10 years? There could be legitimate reasons for either answer, so your debate is unresolvable. Should you change your pre-tax retirement fund contributions to alter the THP percentage to meet some artificial limit? There might even be cases where 40-50-60% of THP, all other case-specific things considered, is OK.

barnaclebob
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Re: Mortgage as percentage of take-home pay

Post by barnaclebob » Wed Dec 06, 2017 12:37 pm

Or mortgage on our new house will be approximately 50% of our take home pay on a 20 year note. But we put in 30% (will temporarily go down to 20% to rebuild some taxable $ savings) to our 401k before that. About 25% of take home pay is other expenses and the final 25% for the backdoor roth and other taxable long term savings.

If one of us looses our job we'll have to reduce the 30% and worst case have to sell the house, downsize and pay mostly cash with the equity from the expensive house.

It all depends on how much safety net you have and what form that safety is in. 50% take home with a low 401k contribution and not much equity? Way to risky for us.
Last edited by barnaclebob on Wed Dec 06, 2017 12:43 pm, edited 3 times in total.

mega317
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Re: Mortgage as percentage of take-home pay

Post by mega317 » Wed Dec 06, 2017 12:39 pm

Depends completely on context. DINK is very different from 3 kids in daycare/private school, for example. But if you make millions with a ridiculous house, then private school would only be a drop in the bucket.

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Pajamas
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Re: Mortgage as percentage of take-home pay

Post by Pajamas » Wed Dec 06, 2017 12:48 pm

It's meaningless to think in those terms because pay can vary from a couple of hundred dollars a week to millions every month and housing needs and costs vary, too.

Example: If you make $50,000 a month, 50% of that for mortgage payments might be fine, whereas if you make $2,000 a month, 50% of that might not leave enough to cover other expenses.

Ultimately, the only hard rule is how much of a mortgage you can get.

dcd72
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Re: Mortgage as percentage of take-home pay

Post by dcd72 » Wed Dec 06, 2017 12:51 pm

Take home pay is also a variable concept. Is it take home pay in January, when we're paying full 401k contributions and OASDI taxes? Is it mid-year, after OASDI taxes cease? Is it September, when 401k contributions top out? Do we count the deferred income (20%) that, while not technically guaranteed, is the next best thing?

FWIW, in January 2018, my Mortgage + property tax will be a shade over 40% of my January checks. In October, it will be 33%. Including deferred income drops it substantially more.

KlangFool
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Re: Mortgage as percentage of take-home pay

Post by KlangFool » Wed Dec 06, 2017 12:51 pm

OP,

1) I do not buy any house that I cannot pay the mortgage off if I want to. Aka, my net worth is 2 or more times the price of the house. So, I do not judge the affordability of the house only based on the mortgage payment.

2) Even on income, the criteria is wrong anyhow. The correct question should be can the person save 10% to 15% of his/her gross pay after buying the house.

KlangFool

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flamesabers
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Re: Mortgage as percentage of take-home pay

Post by flamesabers » Wed Dec 06, 2017 12:57 pm

Tamales wrote:
Wed Dec 06, 2017 12:33 pm
This seems to follow the mindset of buying a car based on minimizing the monthly payment. You can tweak loan parameters to get any answer you want, but to what end? Think long term not short term.
+1.

I don't think your housing cost to take-home pay will necessarily make or break your financial health. If you're in bad financial health, there'll be other signs then just the percentage of income you're spending on a mortgage. Even if you meet the 25% limit, you can still be in financial trouble if you're mismanaging the remaining 75%+ of your income.

jlcnuke
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Re: Mortgage as percentage of take-home pay

Post by jlcnuke » Wed Dec 06, 2017 1:22 pm

PITI + extra payment (15 year mortgage) currently comes out to 18% of net pay (minus taxes only, not after 401k contributions, payroll deductions etc). I think I'd be comfortable at up to ~25%, but lower is more comfortable.

miamivice
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Re: Mortgage as percentage of take-home pay

Post by miamivice » Wed Dec 06, 2017 1:26 pm

KlangFool wrote:
Wed Dec 06, 2017 12:51 pm
OP,

1) I do not buy any house that I cannot pay the mortgage off if I want to. Aka, my net worth is 2 or more times the price of the house. So, I do not judge the affordability of the house only based on the mortgage payment.
Are you suggesting everybody rent until they have saved up enough to buy a house cash? That would mean many people not buy a house until retirement.

That doesn't make good financial sense to me.

KlangFool
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Re: Mortgage as percentage of take-home pay

Post by KlangFool » Wed Dec 06, 2017 1:38 pm

miamivice wrote:
Wed Dec 06, 2017 1:26 pm
KlangFool wrote:
Wed Dec 06, 2017 12:51 pm
OP,

1) I do not buy any house that I cannot pay the mortgage off if I want to. Aka, my net worth is 2 or more times the price of the house. So, I do not judge the affordability of the house only based on the mortgage payment.
Are you suggesting everybody rent until they have saved up enough to buy a house cash? That would mean many people not buy a house until retirement.

That doesn't make good financial sense to me.
miamivice,

I have a mortgage. I can pay off my mortgage if I want to. I did not suggest a person buy the house with cash.

<<That would mean many people not buy a house until retirement.>>

Many people should never buy a house. Even when they have the money.

KlangFool

alfaspider
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Re: Mortgage as percentage of take-home pay

Post by alfaspider » Wed Dec 06, 2017 1:44 pm

Mine is currently around 10% of combined take home or 20% of single-income takehome excluding deferred compensation. The idea of 20% total takehome is a bit scary to me, barring exigent circumstances. Property taxes may be a factor. In my area, they are quite high (2.5-3% of assessed value with rather aggressive assessments).

Jags4186
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Re: Mortgage as percentage of take-home pay

Post by Jags4186 » Wed Dec 06, 2017 1:52 pm

Define take home pay.

Define mortgage payment.

My take home pay would certainly be higher if I didn’t contribute to 401k or HSA. Is someone who makes less money than me but doesn’t contribute to their 401k therefore having a higher net paycheck able to afford a more expensive home?

Mortgage payment or PITI? A $300,000 mortgage on a $360,000 home will have a significantly lower PITI than a $300,000 mortgage on a $360,000 home in NYC suburbs. Monthly property taxes could be higher than P&I.

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Cycle
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Re: Mortgage as percentage of take-home pay

Post by Cycle » Wed Dec 06, 2017 2:02 pm

I'm assuming take home pay includes 401k match, stock discounts, year end bonus. Excludes taxes. 4% before we paid it off. Roughly 10% when I first got it when I was single and 24. It was a 15yr mortgage.

SeaToTheBay
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Re: Mortgage as percentage of take-home pay

Post by SeaToTheBay » Wed Dec 06, 2017 2:12 pm

As others have said, it's too dependent on other factors to use a one-size-fits-all percentage. 25% sounds like a decent limit, but it shouldn't be the same for a 40-year-old couple with five kids as it is for a single 25-year-old with a roommate.

Another thing I hate about ANY percentage of income limit is it fundamentally doesn't make much sense, as the cost of other things doesn't necessarily increase with income. Going out for a $15 lunch has a much larger effect on disposable income for someone making $40k than someone making $1M, and health insurance costs the same for those people as well. Therefore, the higher earner can afford to safely spend a higher % of his/her income and still make ends meet.
GAAP wrote:
Wed Dec 06, 2017 12:05 pm
My personal limit is more around total housing costs, not just the mortgage.

Depending on where you live -- or in California, how long you've been there -- property taxes may or may not be a significant part of your budget.

Home repair costs are also highly variable, depending on house age, location, construction, etc.
x2. I'd be more comfortable at 25% in a brand new townhouse like the one we have than a 100-year-old single family home on 5 acres.

head gamez
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Re: Mortgage as percentage of take-home pay

Post by head gamez » Wed Dec 06, 2017 2:43 pm

14% for us. That is based on actual net pay (after all retirement, savings, etc).

We have our "dream home" with plenty of land. It would be hard to imagine what kind of place we could buy here if we went to 25%.

Independent
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Re: Mortgage as percentage of take-home pay

Post by Independent » Wed Dec 06, 2017 2:53 pm

"A standard rule for lenders is that your monthly housing payment (principal, interest, taxes and insurance) should not take up more than 28 percent of your income before taxes."

When we were buying, I thought the comparison should be to before tax income, because most of our mortgage payment was tax deductible.

"Prudent" to me is definitely less than the maximum a lender will loan.

3funder
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Re: Mortgage as percentage of take-home pay

Post by 3funder » Wed Dec 06, 2017 5:07 pm

snowox wrote:
Wed Dec 06, 2017 11:44 am
Depending on some variables 25 would be my max but could see as high as 30 but no higher than that.
+1, although ours is like 10%. There's more to the story, but if things had been different, we would've been inclined to target 25% as our max.

texas lawdog
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Re: Mortgage as percentage of take-home pay

Post by texas lawdog » Wed Dec 06, 2017 5:32 pm

Recent article on Business Insider showed that top 20% income earners spend 29.9% of their income on housing, while bottom 20% spend 40.4% of their income on housing, if that is any guide. I personally think that anything +25% is excessive

2Birds1Stone
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Re: Mortgage as percentage of take-home pay

Post by 2Birds1Stone » Wed Dec 06, 2017 7:11 pm

We rent, but our all in cost for Housing + Utilities is roughly 20% of take home pay.

boglewill34
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Re: Mortgage as percentage of take-home pay

Post by boglewill34 » Wed Dec 06, 2017 8:13 pm

Mortgage plus escrow for insurance and taxes come to 33% of our net take home, after health insurance premiums. It’s too high, wouldn’t recommend.

hightower
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Re: Mortgage as percentage of take-home pay

Post by hightower » Wed Dec 06, 2017 8:16 pm

No more than 2x your gross annual salary for the size of your mortgage. I like this rule. It prevents you from becoming house poor.

Thesaints
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Re: Mortgage as percentage of take-home pay

Post by Thesaints » Wed Dec 06, 2017 8:20 pm

Compare to cost of renting. That's the first criterion.

awval999
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Re: Mortgage as percentage of take-home pay

Post by awval999 » Wed Dec 06, 2017 8:27 pm

Question for the board...

Does the answer change if the mortgage is:
30 years?
15 years?
10 years?

Is the shorter term more of a "forced savings"?

Example.

Boglehead Joe has a 30 year mortgage at 25% of take-home pay.
Boglehead Jane has a 10 year mortgage at 34% of take-home pay.

Who's the better boglehead? Who's overspending? Jane clearly is spending more of her take home pay.

lakja
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Re: Mortgage as percentage of take-home pay

Post by lakja » Wed Dec 06, 2017 9:31 pm

Northern VA, 20% down, 3.625% - 30 year note

PITI:
9% gross
14% taxes only
22% all payroll deductions (life/health insurance, 36k 401k deductions, maxed HSA, FICA, dependent care account, etcetera)

Ron Ronnerson
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Re: Mortgage as percentage of take-home pay

Post by Ron Ronnerson » Wed Dec 06, 2017 10:08 pm

Jags4186 wrote:
Wed Dec 06, 2017 1:52 pm
Define take home pay.

Define mortgage payment.

My take home pay would certainly be higher if I didn’t contribute to 401k or HSA. Is someone who makes less money than me but doesn’t contribute to their 401k therefore having a higher net paycheck able to afford a more expensive home?

Mortgage payment or PITI? A $300,000 mortgage on a $360,000 home will have a significantly lower PITI than a $300,000 mortgage on a $360,000 home in NYC suburbs. Monthly property taxes could be higher than P&I.
These are good points. I'll also add that circumstances (income, expenses, etc.) can and do change so you have to keep that in mind too.

Our PITI + HOA dues are roughly 40% of take home pay. However, that's because we're maxing two Roth IRAs and a 457b, partially funding a 403b, putting the max allowable in a dependent care FSA, and putting money into a healthcare FSA. This is right now.

Here is what 2019 could look like if we choose to: Eliminate contributing to Roth IRAs, 457b, and 403b. Dependent care FSA stops. Preschool ends and the expensive tuition for it goes away. All of a sudden, the numbers look much better. Pension and social security should provide us with a six-figure income in retirement, which should be sufficient to cover retirement expenses. What we have already contributed into retirement accounts should provide us another million dollars or so to access on top.

We're middle-income folks, in the 15% tax bracket. We live in a VHCOL area (Bay Area) so homes are pricey out here but other things aren't so bad. PITI that is 40% of net pay is not only affordable, but easily so. If it weren't, we would just increase our net pay.

Bacchus01
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Re: Mortgage as percentage of take-home pay

Post by Bacchus01 » Wed Dec 06, 2017 10:18 pm

about 13% here in mortgage on a 15 year

Charlesmetz83
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Re: Mortgage as percentage of take-home pay

Post by Charlesmetz83 » Wed Dec 06, 2017 11:08 pm

Here in Indiana PITI on 15 yr @3.125% is. 17% of take home after taxes and max 403b.

TropikThunder
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Re: Mortgage as percentage of take-home pay

Post by TropikThunder » Thu Dec 07, 2017 12:29 am

hightower wrote:
Wed Dec 06, 2017 8:16 pm
No more than 2x your gross annual salary for the size of your mortgage. I like this rule. It prevents you from becoming house poor.
If this was a universal standard, realtors would need to survive on cat food. Let's look at the Top 25 Metro Areas per US Census and compare median household income, median home price, and the ratio of home price to income and see how your 2x rule works in the real world (all numbers as of end of 2016).

Code: Select all

							Median    	  Median	
Metro Area						Income*   	  Home**	Ratio
Atlanta-Sandy Springs-Roswell, GA   			$62,613		$184,500	2.95
Baltimore-Columbia-Towson, MD   			$76,788		$253,000	3.29
Boston-Cambridge-Newton, MA-NH   			$82,380		$421,100	5.11
Charlotte-Concord-Gastonia, NC-SC  			$59,979		$208,400	3.47
Chicago-Naperville-Elgin, IL-IN-WI   			$66,020		$234,900	3.56
Dallas-Fort Worth-Arlington, TX   			$63,812		$227,100	3.56
Denver-Aurora-Lakewood, CO   				$71,926		$384,300	5.34
Detroit-Warren-Dearborn, MI   				$56,142		$225,200	4.01
Houston-The Woodlands-Sugar Land, TX   			$61,708		$217,400	3.52
Los Angeles-Long Beach-Anaheim, CA   			$65,950		$507,100	7.69
Miami-Fort Lauderdale-West Palm Beach, FL   		$51,362		$305,000	5.94
Minneapolis-St Paul-Bloomington, MN-WI   		$73,231		$237,000	3.24
New York-Newark-Jersey City, NY-NJ-PA			$71,897		$370,200	5.15
Orlando-Kissimmee-Sanford, FL				$52,385		$224,000	4.28
Philadelphia-Camden-Wilmington, PA-NJ-DE-MD		$65,996		$225,400	3.42
Phoenix-Mesa-Scottsdale, AZ   				$58,075		$232,700	4.01
Portland-Vancouver-Hillsboro, OR-WA  		 	$68,676		$351,200	5.11
Riverside-San Bernardino-Ontario, CA   			$58,236		$313,500	5.38
St  Louis, MO-IL   					$59,780		$163,900	2.74
San Antonio-New Braunfels, TX  			 	$56,105		$206,900	3.69
San Diego-Carlsbad, CA   				$70,824		$565,000	7.98
San Francisco-Oakland-Hayward, CA   			$96,677		$838,600	8.67
Seattle-Tacoma-Bellevue, WA   				$78,612		$414,500	5.27
Tampa-St  Petersburg-Clearwater, FL   			$51,115		$198,000	3.87
Washington-Arlington-Alexandria, DC-VA-MD-WV   		$95,843		$390,600	4.08
						Average	$67,045		$315,980	4.71
						Median	$65,950		$237,000	3.59
*https://www.census.gov/content/dam/Census/library/publications/2017/acs/acsbr16-02.pdf
**https://www.nar.realtor/sites/default/files/documents/metro-home-prices-q3-2017-single-family-2017-11-02.pdf
Note that not a single one of the 25 biggest metro areas in the US has a median home price:median income of less than 2.74x, and only 2 of the 25 are below 3x. [Good Lord, SF is 8.67x, San Diego is 7.98x :( ]. And note this is not a select list of only HCOL areas, there's plenty of mid-America there too. Texas and Arizona are considered LCOL, and Dallas, Houston, and Phoenix are all >3.5x. The median income for the top 25 metro areas in aggregate is $65,950 while the median home price is $237,000, for a ratio of 3.59x home:income.

The arbitrary limits many BH's advocate are just not practical for the real world, and yet another indication that Bogleville is not like the rest of America.

srj
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Re: Mortgage as percentage of take-home pay

Post by srj » Thu Dec 07, 2017 12:58 am

Bogleville has many that are at or near retirement age and don't know what it's like to be buying your first house in 2017. My parents bought a house in a top school district with a 15 min commute for 2x median. You can't find that sort of deal today.

Jags4186
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Re: Mortgage as percentage of take-home pay

Post by Jags4186 » Thu Dec 07, 2017 8:05 am

TropikThunder wrote:
Thu Dec 07, 2017 12:29 am
hightower wrote:
Wed Dec 06, 2017 8:16 pm
No more than 2x your gross annual salary for the size of your mortgage. I like this rule. It prevents you from becoming house poor.
If this was a universal standard, realtors would need to survive on cat food. Let's look at the Top 25 Metro Areas per US Census and compare median household income, median home price, and the ratio of home price to income and see how your 2x rule works in the real world (all numbers as of end of 2016).

Code: Select all

							Median    	  Median	
Metro Area						Income*   	  Home**	Ratio
Atlanta-Sandy Springs-Roswell, GA   			$62,613		$184,500	2.95
Baltimore-Columbia-Towson, MD   			$76,788		$253,000	3.29
Boston-Cambridge-Newton, MA-NH   			$82,380		$421,100	5.11
Charlotte-Concord-Gastonia, NC-SC  			$59,979		$208,400	3.47
Chicago-Naperville-Elgin, IL-IN-WI   			$66,020		$234,900	3.56
Dallas-Fort Worth-Arlington, TX   			$63,812		$227,100	3.56
Denver-Aurora-Lakewood, CO   				$71,926		$384,300	5.34
Detroit-Warren-Dearborn, MI   				$56,142		$225,200	4.01
Houston-The Woodlands-Sugar Land, TX   			$61,708		$217,400	3.52
Los Angeles-Long Beach-Anaheim, CA   			$65,950		$507,100	7.69
Miami-Fort Lauderdale-West Palm Beach, FL   		$51,362		$305,000	5.94
Minneapolis-St Paul-Bloomington, MN-WI   		$73,231		$237,000	3.24
New York-Newark-Jersey City, NY-NJ-PA			$71,897		$370,200	5.15
Orlando-Kissimmee-Sanford, FL				$52,385		$224,000	4.28
Philadelphia-Camden-Wilmington, PA-NJ-DE-MD		$65,996		$225,400	3.42
Phoenix-Mesa-Scottsdale, AZ   				$58,075		$232,700	4.01
Portland-Vancouver-Hillsboro, OR-WA  		 	$68,676		$351,200	5.11
Riverside-San Bernardino-Ontario, CA   			$58,236		$313,500	5.38
St  Louis, MO-IL   					$59,780		$163,900	2.74
San Antonio-New Braunfels, TX  			 	$56,105		$206,900	3.69
San Diego-Carlsbad, CA   				$70,824		$565,000	7.98
San Francisco-Oakland-Hayward, CA   			$96,677		$838,600	8.67
Seattle-Tacoma-Bellevue, WA   				$78,612		$414,500	5.27
Tampa-St  Petersburg-Clearwater, FL   			$51,115		$198,000	3.87
Washington-Arlington-Alexandria, DC-VA-MD-WV   		$95,843		$390,600	4.08
						Average	$67,045		$315,980	4.71
						Median	$65,950		$237,000	3.59
*https://www.census.gov/content/dam/Census/library/publications/2017/acs/acsbr16-02.pdf
**https://www.nar.realtor/sites/default/files/documents/metro-home-prices-q3-2017-single-family-2017-11-02.pdf
Note that not a single one of the 25 biggest metro areas in the US has a median home price:median income of less than 2.74x, and only 2 of the 25 are below 3x. [Good Lord, SF is 8.67x, San Diego is 7.98x :( ]. And note this is not a select list of only HCOL areas, there's plenty of mid-America there too. Texas and Arizona are considered LCOL, and Dallas, Houston, and Phoenix are all >3.5x. The median income for the top 25 metro areas in aggregate is $65,950 while the median home price is $237,000, for a ratio of 3.59x home:income.

The arbitrary limits many BH's advocate are just not practical for the real world, and yet another indication that Bogleville is not like the rest of America.

Doesn't take into account down payment. In Atlanta you could put down $62k and get a median home for a mortgage of 2x your income. Although I'm sure many of those are 3% FHA down payments.

I'd also be curious to know the percentage of renters in the markets vs home owners. After all, the real question is what is the median income of home buyers not everyone. I don't expect a 22 year old with his first job to be buying a median home.

Bacchus01
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Re: Mortgage as percentage of take-home pay

Post by Bacchus01 » Thu Dec 07, 2017 8:12 am

srj wrote:
Thu Dec 07, 2017 12:58 am
Bogleville has many that are at or near retirement age and don't know what it's like to be buying your first house in 2017. My parents bought a house in a top school district with a 15 min commute for 2x median. You can't find that sort of deal today.
Of course you can.

Bacchus01
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Re: Mortgage as percentage of take-home pay

Post by Bacchus01 » Thu Dec 07, 2017 8:15 am

Bacchus01 wrote:
Wed Dec 06, 2017 10:18 pm
about 13% here in mortgage on a 15 year
Add. When bought it was 2.03 times pay. 7 yrs ago

Now 1.16 times pay. Mortgage value is less than .9 pay

KlangFool
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Re: Mortgage as percentage of take-home pay

Post by KlangFool » Thu Dec 07, 2017 8:21 am

awval999 wrote:
Wed Dec 06, 2017 8:27 pm
Question for the board...

Does the answer change if the mortgage is:
30 years?
15 years?
10 years?

Is the shorter term more of a "forced savings"?

Example.

Boglehead Joe has a 30 year mortgage at 25% of take-home pay.
Boglehead Jane has a 10 year mortgage at 34% of take-home pay.

Who's the better boglehead? Who's overspending? Jane clearly is spending more of her take home pay.
awval999,

Who's overspending?

How would you know unless you know their saving rate?

<<Jane clearly is spending more of her take home pay.?>>

Which may not matter if Jane has a higher saving rate than Joe?

The bottom line on whether someone can afford to buy/spend on something is whether they can still save money after the spending.

Let's take an even extreme example:

I am living paycheck to paycheck now. All my current paycheck go towards my expenses and my kids' college education. Am I in a bad shape financially? The answer is no because my portfolio is 20 times my current annual expense. I no longer need to save in order to reach my FI target.

In summary, we need saving rate and net worth in order to know whether someone can afford to spend.

KlangFool

awval999
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Re: Mortgage as percentage of take-home pay

Post by awval999 » Thu Dec 07, 2017 8:40 am

KlangFool---

Is rapid mortgage payoff (10 years instead of 30 years) considered savings?

msk
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Re: Mortgage as percentage of take-home pay

Post by msk » Thu Dec 07, 2017 8:53 am

I see these questions are more relevant for youngsters rather than BHs nearing retirement. Money is normally in very short supply in your 20s and 30s. If it is still very tight when you are in your 40s then you have either been very unlucky or been careless with savings/investing. I'll now recount my rules-of-thumb that enabled me to retire at 55, perhaps of use for the youngsters:

1. No matter how puny your pay seems, you ought to save and invest 30+%. But include paying off the principal in a mortgage as part of that, not interest. In most locations the value of your home will keep up with inflation and in a HCOLA it may outpace inflation very substantially. Assuming you prefer to buy rather than rent your home, just shut your eyes and treat the rising equity as your bond allocation :shock:

2. Never purchase a home costing more than 3x income (or 2.5x shared income)

You will note immediately that large monthly payments on a mortgage are NOT the critical factor if they go mainly towards principal. Many 30 something couples also make a huge mistake believing that the house they are about to purchase is their forever home. Highly unlikely! So do note item 2. above.

nickjoy
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Re: Mortgage as percentage of take-home pay

Post by nickjoy » Thu Dec 07, 2017 9:20 am

Hello All,

I am not trying to derail this thread, but is the rule/guideline to save approximately 30% of your gross?

If so, then no matter how you save that 30% you should be relatively good.

Isn't paying down a mortgage considered saving once you exclude the interest paid since that doesn't increase your ownership percentage of the house?

So as long as you look at the principle of the mortgage you're paying down, plus all of your 401K's, savings, and whatnot, and it all equals 30% or more of your gross, you should be good right?

If you can get that 30% up to a higher amount, go for it. But wouldn't this be a good rule of thumb? I may be completely off-base here, and please let me down easy if that's the case. I'm gonna start to look for a house in a little more than 18 months in NoVa/DC Metro area.

technovelist
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Contact:

Re: Mortgage as percentage of take-home pay

Post by technovelist » Thu Dec 07, 2017 9:27 am

hightower wrote:
Wed Dec 06, 2017 8:16 pm
No more than 2x your gross annual salary for the size of your mortgage. I like this rule. It prevents you from becoming house poor.
When I bought my current house, my mortgage was about 1x my gross salary, and that was as much as I was willing to spend.

Which turned out to be a good thing because I lost my job a couple of years later in the 2001 tech bust. I couldn't find another one for 18 months, and that was 1000 miles away.

It was still stressful but might have been disastrous if I had borrowed much more than that.
In theory, theory and practice are identical. In practice, they often differ.

staythecourse
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Re: Mortgage as percentage of take-home pay

Post by staythecourse » Thu Dec 07, 2017 9:33 am

awval999 wrote:
Thu Dec 07, 2017 8:40 am
KlangFool---

Is rapid mortgage payoff (10 years instead of 30 years) considered savings?
Great question. The answer is yes. How much is the post tax interest rate. That is a better way of looking at prepayment is the opportunity cost of earning posttax interest rate vs. whatever the expected return of your asset allocation my be. I'm a heavey equity investor so there is NO way I would prepay my low debt when I fundamentally believe stocks will earn more in the long run (30 year period).

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

Texanbybirth
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Re: Mortgage as percentage of take-home pay

Post by Texanbybirth » Thu Dec 07, 2017 9:42 am

PITI on a 30y note is 33.4% of net take-home pay. We live in a modest home in a very nice DFW suburb where people are busting down the doors to get in. No plans to ever move, though my commute is about 35 minutes. :beer

Jags4186
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Re: Mortgage as percentage of take-home pay

Post by Jags4186 » Thu Dec 07, 2017 10:04 am

awval999 wrote:
Thu Dec 07, 2017 8:40 am
KlangFool---

Is rapid mortgage payoff (10 years instead of 30 years) considered savings?
Klangfool doesn’t consider a house an asset. So judging by that logic, paying off in 10 years means throwing significantly more money away every month but for a shorter period of time vs throwing away less money for a longer period of time.

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

Re: Mortgage as percentage of take-home pay

Post by KlangFool » Thu Dec 07, 2017 10:13 am

awval999 wrote:
Thu Dec 07, 2017 8:40 am
KlangFool---

Is rapid mortgage payoff (10 years instead of 30 years) considered savings?
awval999,

Are you aiming for Financial Independence or Retirement?

I am aiming for FI. In general, I do not believe in pre-paying the mortgage incrementally. I would either paid off the mortgage in a lump sum or keep the mortgage.

I had seen enough folks that paid off their mortgage and then take a student loan or re-mortgage their house for their kids' education.

KlangFool

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

Re: Mortgage as percentage of take-home pay

Post by KlangFool » Thu Dec 07, 2017 10:15 am

Jags4186 wrote:
Thu Dec 07, 2017 10:04 am
awval999 wrote:
Thu Dec 07, 2017 8:40 am
KlangFool---

Is rapid mortgage payoff (10 years instead of 30 years) considered savings?
Klangfool doesn’t consider a house an asset. So judging by that logic, paying off in 10 years means throwing significantly more money away every month but for a shorter period of time vs throwing away less money for a longer period of time.
Jags4186,

1) You are correct. I would rather invest that money and pay off the mortgage in one lump sum when I hit my FI number.

2) 30 years fixed-rate mortgage is a good hedge against the rising interest rate.

KlangFool

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