Mortgage as percentage of take-home pay

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lazydavid
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Re: Mortgage as percentage of take-home pay

Post by lazydavid » Thu Dec 07, 2017 10:35 am

Considering only my biweekly checks:

15% of Gross
25% of takehome after taxes/benefits/401k contributions (takehome is 40% of gross)
42% of remainder after taxable investments

This is on a 15-year mortgage. My wife makes more than I do and we don't take benefits or taxable investing from her salary, so I think we're doing ok. This also doesn't consider lumpy inflows like bonuses, RSUs, and tax refunds. It's somewhere around 4.5% of our combined gross on an annual basis. Too lazy to do the math on the rest.

KlangFool
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Re: Mortgage as percentage of take-home pay

Post by KlangFool » Thu Dec 07, 2017 11:23 am

nickjoy wrote:
Thu Dec 07, 2017 9:20 am

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?
nickjoy,

How does that help you financially until it is totally paid off? It does not.

Let's assume that you have a 400K house, 300K mortgage, and 100K home equity. You pre-pay the mortgage and it is now 400K house, 200K mortgage, and 200K home equity. You claimed that it is 100K forced savings.

But,

1) Your forced savings generate no additional cash flow to you until it is paid off

2) You tied up 100K in an illiquid asset.

3) Depending on the price of the house when you sell the house, your "forced savings" may be disappeared

This is the problem with many "House Poor" folks when they were laid off in 2008/2009. They do not have the "cash flow" / savings to survive the recession and laid off.

KlangFool

Jags4186
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Re: Mortgage as percentage of take-home pay

Post by Jags4186 » Thu Dec 07, 2017 11:38 am

KlangFool wrote:
Thu Dec 07, 2017 11:23 am
nickjoy wrote:
Thu Dec 07, 2017 9:20 am

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?
nickjoy,

How does that help you financially until it is totally paid off? It does not.

Let's assume that you have a 400K house, 300K mortgage, and 100K home equity. You pre-pay the mortgage and it is now 400K house, 200K mortgage, and 200K home equity. You claimed that it is 100K forced savings.

But,

1) Your forced savings generate no additional cash flow to you until it is paid off

2) You tied up 100K in an illiquid asset.

3) Depending on the price of the house when you sell the house, your "forced savings" may be disappeared

This is the problem with many "House Poor" folks when they were laid off in 2008/2009. They do not have the "cash flow" / savings to survive the recession and laid off.

KlangFool
KlangFool,

Correct but this is the nature of all leveraged investments. It is not something unique to houses. In reality, housing is the safest leveraged investment because as long as you can continue to make your monthly payment your loan cannot be called due to the value of the underlying investment.

What is unique to a house is that is usually the only leveraged investment anyone will ever make. And I call it an investment because it does historically increase in value. Other things you get loans for are usually consumer purchases which go down in value. However most people do not understand the risk of owning a leveraged investment--even one that has many government protections for the holder.

runner3081
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Re: Mortgage as percentage of take-home pay

Post by runner3081 » Thu Dec 07, 2017 11:41 am

cashisking500 wrote:
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.
We are just shy of 15%, MCOL area. 5 years into a 30 year mortgage, should be paid off in the next 3 or so years (3.5% Interest Rate - standard deduction, not itemizing).

Personally, this is too much house for us. Could have used something smaller and cheaper, but bought into one of the top school districts in the state.

mega317
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Re: Mortgage as percentage of take-home pay

Post by mega317 » Thu Dec 07, 2017 12:31 pm

Jags4186 wrote:
Thu Dec 07, 2017 8:05 am
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.
+1. I have lived in both LA and San Diego and those ratios don't reflect reality.

LiterallyIronic
Posts: 299
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Re: Mortgage as percentage of take-home pay

Post by LiterallyIronic » Thu Dec 07, 2017 12:54 pm

KlangFool wrote:
Thu Dec 07, 2017 10:13 am
Are you aiming for Financial Independence or Retirement?
Those are the same thing. Got enough money to live on? Retire.

To OP, if "take-home pay" is gross minus taxes, our mortgage is 20% ($808 out of $4,000). If it's gross minus taxes minus 401k minus pre-tax health insurance premiums, our mortgage is 21% ($808 out of $3,860) . If it's gross minus taxes minus 401k minus pre-tax health insurance premiums - IRA contributions, it's 27% ($808 out of $2,944). From gross it's pretty much 20% goes to taxes, 16% goes to mortgage, 24% goes to retirement.

It's still a little higher ratio than I would like. Maybe I can get a raise.

hightower
Posts: 359
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Re: Mortgage as percentage of take-home pay

Post by hightower » Thu Dec 07, 2017 1:03 pm

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.
Point taken, but what I would say to this is that it's further proof that American standards of living are not only ridiculous, but irresponsible. If you make 70k a year and live in San Diego, you can not afford a 565k house. That's INSANE. There are lots of reasons why these home prices are so high and we could argue all day about what should or should not be done about it, but it doesn't really matter unless people stop signing up for enormous mortgages. On top of being so house poor, Americans also have horrifically low savings rates. Then again, it's always interesting to me that those of us who are living in "Bogleville" (I like that term, good one:)), also rely on our investments to grow over time which are all based in a consumer driven economy which would ultimately collapse if people weren't buying over priced cars and gadgets they don't need, etc. So, yeah I preach the 2X mortgage rule, but at the same time I don't actually want everyone to live by it and other conservative spending habits because our economy would collapse if everyone did.
Since everyone else is sharing their ratios...My mortgage plus taxes and insurance is around 10% of my take home pay, but I'm a physician and this is probably not a fair comparison for people not making what I make. I could afford a much larger mortgage with the 2x rule than I currently have, but I would hate having such a large mortgage payment every month. I think my experience is skewed due to the fact that I know what it feels like to be drowning in debt (student loans after I graduated) and now that I'm out from under it and feel so much better, I would never want to go back there. So, I choose to live well below my means.

hightower
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Re: Mortgage as percentage of take-home pay

Post by hightower » Thu Dec 07, 2017 1:18 pm

KlangFool wrote:
Thu Dec 07, 2017 11:23 am
nickjoy wrote:
Thu Dec 07, 2017 9:20 am

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?
nickjoy,

How does that help you financially until it is totally paid off? It does not.

Let's assume that you have a 400K house, 300K mortgage, and 100K home equity. You pre-pay the mortgage and it is now 400K house, 200K mortgage, and 200K home equity. You claimed that it is 100K forced savings.

But,

1) Your forced savings generate no additional cash flow to you until it is paid off

2) You tied up 100K in an illiquid asset.

3) Depending on the price of the house when you sell the house, your "forced savings" may be disappeared

This is the problem with many "House Poor" folks when they were laid off in 2008/2009. They do not have the "cash flow" / savings to survive the recession and laid off.

KlangFool
Completely agree. Houses are not savings accounts! During a housing market boom (as we are in now), people see the value of their house rising and they feel all warm and fuzzy. They borrow more than they should, they buy more house than they should, and they think everything is great until they lose their job or they need to move and at the same time the housing market takes a down turn and suddenly their "forced savings" and all that wonderful equity disappears overnight. Then they have no choice but to either foreclose or try to sell as a short sale. Sure, you can walk way from a mortgage with little consequence (7 years of bad credit, then it goes away), but you lose your home when you do so.
Don't get me wrong, I love that I have 50% equity on my house because it makes my net worth seem higher and I know it will help protect me if the market crashes again, but I also don't see that money as real because it's not unless I sell it now.

KlangFool
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Re: Mortgage as percentage of take-home pay

Post by KlangFool » Thu Dec 07, 2017 3:48 pm

LiterallyIronic wrote:
Thu Dec 07, 2017 12:54 pm
KlangFool wrote:
Thu Dec 07, 2017 10:13 am
Are you aiming for Financial Independence or Retirement?
Those are the same thing. Got enough money to live on? Retire.
LiterallyIronic,

Not to some folks. For some people, retirement implies retirement age (62 to 67). Meanwhile, FI has no such implication. It could happen anytime.

KlangFool

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grabiner
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Re: Mortgage as percentage of take-home pay

Post by grabiner » Thu Dec 07, 2017 11:03 pm

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).

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.
These are different medians. The median income is the income of all households, while the median home price is the median paid when someone buys a home. Renters likely earn less than homeowners, and retirees are likely to have lower income and more valuable houses than when they bought the houses. The median home-buying family can usually afford the median home.

Retirees are likely the reason for the high ratio of home price to income in Miami; retirees moving to Miami can afford expensive homes because they are either selling their old homes or using retirement savings to make a large down payment.

But I agree with you that the California situation is unstable. Who is buying homes which cost eight times the median income in Los Angeles, San Diego, and San Francisco?
David Grabiner

hmw
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Re: Mortgage as percentage of take-home pay

Post by hmw » Fri Dec 08, 2017 12:33 am

My mortgage plus property tax, and house insurance is about 8% of take home pay.
15 year mortgage at 2.875%.

iflyjetzzz
Posts: 107
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Re: Mortgage as percentage of take-home pay

Post by iflyjetzzz » Fri Dec 08, 2017 1:27 am

We're not normal, but here are our numbers.

Wife is in her late 40s; I'm mid/late 50s.

Current: 30 year VA (no money down) mortgage, 3.625%. Bought the home in 2014.

Current: PITI is ~7% of combined take home pay (gross minus FICA + taxes)

We bought our house ~3 years ago and my wife didn't feel comfortable spending more on a house. She does now. We are now in the process of building a new home that checks off almost every box for our dream house. We'll get a 30 year VA mortgage on the house and then after making a lot of improvements on the house (swimming pool, exterior, interior upgrades), we'll do a 30 year Jumbo VA cash out refi (90% LTV). I estimate that the PITI will be ~16% of take home pay on the cash out refi.

My wife and I keep our finances separate and have always done so. I pay the mortgage and she pays the utilities. We have never had a budget and don't need one; we're both pretty frugal - we have each saved ~50% of gross for quite a while. Now that we both have more than enough saved up to be able to retire tomorrow, we're getting a bit less tight with money (hence the new home). For me alone, the PITI on the new home will be ~24% of my take home pay.

hale2
Posts: 109
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Re: Mortgage as percentage of take-home pay

Post by hale2 » Fri Dec 08, 2017 2:03 pm

KlangFool wrote:
Thu Dec 07, 2017 11:23 am
nickjoy wrote:
Thu Dec 07, 2017 9:20 am

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?
nickjoy,

How does that help you financially until it is totally paid off? It does not.

Let's assume that you have a 400K house, 300K mortgage, and 100K home equity. You pre-pay the mortgage and it is now 400K house, 200K mortgage, and 200K home equity. You claimed that it is 100K forced savings.

But,

1) Your forced savings generate no additional cash flow to you until it is paid off

2) You tied up 100K in an illiquid asset.

3) Depending on the price of the house when you sell the house, your "forced savings" may be disappeared

This is the problem with many "House Poor" folks when they were laid off in 2008/2009. They do not have the "cash flow" / savings to survive the recession and laid off.

KlangFool
Klang,

It doesn't need to be all or nothing. I know you know plenty of people who got in over their head with the price they paid for a property, so do I. And like you, some of those people lost it. That doesn't mean you need to wait until you have all of the cash before buying. People need to have a buffer in their numbers (in the event of loss of employment, disability or just reduction in income) and a good emergency fund before buying. Getting the largest mortgage you can qualify for is probably a bad idea, but purchasing something well within your means is different. That's what I have done. And a few times I only broke even (My job required several moves during my career). But, I came out ahead buying not putting all of my money in a home, nor renting my entire adult life. Many people I know (but definitely not all) have done the same and are in a good position too.

KlangFool
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Re: Mortgage as percentage of take-home pay

Post by KlangFool » Fri Dec 08, 2017 2:10 pm

hale2 wrote:
Fri Dec 08, 2017 2:03 pm
Klang,

It doesn't need to be all or nothing. I know you know plenty of people who got in over their head with the price they paid for a property, so do I. And like you, some of those people lost it. That doesn't mean you need to wait until you have all of the cash before buying. People need to have a buffer in their numbers (in the event of loss of employment, disability or just reduction in income) and a good emergency fund before buying. Getting the largest mortgage you can qualify for is probably a bad idea, but purchasing something well within your means is different. That's what I have done. And a few times I only broke even (My job required several moves during my career). But, I came out ahead buying not putting all of my money in a home, nor renting my entire adult life. Many people I know (but definitely not all) have done the same and are in a good position too.
hale2,

<< purchasing something well within your means is different.>>

In order for this phrase to be meaningful, what do you mean by this? Let's put a number on this. The common number used by my "House Poor" peers are 3 times their gross household income. They believed that they are purchasing within their means.

KlangFool

hale2
Posts: 109
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Re: Mortgage as percentage of take-home pay

Post by hale2 » Fri Dec 08, 2017 2:23 pm

KlangFool wrote:
Fri Dec 08, 2017 2:10 pm
hale2 wrote:
Fri Dec 08, 2017 2:03 pm
Klang,

It doesn't need to be all or nothing. I know you know plenty of people who got in over their head with the price they paid for a property, so do I. And like you, some of those people lost it. That doesn't mean you need to wait until you have all of the cash before buying. People need to have a buffer in their numbers (in the event of loss of employment, disability or just reduction in income) and a good emergency fund before buying. Getting the largest mortgage you can qualify for is probably a bad idea, but purchasing something well within your means is different. That's what I have done. And a few times I only broke even (My job required several moves during my career). But, I came out ahead buying not putting all of my money in a home, nor renting my entire adult life. Many people I know (but definitely not all) have done the same and are in a good position too.
hale2,

<< purchasing something well within your means is different.>>

In order for this phrase to be meaningful, what do you mean by this? Let's put a number on this. The common number used by my "House Poor" peers are 3 times their gross household income. They believed that they are purchasing within their means.

KlangFool
The OP's question was looking for a meaningful number. He's trying to make an intelligent decision. You're house poor peers didn't. Since the OP is trying to ensure he doesn't do the same thing, I don't think advising him he needs to wait until he has enough assets to pay it off is appropriate for him, nor for the vast majority of people who visit this site. For those whom the advice is appropriate (your house poor peers) wouldn't bother asking.

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

Re: Mortgage as percentage of take-home pay

Post by KlangFool » Fri Dec 08, 2017 2:31 pm

hale2 wrote:
Fri Dec 08, 2017 2:23 pm
KlangFool wrote:
Fri Dec 08, 2017 2:10 pm
hale2 wrote:
Fri Dec 08, 2017 2:03 pm
Klang,

It doesn't need to be all or nothing. I know you know plenty of people who got in over their head with the price they paid for a property, so do I. And like you, some of those people lost it. That doesn't mean you need to wait until you have all of the cash before buying. People need to have a buffer in their numbers (in the event of loss of employment, disability or just reduction in income) and a good emergency fund before buying. Getting the largest mortgage you can qualify for is probably a bad idea, but purchasing something well within your means is different. That's what I have done. And a few times I only broke even (My job required several moves during my career). But, I came out ahead buying not putting all of my money in a home, nor renting my entire adult life. Many people I know (but definitely not all) have done the same and are in a good position too.
hale2,

<< purchasing something well within your means is different.>>

In order for this phrase to be meaningful, what do you mean by this? Let's put a number on this. The common number used by my "House Poor" peers are 3 times their gross household income. They believed that they are purchasing within their means.

KlangFool
The OP's question was looking for a meaningful number. He's trying to make an intelligent decision. You're house poor peers didn't. Since the OP is trying to ensure he doesn't do the same thing, I don't think advising him he needs to wait until he has enough assets to pay it off is appropriate for him, nor for the vast majority of people who visit this site. For those whom the advice is appropriate (your house poor peers) wouldn't bother asking.
hale2,

Okay. So, what do you think is an appropriate number? You know my number. And, you believe that it is too extreme. So, what are your numbers?

<< I don't think advising him he needs to wait until he has enough assets to pay it off is appropriate for him, >>

Why do you think so? Obviously, there are some reasons behind your thinking. What are them?

KlangFool

Jags4186
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Re: Mortgage as percentage of take-home pay

Post by Jags4186 » Fri Dec 08, 2017 2:38 pm

I think there is also an option many people forget. You can always save outside of the mortgage and make periodic lump sum payments and request a mortgage recast. That way your payments into the mortgage, while not changing the term of the loan, and providing you with immediate “income” in the form of reduced mortgage payments.

Here is a good example:

Say you have a $400,000 mortgage on a 30 year fixed 3.625% mortgage. Your payment is $1825/mo

After 5 years your loan balance would be $359,xxx. You’ve managed to save $10,000/yr additional to your monthly expenses. You make a $50,000 lump sum payment and recast your mortgage. You now have a $309,xxx mortgage with a payment of $1571/mo for 25 years. Your $50,000 has given you imputed income of $3096/yr which has the direct to you effect of generating 6% annually on that $50k.

randomguy
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Re: Mortgage as percentage of take-home pay

Post by randomguy » Fri Dec 08, 2017 3:12 pm

cashisking500 wrote:
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)
These rules of thumb are guideline. You have to put in your own situation. A person making 300k/year can spend much higher pecentage of take home pay on housing than someone making 20k. The person with 100k of school debt can't pay as much as someone with 0. And so on.

As it is 30% of take home pay on debt is very comfortable. It is a lot lower than any of the lending guidelines (something like 28% of gross). Up to you if you want to spend your money on houses or cars or vacations or retiring early.

MathWizard
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Re: Mortgage as percentage of take-home pay

Post by MathWizard » Fri Dec 08, 2017 4:05 pm

I did not go higher than 20% of take-home of the higher earner's salary on a 30 year mortgage.

I wanted it to be on a single person's salary. My wife has had to look for another job twice since we bought
the house, so it was comforting not to have to depend on her salary for fear of losing our home.

I was able to do this by buying a structurally sound fixer-upper. My wife and I were able to do most of the
improvements ourselves, but we still put in about 40% of the house price in materials over the years.

We ended up paying it off last year, 17 years into the 30 years. We have a few thousand of improvements to
make next summer, and we should be completely done. (Lots of landscaping, raised garden, custom shed,
new patio and deck, new siding, doors and windows, new furnace and central air, new roof, remodeled kitchen
two baths, and three season porch, new hardwood floor in dining room, and refinished OAK flooring in the rest
of the upstairs.)

We probably move in the next 10 years to a place with fewer stairs.

Pigeye Brewster
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Re: Mortgage as percentage of take-home pay

Post by Pigeye Brewster » Fri Dec 08, 2017 4:21 pm

Mortgage PITI is 7.6% of take-home pay.

iflyjetzzz
Posts: 107
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Re: Mortgage as percentage of take-home pay

Post by iflyjetzzz » Fri Dec 08, 2017 5:48 pm

hale2 wrote:
Fri Dec 08, 2017 2:23 pm
The OP's question was looking for a meaningful number. He's trying to make an intelligent decision. You're house poor peers didn't. Since the OP is trying to ensure he doesn't do the same thing, I don't think advising him he needs to wait until he has enough assets to pay it off is appropriate for him, nor for the vast majority of people who visit this site. For those whom the advice is appropriate (your house poor peers) wouldn't bother asking.
The problem with having a specific percentage for one's mortgage payment is that it doesn't account for other major bills (or lack thereof). Personally, we haven't had a car payment for more than a decade. If we want a car, we pay cash for it. Given that two car payments can be close to a mortgage payment, one must also factor in all other bills. A DTI (debt to income) ratio is more relevent than the front end (mortgage to income) ratio. And don't forget to factor in other big expenses such as tuition for college or private school.

randomguy
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Joined: Wed Sep 17, 2014 9:00 am

Re: Mortgage as percentage of take-home pay

Post by randomguy » Fri Dec 08, 2017 5:59 pm

iflyjetzzz wrote:
Fri Dec 08, 2017 5:48 pm
hale2 wrote:
Fri Dec 08, 2017 2:23 pm
The OP's question was looking for a meaningful number. He's trying to make an intelligent decision. You're house poor peers didn't. Since the OP is trying to ensure he doesn't do the same thing, I don't think advising him he needs to wait until he has enough assets to pay it off is appropriate for him, nor for the vast majority of people who visit this site. For those whom the advice is appropriate (your house poor peers) wouldn't bother asking.
The problem with having a specific percentage for one's mortgage payment is that it doesn't account for other major bills (or lack thereof). Personally, we haven't had a car payment for more than a decade. If we want a car, we pay cash for it. Given that two car payments can be close to a mortgage payment, one must also factor in all other bills. A DTI (debt to income) ratio is more relevent than the front end (mortgage to income) ratio. And don't forget to factor in other big expenses such as tuition for college or private school.

There is really no difference between paying cash for the car and financing (ok a bit of interest but that tends to be minor). The difference is in those expenses (i.e. you are buying a 20k civic and I am buying a 60k jaguar). And it is a lot more than debt things. Things like desired vacations, clothes budget, medical issues, eating out, and the rest all add up so that ones persons comfortable 50% is another uncomfortable 15%.


You know what you make. You know what you spend. You know your savings goals. Pretty easy to figure out what the max you can spend on housing is.

hale2
Posts: 109
Joined: Sat Feb 15, 2014 5:54 pm

Re: Mortgage as percentage of take-home pay

Post by hale2 » Fri Dec 08, 2017 8:06 pm

KlangFool wrote:
Fri Dec 08, 2017 2:31 pm
hale2 wrote:
Fri Dec 08, 2017 2:23 pm
KlangFool wrote:
Fri Dec 08, 2017 2:10 pm
hale2 wrote:
Fri Dec 08, 2017 2:03 pm
Klang,

It doesn't need to be all or nothing. I know you know plenty of people who got in over their head with the price they paid for a property, so do I. And like you, some of those people lost it. That doesn't mean you need to wait until you have all of the cash before buying. People need to have a buffer in their numbers (in the event of loss of employment, disability or just reduction in income) and a good emergency fund before buying. Getting the largest mortgage you can qualify for is probably a bad idea, but purchasing something well within your means is different. That's what I have done. And a few times I only broke even (My job required several moves during my career). But, I came out ahead buying not putting all of my money in a home, nor renting my entire adult life. Many people I know (but definitely not all) have done the same and are in a good position too.
hale2,

<< purchasing something well within your means is different.>>

In order for this phrase to be meaningful, what do you mean by this? Let's put a number on this. The common number used by my "House Poor" peers are 3 times their gross household income. They believed that they are purchasing within their means.

KlangFool
The OP's question was looking for a meaningful number. He's trying to make an intelligent decision. You're house poor peers didn't. Since the OP is trying to ensure he doesn't do the same thing, I don't think advising him he needs to wait until he has enough assets to pay it off is appropriate for him, nor for the vast majority of people who visit this site. For those whom the advice is appropriate (your house poor peers) wouldn't bother asking.
hale2,

Okay. So, what do you think is an appropriate number? You know my number. And, you believe that it is too extreme. So, what are your numbers?

<< I don't think advising him he needs to wait until he has enough assets to pay it off is appropriate for him, >>

Why do you think so? Obviously, there are some reasons behind your thinking. What are them?

KlangFool
After maxing 401k match and saving at least 15% gross each month for retirement should he consider buying. 25% of take home for PITI and 20% down.

KlangFool
Posts: 7173
Joined: Sat Oct 11, 2008 12:35 pm

Re: Mortgage as percentage of take-home pay

Post by KlangFool » Fri Dec 08, 2017 8:24 pm

hale2 wrote:
Fri Dec 08, 2017 8:06 pm
KlangFool wrote:
Fri Dec 08, 2017 2:31 pm
hale2 wrote:
Fri Dec 08, 2017 2:23 pm
KlangFool wrote:
Fri Dec 08, 2017 2:10 pm
hale2 wrote:
Fri Dec 08, 2017 2:03 pm
Klang,

It doesn't need to be all or nothing. I know you know plenty of people who got in over their head with the price they paid for a property, so do I. And like you, some of those people lost it. That doesn't mean you need to wait until you have all of the cash before buying. People need to have a buffer in their numbers (in the event of loss of employment, disability or just reduction in income) and a good emergency fund before buying. Getting the largest mortgage you can qualify for is probably a bad idea, but purchasing something well within your means is different. That's what I have done. And a few times I only broke even (My job required several moves during my career). But, I came out ahead buying not putting all of my money in a home, nor renting my entire adult life. Many people I know (but definitely not all) have done the same and are in a good position too.
hale2,

<< purchasing something well within your means is different.>>

In order for this phrase to be meaningful, what do you mean by this? Let's put a number on this. The common number used by my "House Poor" peers are 3 times their gross household income. They believed that they are purchasing within their means.

KlangFool
The OP's question was looking for a meaningful number. He's trying to make an intelligent decision. You're house poor peers didn't. Since the OP is trying to ensure he doesn't do the same thing, I don't think advising him he needs to wait until he has enough assets to pay it off is appropriate for him, nor for the vast majority of people who visit this site. For those whom the advice is appropriate (your house poor peers) wouldn't bother asking.
hale2,

Okay. So, what do you think is an appropriate number? You know my number. And, you believe that it is too extreme. So, what are your numbers?

<< I don't think advising him he needs to wait until he has enough assets to pay it off is appropriate for him, >>

Why do you think so? Obviously, there are some reasons behind your thinking. What are them?

KlangFool
After maxing 401k match and saving at least 15% gross each month for retirement should he consider buying. 25% of take home for PITI and 20% down.
hale2,

1) Does the 15% gross include the 401K contribution and Employer matching contribution?

2) Is the mortgage loan = 30 years fixed rate or 15 years fixed rate?

Thanks for the clarification.

KlangFool

hale2
Posts: 109
Joined: Sat Feb 15, 2014 5:54 pm

Re: Mortgage as percentage of take-home pay

Post by hale2 » Fri Dec 08, 2017 8:29 pm

KlangFool wrote:
Fri Dec 08, 2017 8:24 pm
hale2 wrote:
Fri Dec 08, 2017 8:06 pm
KlangFool wrote:
Fri Dec 08, 2017 2:31 pm
hale2 wrote:
Fri Dec 08, 2017 2:23 pm
KlangFool wrote:
Fri Dec 08, 2017 2:10 pm


hale2,

<< purchasing something well within your means is different.>>

In order for this phrase to be meaningful, what do you mean by this? Let's put a number on this. The common number used by my "House Poor" peers are 3 times their gross household income. They believed that they are purchasing within their means.

KlangFool
The OP's question was looking for a meaningful number. He's trying to make an intelligent decision. You're house poor peers didn't. Since the OP is trying to ensure he doesn't do the same thing, I don't think advising him he needs to wait until he has enough assets to pay it off is appropriate for him, nor for the vast majority of people who visit this site. For those whom the advice is appropriate (your house poor peers) wouldn't bother asking.
hale2,

Okay. So, what do you think is an appropriate number? You know my number. And, you believe that it is too extreme. So, what are your numbers?

<< I don't think advising him he needs to wait until he has enough assets to pay it off is appropriate for him, >>

Why do you think so? Obviously, there are some reasons behind your thinking. What are them?

KlangFool
After maxing 401k match and saving at least 15% gross each month for retirement should he consider buying. 25% of take home for PITI and 20% down.
hale2,

1) Does the 15% gross include the 401K contribution and Employer matching contribution?

2) Is the mortgage loan = 30 years fixed rate or 15 years fixed rate?

Thanks for the clarification.

KlangFool
1) 15% including match at a minimum.
2) 30 year is best for most people but I have always thought that it should be paid off by retirement (even now with extremely low interest rates) because that would reduce their need for cash flow at retirement.

KlangFool
Posts: 7173
Joined: Sat Oct 11, 2008 12:35 pm

Re: Mortgage as percentage of take-home pay

Post by KlangFool » Fri Dec 08, 2017 8:33 pm

hale2 wrote:
Fri Dec 08, 2017 8:29 pm
KlangFool wrote:
Fri Dec 08, 2017 8:24 pm
hale2 wrote:
Fri Dec 08, 2017 8:06 pm
KlangFool wrote:
Fri Dec 08, 2017 2:31 pm
hale2 wrote:
Fri Dec 08, 2017 2:23 pm


The OP's question was looking for a meaningful number. He's trying to make an intelligent decision. You're house poor peers didn't. Since the OP is trying to ensure he doesn't do the same thing, I don't think advising him he needs to wait until he has enough assets to pay it off is appropriate for him, nor for the vast majority of people who visit this site. For those whom the advice is appropriate (your house poor peers) wouldn't bother asking.
hale2,

Okay. So, what do you think is an appropriate number? You know my number. And, you believe that it is too extreme. So, what are your numbers?

<< I don't think advising him he needs to wait until he has enough assets to pay it off is appropriate for him, >>

Why do you think so? Obviously, there are some reasons behind your thinking. What are them?

KlangFool
After maxing 401k match and saving at least 15% gross each month for retirement should he consider buying. 25% of take home for PITI and 20% down.
hale2,

1) Does the 15% gross include the 401K contribution and Employer matching contribution?

2) Is the mortgage loan = 30 years fixed rate or 15 years fixed rate?

Thanks for the clarification.

KlangFool
1) 15% including match at a minimum.
2) 30 year is best for most people but I have always thought that it should be paid off by retirement (even now with extremely low interest rates) because that would reduce their need for cash flow at retirement.
Thanks.

KlangFool

brajalle
Posts: 136
Joined: Tue Jul 13, 2010 12:03 pm

Re: Mortgage as percentage of take-home pay

Post by brajalle » Sat Dec 09, 2017 3:33 am

Years ago I read a thread similar to this one except also asking if there was a certain % you felt like you had enough extra money or felt tight on the budget.

The thing I took away from that thread's comments was that people with PITI+HoA of under 20% gross income were the ones that said they felt like they had extra money, but whenever you went higher (ie over 25% for sure) you started to have people who didn't feel like that. I've personally found it to be true myself, and anything under 20% is great, with 25% being a hard upper limit. Our current cost is around 15% as a FYI.

crazylightgirl
Posts: 28
Joined: Wed Aug 10, 2016 3:30 pm

Re: Mortgage as percentage of take-home pay

Post by crazylightgirl » Sat Dec 09, 2017 8:11 pm

Net pay 23%
add. principal 26%
gross pay 11%

Gotta love taxes

Atilla
Posts: 1172
Joined: Tue Feb 09, 2010 7:44 pm

Re: Mortgage as percentage of take-home pay

Post by Atilla » Sat Dec 09, 2017 8:16 pm

Back when we had a mortgage it was $1,000 a month on a six figure family income and it bugged the hell out of us.

Killed the mortgage going on 4 years ago. The no cash flow at retirement thing is key to me, No. Cash. Needed. For. A. Mortgage. When. You. Want. To. Retire.
The Village Idiot - here for your entertainment.

Engineer250
Posts: 810
Joined: Wed Jun 22, 2016 1:41 pm

Re: Mortgage as percentage of take-home pay

Post by Engineer250 » Sat Dec 09, 2017 9:52 pm

Bought our house PITI was ~38% of our gross salary (and keep in mind this was right after the housing crash). Due to salary increases and refinance at lower rates it's currently ~17% of gross income.

I've been in my house ~10 years. My neighbor's house is for rent and is the same size as mine and being rented for about $1200 a month more than my PITI is. The 1 bedroom 1 bath apartments down the street from me rent for about what my PITI is (more expensive if you want a 2 or 3 bedroom).

I live in a HCOL area but in Cali so property taxes are low and everything else is high. If I'd waited for PITI to be below 25% or 20% I'd have never bought and my rent would probably be more assuming I didn't want to be in a 1 bedroom 1 bath apartment. In another 10 years, rents will certainly go up but my monthly payment won't. I finally make six figures and there's not a house in the county that could be had for $200k so the 2x salary thing isn't going to work for a lot of people either.

This topic comes up a lot and I don't advocate buying too much house by any means. But for some people it can make sense to stretch a little if it's a good time to buy and you can afford it. You get to decide what % you want to spend on your house, your food, whatever. I've been saving a good percentage for my retirement since I was 20 even though I only made $30k a year then. For some reason people on here are super concerned if you "bought too much house" or live the sin of working in a HCOL area. Regrettably, there are no similar threads for "had too many kids" or "why did you have kids at all" or "why are you wasting so much money sending your kids to private school". So everyone has their own guidelines on the "wrong" and "right" ways to spend your money. We all get to decide for ourselves.
Where the tides of fortune take us, no man can know.

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