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  • AnjaliFIT
    replied
    Right that is why rule of thumbs are not relevant to follow because as mentioned 3x income is a rule of thumb but something I would never recommend doing.  I still think focusing on your goals/values and cash flow situation to back into a home purchase price makes more sense

     

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  • beachbum
    replied
    I imagine most of us are aiming to retire early. The age at which you desire to retire (or better yet, the age at which you predict you will have enough money to retire) should be carefully thought out prior to taking on a mortgage so that you can have it paid off before retirement.

    Leave a comment:


  • MPMD
    replied




    The math works at a 4X multiple. If the mortgage is 4x salary, at a 4.25 percent interest rate, housing payments would account for 25 percent of income for a 30 year loan or 30 percent of income for a 20 year loan.

    I agree that a lower home price : income ratio is advisable, but I wouldn’t say it is an unreasonable choice in a HCOL area. It’s also worth considering inflation and potential increases in salary over the length of a career.

    TL;dr There’s more nuance than a simple rule of thumb
    Click to expand...


    It would be 25% of your gross income not your take home pay. It would be closer to 45% of your take home.

    There was a point in my life when I actually made right at $250k so these #s are pretty easy to do. I got home with around $11k/mo after doing my benes and retirement.

    $1M mortgage at 4.25% 30 year gives you a P+I of just under $5k. That would have been 45% of my take home pay. If you believe estimate that upkeep is 1%/year and then factor in property taxes, heating, cooling etc you're talking about being left with a fraction of your income after paying housing costs. Again, I'm not telling anyone how to life their lives, I'm just saying that is not a rule of thumb that is going to lead to anything good. I am continually shocked by what the lay public and/or real estate agents mean when they talk about "affording" a house, they often mean that you are probably able to keep the wolf away from the door. Probably.

     

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  • StarTrekDoc
    replied
    Just a bigger thumb rule.  Even Fanny Mac recognizes this and supersizes the conforming loan limits in VHCOL areas (NYC/boston area, and coastal Cali)

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  • amphora
    replied
    The math works at a 4X multiple. If the mortgage is 4x salary, at a 4.25 percent interest rate, housing payments would account for 25 percent of income for a 30 year loan or 30 percent of income for a 20 year loan.

    I agree that a lower home price : income ratio is advisable, but I wouldn't say it is an unreasonable choice in a HCOL area. It's also worth considering inflation and potential increases in salary over the length of a career.

    TL;dr There's more nuance than a simple rule of thumb

    Leave a comment:


  • MPMD
    replied




    As others have pointed out there is a big difference between HCOL and LCOL areas. In many HCOL areas the ratio between average house price and average household income is 8 x or more so even a 4 x ratio is reasonable. I would add a second rule of thumb which is not buying a house too far above the median for the area. You are going to have more trouble selling a 500K house in a LCOL area than a 1M house in a HCOL area.
    Click to expand...


    I'm sorry but that's not how this works. How much house you can afford is a function of your salary and your other obligations. You don't suddenly have different numbers b/c you live in an expensive place.

     

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  • amphora
    replied
    As others have pointed out there is a big difference between HCOL and LCOL areas. In many HCOL areas the ratio between average house price and average household income is 8 x or more so even a 4 x ratio is reasonable. I would add a second rule of thumb which is not buying a house too far above the median for the area. You are going to have more trouble selling a 500K house in a LCOL area than a 1M house in a HCOL area.

    Leave a comment:


  • MPMD
    replied







    The rule of thumb is your total debt should not be more than 3x income.  Thus, if you make $500k then your total debt should not be more than $1.5M.  The other number lenders look at is your debt to income ratio which should be below 40%.  These are just rules of thumb which are not necessarily the best to use for your specific situation.  Instead of focusing on the rules, I would really take a deep look at your current cash flow and how much you are saving i.e., how much money is coming in and how much is going out to current expenses (fixed and discretionary).  Then factor in the cost of home (principal, interest, property tax and insurance) and how much of your savings is getting eaten up by the new home purchase.  If the savings level is at a point that you are comfortable with then it is probably a home that you can afford.  If the new home eats into savings or puts you in negative cash flow then you may want to reassess the purchase price.
    Click to expand…


    1.5 million in debt on a 500k income?  That’s insanity to me.  Why would anyone voluntarily sign up for that?  That is how you are guaranteed to be in debt your entire life and never have a chance to stop working.

    “If the savings level is at a point that you are comfortable with…” what does this mean?  People need to be aware of two things at all times…1. Their actual net worth 2. What it would take to be financial independent so that some day they can retire comfortably.   They should use those two pieces of information to figure out what savings rate is actually  realistic to their situation.  IF someone loves their job and they want to work until they are 65-70, then they can look at what they make, what they spend, how much debt they need to pay off first, and calculate their FI number (at least 25X their annual expenses saved in investable assets).  IF they can still reach FI by their ideal retirement age with their savings rate, then they can probably afford the house they want.   But, I find it hard to believe that a 1.5 million dollar house on a 500k salary is going to get them to FI soon enough for them to retire comfortably, maintaining the same lavish lifestyle they’ve become accustomed to living in a millionaires neighborhood their whole life.    Because remember, with that 1.5 million dollar house they are going to have to pay for 50k/yr/child private schools, drive 75k+ cars, and furnish that big house with the latest “keeping up with the Jones’ crap.”  Not to mention all the crazy repair, maintenance, HOA bills, and other unexpected expenses they will have.

    The 2X rule of thumb is conservative enough to prevent putting yourself into a situation like that.  It’s also generous enough to let you live pretty lavishly without becoming house poor assuming you do all the other right things (pay cash for cars, max your tax advantaged retirement savings every year, etc, etc).

     
    Click to expand...


    I think it's also worth pointing out that if you can't be happy in a 2x house you're probably not going to be happy in a 3x.

     

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  • hightower
    replied




    The rule of thumb is your total debt should not be more than 3x income.  Thus, if you make $500k then your total debt should not be more than $1.5M.  The other number lenders look at is your debt to income ratio which should be below 40%.  These are just rules of thumb which are not necessarily the best to use for your specific situation.  Instead of focusing on the rules, I would really take a deep look at your current cash flow and how much you are saving i.e., how much money is coming in and how much is going out to current expenses (fixed and discretionary).  Then factor in the cost of home (principal, interest, property tax and insurance) and how much of your savings is getting eaten up by the new home purchase.  If the savings level is at a point that you are comfortable with then it is probably a home that you can afford.  If the new home eats into savings or puts you in negative cash flow then you may want to reassess the purchase price.
    Click to expand...


    1.5 million in debt on a 500k income?  That's insanity to me.  Why would anyone voluntarily sign up for that?  That is how you are guaranteed to be in debt your entire life and never have a chance to stop working.

    "If the savings level is at a point that you are comfortable with..." what does this mean?  People need to be aware of two things at all times...1. Their actual net worth 2. What it would take to be financial independent so that some day they can retire comfortably.   They should use those two pieces of information to figure out what savings rate is actually  realistic to their situation.  IF someone loves their job and they want to work until they are 65-70, then they can look at what they make, what they spend, how much debt they need to pay off first, and calculate their FI number (at least 25X their annual expenses saved in investable assets).  IF they can still reach FI by their ideal retirement age with their savings rate, then they can probably afford the house they want.   But, I find it hard to believe that a 1.5 million dollar house on a 500k salary is going to get them to FI soon enough for them to retire comfortably, maintaining the same lavish lifestyle they've become accustomed to living in a millionaires neighborhood their whole life.    Because remember, with that 1.5 million dollar house they are going to have to pay for 50k/yr/child private schools, drive 75k+ cars, and furnish that big house with the latest "keeping up with the Jones' crap."  Not to mention all the crazy repair, maintenance, HOA bills, and other unexpected expenses they will have.

    The 2X rule of thumb is conservative enough to prevent putting yourself into a situation like that.  It's also generous enough to let you live pretty lavishly without becoming house poor assuming you do all the other right things (pay cash for cars, max your tax advantaged retirement savings every year, etc, etc).

     

    Leave a comment:


  • MPMD
    replied







    OK quick question. The rule of thumb that I’ve seen around here is don’t buy a house worth more than 2-2.5x your annual income. So does this apply to the mortgage amount or house value?

    Example: House price = 650K. After 20% downpayment, the mortgage amount is 520K. For an income of 250K/yr the mortgage amount is less than 2.5x annual income, but the price of the house is a little bit above 2.5x the annual income.

    Is this too much house? Or would it fit within our rule of thumb?
    Click to expand…


    thats fine.

    guideline is mortgage 2x income. so if you put 90% down you can buy a HUGE house haha.

    HCOL ppl need to go 3x, maybe 4x.

    you dont want to see 5x or more basically.
    Click to expand...


    We've all hashed this out on many other threads esp about CA real estate.

    If you "need" to go to 4x to buy a house, you can't afford to live where you live, full stop. You might love it and think no where on earth compares but you can't afford it.

    Looking at what the mortgage payment would be for us at 4x makes me cringe in terror. Those crazy real estate markets keep climbing right up to the minute that they don't anymore.

    Leave a comment:


  • hightower
    replied




    Its hard or nearly impossible to make 2x the mortgage in many HCOL areas, unless you want to live in a small attached condo or live in areas with horrible schools that may be a bit unsafe.  I think Anjali said it best.  If you can save enough money after paying your mortgage and other living expenses, then it should be all good.
    Click to expand...


    Which is why there are a lot of very house poor people in those areas who could otherwise be very wealthy elsewhere.  They are all living dangerously IMO because their net worth is at the mercy of the real estate market.  I wouldn't sleep well at night knowing that.  I don't even like have my current 0.8X mortgage.

    It's a choice though.  If living in one of these areas is absolutely the thing that makes you happy and you're okay extending your working years just to own a house that is 3-4X your income, then good for you.  I do like visiting SF, LA, or NYC, but I wouldn't want to own property there unless I were making millions/year.

    Leave a comment:


  • White.Beard.Doc
    replied
    In a low cost of living area you may get a nice home at 1x annual income.  In San Francisco, good luck finding anything.  It really depends on where you live.  The simple ratio of 2x annual income is just a starting point.

    Leave a comment:


  • KPInvestor
    replied
    Its hard or nearly impossible to make 2x the mortgage in many HCOL areas, unless you want to live in a small attached condo or live in areas with horrible schools that may be a bit unsafe.  I think Anjali said it best.  If you can save enough money after paying your mortgage and other living expenses, then it should be all good.

    Leave a comment:


  • Peds
    replied




    OK quick question. The rule of thumb that I’ve seen around here is don’t buy a house worth more than 2-2.5x your annual income. So does this apply to the mortgage amount or house value?

    Example: House price = 650K. After 20% downpayment, the mortgage amount is 520K. For an income of 250K/yr the mortgage amount is less than 2.5x annual income, but the price of the house is a little bit above 2.5x the annual income.

    Is this too much house? Or would it fit within our rule of thumb?
    Click to expand...


    thats fine.

    guideline is mortgage 2x income. so if you put 90% down you can buy a HUGE house haha.

    HCOL ppl need to go 3x, maybe 4x.

    you dont want to see 5x or more basically.

    Leave a comment:


  • AnjaliFIT
    replied
    The rule of thumb is your total debt should not be more than 3x income.  Thus, if you make $500k then your total debt should not be more than $1.5M.  The other number lenders look at is your debt to income ratio which should be below 40%.  These are just rules of thumb which are not necessarily the best to use for your specific situation.  Instead of focusing on the rules, I would really take a deep look at your current cash flow and how much you are saving i.e., how much money is coming in and how much is going out to current expenses (fixed and discretionary).  Then factor in the cost of home (principal, interest, property tax and insurance) and how much of your savings is getting eaten up by the new home purchase.  If the savings level is at a point that you are comfortable with then it is probably a home that you can afford.  If the new home eats into savings or puts you in negative cash flow then you may want to reassess the purchase price.

    Leave a comment:

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