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Mortgage rule of thumb

Home Mortgages and Home Buying Mortgage rule of thumb

  • Avatar amphora 
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    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.

    #114986 Reply
    Liked by q-school, Rando
    MPMD MPMD 
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    Status: Physician
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    Joined: 05/01/2017

    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.

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    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.

     

    #115028 Reply
    Liked by octopus85, jz
    Avatar amphora 
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    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

    #115083 Reply
    Liked by Firefly
    Avatar StarTrekDoc 
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    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)

    #115116 Reply
    MPMD MPMD 
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    Joined: 05/01/2017

    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.

     

    #115133 Reply
    Liked by octopus85
    Avatar beachbum 
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    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.

    #115167 Reply
    AnjaliFIT AnjaliFIT 
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    Status: Financial Advisor, Small Business Owner
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    Joined: 04/01/2018

    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

     

    Anjali Jariwala CPA, CFP®
    [email protected]┃847.863.6836
    http://www.fitadvisors.com

    #115251 Reply

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