GREASER Posted October 8, 2007 Share Posted October 8, 2007 I am trying to figure out what is normal to pay for a house..one article I remember said you should be able to afford 3x your annual salary. Thats total payment, not just principle and taxes. Is this the norm? I cant afford that and just wondering if maybe my spending is out of whack. Link to comment Share on other sites More sharing options...
musicman Posted October 8, 2007 Share Posted October 8, 2007 i know someone doing that and can't afford to do much else. can't go out to eat, doesn't save, etc. sounds like you're realistic and not trying to live beyond your means which is a good thing IMO. Link to comment Share on other sites More sharing options...
RedScare Posted October 8, 2007 Share Posted October 8, 2007 You know back in the old days, when people believed that the LESS you owed, the better, and back when banks actually wanted you to pay back your mortgage, instead of seeing how much interest they could gouge you for, the mortgage companies had a fairly simple formula for taking on mortgage debt. The rule was that your total mortgage payment, including PITI, should be equal to no more than 28% of your monthly income. Additionally, your mortgage plus all other debt (autos, credit cards, student loans, etc.) should equal no more than 37% of your monthly income. This left a cushion for food, utilities, maintanance, etc.I believe that is still a good formula today. I have seen the total number increase to 42%, and that may be tolerable for most. Using a figure such as house price equal to 3x annual salary for the price of the house doesn't tell you what the mortgage payment will be. It is useless as a calculator of what you can afford. It is also too high. A mortgage at no more than double your annual income is probably affordable. Link to comment Share on other sites More sharing options...
texas911 Posted October 15, 2007 Share Posted October 15, 2007 Hey Red, that's a good formula, but does that take into account the tax break from a mortgage? I'm trying my darnd-est to be debt free, except for my mortgage. I'm already credit card debt free, but still have some other things. Link to comment Share on other sites More sharing options...
RedScare Posted October 15, 2007 Share Posted October 15, 2007 The percentage is just a rough number based on gross income. Obviously, any tax breaks gained by deducting interest and property taxes would just be extra money in your pocket. The good news is that while googling articles about the percentages, I found that the 28/36 ratio is still considered a good guide to mortgage affordability. The bad news is, many lenders have jacked up the percentages to sell more loans. I guess the other good news is that the lending crunch has tightened things back up.Good for you for going debt-free. I haven't used a credit card in 2 1/2 years. My car note will be gone after December 2008. I have one other bill due to expire in October 2009. After that, it is just the mortgage and utilities. At that point, I could probably live on $2,500 a month if I had to. That's a pretty comforting thought. Link to comment Share on other sites More sharing options...
texas911 Posted October 15, 2007 Share Posted October 15, 2007 That's what I'm striving for, to live way way within my means. Link to comment Share on other sites More sharing options...
ssullivan Posted October 16, 2007 Share Posted October 16, 2007 I haven't used a credit card in 2 1/2 years.That is quite impressive!I do heavily use credit cards, but a lot of that is business related. I also make sure I pay off my personal charges every month. I mainly do this, as opposed to paying with cash or a debit card, for the hotel points and airline miles I rack up from those cards. It's a pretty good scheme, provided you pay it off every month and don't get hit with interest charges.Earlier this year I paid off the last of some old credit card debt I had from the days when I was barely getting by at an old job, and then was unemployed. And I paid off the last of my student loan debt from college. It was a great feeling when I made those final payments, and was able to redirect several hundred dollars a month into my 401(k) that had been going to pay off debt. It's also allowed me to accelerate my car payments even more, so that I'll pay off my car a couple of years early. Link to comment Share on other sites More sharing options...
texas911 Posted October 16, 2007 Share Posted October 16, 2007 I'm in ssullivan's boat, I still use credit cards, just for connivence, but don't have any debt. I pay it off every month. I hardly buy anything with cash as my cc bill itemizes everything and it really shows where you're money is going. Link to comment Share on other sites More sharing options...
TonyH Posted October 20, 2007 Share Posted October 20, 2007 I'm in ssullivan's boat, I still use credit cards, just for connivence, but don't have any debt. I pay it off every month. I hardly buy anything with cash as my cc bill itemizes everything and it really shows where you're money is going.Not only that, but you also get cash rebates too if you use that particular type of CC. My AmEx is paying 1.5% after the first $5,000 per year.To answer the main question, I think that the total house payment (PITI) should not exceed 30-35% of your [monthly] income. To be on the conservative side I would like to be below 25%.Also, being an investor, I am observing that some bigger (higher end even) homes are renting for less than the cost of ownership, so I believe that being a tenant is not that bad in these cases. (Especially if mobility is a concern).One home in my neighborhood (Spring, average quality) brand new, 3500 s.f. just rented for $1375/month and it cost probably around 180K or so to buy. I think that is probably lower than the cost of ownership (opportunity cost for the money included).If you can find a $300K home for something in the 1600-1800 range, (doable), that's also a good bargain!On the other hand I see people (prospective tenants) applying for -say- $1200 rents, making 2,500 a month and having a bunch of other payments. Well, as much as the house may be a priority over other bills, the math just won't work! If you're making $2,500 a month one should be looking in the $800 range in my opinion (what you can find for that is a whole different story, but unfortunately that is the reality of the free market economy). And probably the main reason that so many families around us are so deep in debt! Link to comment Share on other sites More sharing options...
TAK Posted October 29, 2007 Share Posted October 29, 2007 I believe that 3x salary number also includes a 20% down payment, so:50k per year income * 3 = $150k purchase $150,000 - $30,000 (20% down) = $120,000 financed$120k should yield a PI around $800.Assume 3% taxes on $150k = 4500 a year = $375 a monthAssume insurance to be $1,500 a year = $125 a monthThat's a $1,300 a month PITI.If you make $50k a year, you can usually afford $1,300 a month for a house. Coming up with the 20% ($30k) down payment is usually the hard part. Link to comment Share on other sites More sharing options...
AJXterra Posted October 29, 2007 Share Posted October 29, 2007 I believe that 3x salary number also includes a 20% down payment, so:50k per year income * 3 = $150k purchase $150,000 - $30,000 (20% down) = $120,000 financed$120k should yield a PI around $800.Assume 3% taxes on $150k = 4500 a year = $375 a monthAssume insurance to be $1,500 a year = $125 a monthThat's a $1,300 a month PITI.If you make $50k a year, you can usually afford $1,300 a month for a house. Coming up with the 20% ($30k) down payment is usually the hard part.I'd go lower than 3x salary on that. For someone making 50k, $1300 a month is about 1/2 of thier income after taxes. Throw any car payment, significant purchase, etc. in there and money will get tight. You also risk trapping yourself in some serious debt if you're not able to pay for repairs that might come up. 2-2.5x would be better IMO, but might be tougher to find what you're looking for. Link to comment Share on other sites More sharing options...
texas911 Posted October 30, 2007 Share Posted October 30, 2007 3 x your income? Wow, that doesn't buy a lot of house. I think also that saving for a down payment helps. Or flipping your house! Link to comment Share on other sites More sharing options...
houstonmacbro Posted October 30, 2007 Share Posted October 30, 2007 Hey Red, that's a good formula, but does that take into account the tax break from a mortgage? I'm trying my darnd-est to be debt free, except for my mortgage. I'm already credit card debt free, but still have some other things.I think that is the best thing. Becoming debt free.I have no credit card bills and only student loans right now so feel I am in pretty good shape for a mortgage, even on my lower salary.I think it depends a lot on how you live. Most houses I have been looking at (touring) are crammed ... CRAMMED... full of flat screen televisions, furniture that looks like it is out of Roche Bobois, and owner tastes that just seem out of whack with the property they live in.Combine that with $600+ car notes and such and I am wondering how they are able to do this with presumably similar salaries as mine. I dunno ... maybe they're DINKS, maybe they just make a helluva lot of money and choose to live in smaller, less expensive homes so they afford all the other accoutrements of fine living? *And I am talking about houses in my price range, not some mega Mac-mansions in Tanglewilde or Royal Oaks Country Club.* Link to comment Share on other sites More sharing options...
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