Trying to figure out how much house we can afford

[Anonymous]

Any tips on how to figure out how large a mortgage we can afford?

When I run our numbers through mortgage calculators, they seem to come up with ridiculously high mortgages. How do we figure out how much we really should take on?

We already own a house so would need to sell and use that equity. We make 250,000 from two federal salaries. Job security is very high and raises are practically guaranteed. We have two children in after-care ($800 a month) plus summer camp expenses (not really sure on that but probably need to budget $6000/year for both). We have one car loan which will be paid off in a year (and we would wait till then to buy a new house). However, we would probably still want to put away money for when we need a new car in the future.

[Anonymous]

Anonymous wrote:Any tips on how to figure out how large a mortgage we can afford?

When I run our numbers through mortgage calculators, they seem to come up with ridiculously high mortgages. How do we figure out how much we really should take on?

We already own a house so would need to sell and use that equity. We make 250,000 from two federal salaries. Job security is very high and raises are practically guaranteed. We have two children in after-care ($800 a month) plus summer camp expenses (not really sure on that but probably need to budget $6000/year for both). We have one car loan which will be paid off in a year (and we would wait till then to buy a new house). However, we would probably still want to put away money for when we need a new car in the future.

As someone who has recently been burned in exactly this situation, sell FIRST. Rent in the meantime if you have to. The market is crappy right now, and we had to annul our contract on our dream house because we couldn't sell our current house. Would have been MUCH less expensive if we had focused on selling first (realtor fees, time off from work touring open houses, etc).

[Anonymous]

You need to make a budget. Right down your monthly take home income, then subtract all current and projected expenses and what you consider mandatory saving, including car payments, student loans, food and entertainment, utilities and home maitenance, saving for retirement and kids college, etc. Once you know how much is left, that's your mortgage (after subtracting what you consider a comfortable cushion for rainy day fund, unpredictable expenses, play money, etc.).

[Anonymous]

There was a recent thread that was very similar with lots of good advice, you may want to try to find it.

[Anonymous]

Personally, I'd look at your current mortgage and ask yourself, "How much bigger of a check would I be ok writing each month?" That's what I'm doing. My current mortgage is very small because I bought well within my means 11 years ago. I'll have quite a bit of equity when I sell, but I'm buying closer in so I'll be spending more. I decided that I'm very comfortable with my current payments but I'd still be ok spending $500/month more, so I'm looking at mortgages with payments of $500/month more than I have now. my current expenses include full-time daycare; I figure that hopefully my current car will last another 4 years and then I can make car payments with some of what I was paying for daycare.

[Anonymous]

and don't forget to account for property taxes, increase in home owners' insurance, and any changes in commuting, changes in upkeep costs (yard work, housekeeper if you don't do these yourself), etc.

The calculators generally tell you that you can afford a much bigger mortgage than I would be comfortable with.

Also, as my child gets older (and more interesting), I have more of a desire to either quit or go part time. So even with stable jobs it is nice to have the option of affording your mortgage on one salary.

[Anonymous]

I am currently in the situation of having a mortgage we can afford on our current salaries, but really wishing we had flexibility to move to jobs with lower salaries. Wishing we'd gone for a house that was less than what we could afford.

[Anonymous]

We've always used our own personal rule of thumb that the mortgage amount can't be bigger than 1.5 times our combined gross salary. So, depending on how much equity you have, after you subtract move and sales costs, in your situation we would say 375K plus whatever is left from the equity.

This assumes you don't have a massive debt load from something else. It also means potentially trapping yourselves in the jobs you have now unless one of you somehow gets a big raise.

[Anonymous]

Read the book "All Your Worth." Your "must have" expenses should be 50% of your net salaries.

[Anonymous]

Look for the older thread on this discussion for comprehensive advice. Forget the online calculators. This is what you need to do:

1. Talk to a realtor to get a conservative ballpark figure of what you can get for your current home --- then use a somewhat lower figure just in case and have the realtor estimate all the costs involved with selling your home (realtor fees, taxes, etc.). Then, you'll have a conservative estimate of how much money you will have to use for a downpayment on your new home.

2. Take this info to a trusted lender and have him run the numbers based on sample houses in neighborhoods you like so he can realistically estimate taxes. Ask your realtor to estimate increased utility costs (our realtor did this, and he was right on the money). The lender should be able to give you accurate numbers on what your monthly mortgage will be on various houses at different price points utilizing the number you give him in terms of how much you have for a downpayment and closing costs. Be conservative, ask for conservative estimates. etc. You can also have them run the numbers by saying, "how much of a house can I afford if I want to pay $x/mortgage and have $x to put towards downpaymt and closing."

3. You must sell your home first. In the meantime, you should be checking out neighborhoods and houses to determine what your nonnegotiables are.

4. Bottom line: Don't fall into the "how much of a house can I afford" trap --- only you can answer that question by determing how easily you can write a larger mortgage check than what you are currently paying. If you are comfortable with the amount you are presently paying and don't have tons of surplus money each month, then maybe that's the figure you should use --- or increase that number slightly.

[Anonymous]

The way I did it was to say, I want my monthly payment (mortgage, property tax, and home owners insurance) to be X amount per month, and then I used an online calculator to figure out what the house price would be for that amount. It drove my realtor and loan officer crazy because I bought a place that cost half of what I qualified for. However, it was a mortgage I was very comfortable with.

[Anonymous]

Anonymous wrote:We've always used our own personal rule of thumb that the mortgage amount can't be bigger than 1.5 times our combined gross salary. So, depending on how much equity you have, after you subtract move and sales costs, in your situation we would say 375K plus whatever is left from the equity.

This assumes you don't have a massive debt load from something else. It also means potentially trapping yourselves in the jobs you have now unless one of you somehow gets a big raise.

This is poor advice IMHO. Very old fashioned and not relevant today. Don't underbuy! If you are in your 30s with good secure jobs you can borrow much more. Get a good house in a good neighborhood and tighten your belt for a few years. In our case we underbought and now looking to move in our late 40s. Its painful because our kids are in schools and don't want to move. We don't have the collective energy to orchestrate the move (or expansion of our current house). And we need to focus on college expenses and retirement coming up. We kick ourselves for not spending an extra $200K to get the right house at the time.

Take the time to analyze this fully.

[Anonymous]

Are you done having kids, OP? I've seen people make the mistake of buying at the top of their price range, then having children and be unable to come up with the $1K+ per month for daycare.

[Anonymous]

To 8:12 - you wish you had a higher mortgage, even now with college and retirement looming?! I didn't understand why it's bad to underbuy. You don't have a big enough place, not top quality schools ????

[Anonymous]

1.5x salary is really, really conservative in a HCOL area. For many people, it would mean not being able to afford anything that's not in the ghetto.