Trying to figure out how much house we can afford

[Anonymous]

OP here. Thanks for all of the advice.

To answer some questions. We don't plan to have more children- we have two, the older one is in elementary school and the younger one will be there in a year. We are interested in moving b/c we would like to be in a better school district, and we'd rather the kids get settled while they are still young. If we can afford better schools, I feel like we owe that to our children. If we can't, then we will just have to make due. We are in our mid-30s.

[Anonymous]

OP, have you considered renting out your current house vs selling it? If you bought a while ago, and rents in your area are substantially higher than your mortgage payment, you might consider hanging on to the house. A good loan officer will be able to count the estimated rent into your income, so you should still be able to qualify for the loan that you need. Hanging onto the house will give you some nice income when your kids are in college, when you retire, etc and you could always sell it later if the market improves substantially. Alternatively, you may decide you want a smaller place after the kids are out of school and off to college. If you don't want to deal with the renters, a property management company would handle it for you for around 8% of the rent.

[Anonymous]

Anonymous wrote: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 ????

Sorry should have been more clear. We bought 8 years ago and now have one child in private school and one potentially moving to private. We could have afforded a better school district and a bigger house at the time. We probably could have avoided private school and another move / expansion of the house now.

[Anonymous]

Anonymous wrote:

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).

What area was yoru hosue in that you could not sell?

[Anonymous]

OP Here. We need the equity so can't keep as a rental and, apart from that, rentals are going for less than our mortgage in our neighborhood.

[Anonymous]

Isn't 2.5 x salary a more typical guide? That would be 625k instead of 375k. Anyone heard of a different guideline?

[Anonymous]

1.5x poster here. When I run the numbers, 1.5 gross is actually more than 2.5x net in my case. Our mortgage is 22% of our take home (after deductions for insurance, 401(k), etc.) Maybe it's conservative, but (for example) if friends in another state want us and the kids to visit for a long weekend, I don't want to have to say, "Sorry, we can't afford the plane tickets because we bought this stupid house." Or, "Sorry, kids, but mommy and daddy can't afford to take you to Disney." I'm not a fan of stretching. There's way too much stress in life already without adding self-inflicted financial stress. Plus, don't forget you need cash for furniture, painting, changing that ugly light in the foyer, etc.

[Anonymous]

This is how we calculated for a similar move last year (we sold our first house first).

We knew how much we had in equity and savings (excluding retirement and college savings which I view as untouchable). This money would be divided 3 ways: downpayment plus closing expenses, money to be spent on the house, and our rainy day fund. Since it is annoymous, I will use real numbers. We had $450k in savings and equity and we wanted to have $50k in rainy day fund.
So if a house need work (and the one we bought did, we spent $80k) which meant we had $300k as the downpayment (after $20k for closing costs - including 1 point).

Then we computed the monthly mortgage (PITI) that we were comfortable with. HHI is about $300k. We looked at all our expenses. i set up a spreadsheet and entered our typical expenses, plus an allowance for buying a car (we have 2 cars, one 5 year old, one 12 year, both fully paid but eventually will buy another one), and since we were thinking maybe another child, included daycare and college saving allowance. I used our actual expenses (not a reduced amount based on hoped for future cost cutting!). This gave me about $5k max a month on PITI. I estimated taxes and insurance to get mortgage payment and then I did a backwards calculation which gave us, based on the interest rate currently on offer, what the maximum mortgage amount would be. Of course, this was during some of the market turbulance which meant that I had to keep recomputing this! At the time we bought with an interest rate of 4.875% - this was about $700k which meant we could spend about $1milllion.

House you can afford = deposit you have plus mortgage you can afford!
Mortgage = function(desired monthly payment (PI), current interest rate). (there are reverse calculators on the internet or there are functions in excel that will do this calculation for you).