How much can we afford to spend on home?
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Anonymous
| A fool and his/her money are soon parted. |
Anonymous
You are partly right. Let me fill I the blanks (I do credit risk mgmt). Banks want to approve you for as much as possible - within bounds - for three reasons: larger loans generally demand higher rates (more on that in a minute), the revenue stream is of course larger and on per account basis that translates to lower costs (to illustrate, which would you rather have: one hundred $1 loans that you have to manage and mail or two $50 ones?), and third loans are binary. If the loan isn't sufficient to get the house you want they get $0, but probably still incur some expenses. So, banks don't have your best interests at heart, they have their own. It's the same reason your credit cards offer you $20,000 lines - it's not because you can or should use that much, it's because, if they don't offer you enough then you'll use some other credit card to fill in the amount you wish you had. In credit cards at least they capture some of the spend; in mortgages it's fully binary. You get all or none. At the same time banks need to manage risks so they'll extend as much as their policy and risk management guardrails allow, but they'll also test those boundaries at times to validate the curves and projections. This is art as much as science. You really have no way of knowing if your credit app was processed as part of special batch because of some particular flag or if it wasn't. They may be testing their ability to appropriately price risk in high end segments. Seriously, I do this risk modeling for a living. What you are approved for is not an indication of what you should borrow, it's a reflection of revenue projections, competive response, local markets, testing, imperfect probability matrices, and expected charge off risk. /soapbox |
Anonymous
Once again ignoring leverage. This PP would be right if home buying was 100% cash, like mutual funds normally are. But obviously most borrow. I.just bought an investment property. Lets say it cost $200k and the fmv is $200k (actually was a foreclosure so hopefully 30% under fmv). (And lets pretend the rent covers all expenses with no cash flow). I plan to keep it for 3 years. If it appreciates approx 3% a year, it will be worth around $220k in 3 years. That is a lame investment compared to the stock market. But if you borrowed 80% at 3.5%, the $20k gain is on $40k cash. Now the 3% annual return is more like 17%. In my real situation, the house appraised for $180k, I bought for$130k, put $6k into it, had closing costs, rented it out in 3 days for $1400/ month. If I keep it 3 years, I guarantee it will destroy the dow Jones. |
Anonymous
This is why home prices are so expensive in DC. Everybody wants the same things. Salaries in DC do not keep up with these home prices. Everybody wants good schools, short commute, nice house. But the DC area has a lot of people packed in a small area so everyone is chasing the same thing and people drive up the home prices by rationalizing that they need to pay more than they can afford. Sure you could be approved for a $900,000 home, but with only $90,000 you will handcuffed to that mortgage. Expenses do not get smaller after daycare and school loans. You end up spending that money on kids activities, braces, college, home repairs etc. Also stop looking for the perfect house. Unless you are super rich it does not exist. Find a house that is the lowest price you can live with that has good schools and just start living your life. Do not make yourself house poor. |
Anonymous
| She wouldn't be anywhere close to house poor. I am, by choice, due to a 15 year mtg. |
Anonymous
OK, so explain this to me. We bought a house in early 2009. It was $420k. The gov't gave us an $8k gift to go with it (first time homebuyer credit). Over the course of four years, we put in about $10k in improvements/repairs. We sold last year for $500k (and house is now worth $525k). We didn't pay realtor fees when we sold or closing costs when we bought, so the profit was pretty straightforward--about $80k, give or take. Our down payment was $80k, so we doubled our "investment" in less than 5 years. Even if we had paid realtor/closing cost fees (to the tune of $40k), we still would have done OK for ourselves. This is not factoring in tax breaks or anything, either. An investment is defined as "a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price." This is what we did, is it not? Maybe not everyone will have a positive outcome or realize significant gains, but investments carry risk. I know there are people in the DC area who extended themselves more and did way better than us, and people who are underwater in the Midwest. Maybe we're arguing about semantics, but I really don't understand your black-and-white viewpoint, and nobody ever calls you out on it when you trot it out on these forums. |
Anonymous
| PP's point was that homes generally just keep pace with inflation. you can find plenty of anecdotal evidence to the contrary (as you did with your own situation), but this doesn't refute all the data out there to support the conclusion that real estate generally isn't a great investment. the last 15 or so years have been an anomaly. |
Anonymous
I think the 10:30 poster called her out on it perfectly. the PP ignores leverage for some bad reason. |
Anonymous
again, ignoring leverage. When the home keeps pace with inflation, that is still a great investment when you are only using 20% cash down and the interest and taxes are tax-deductible. why is this hard to understand? |
Anonymous
We make about the same. Bought 800k home in school one we love. And we love never having to stress about money. We have simple tastes, but the impulse 'lets go to Disney for spring break' is easy. Kids only young once. More house is more rooms. And more downside if housing ever drops |
Anonymous
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[quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous]Put down $100k and get a $900k house at historically low interest rates. The $100k will give you a far greater return than any other investment as the house appreciates, even if a low amount.
No brainer. [/quote] In the long term, housing prices stay in tune with wage inflation. That was not the case in the 2000's, but it is factually, true. Do NOT consider your home as an "investment." Your money is not working for you. You are living in your money/debt. Perhaps read a few books from the library before making the biggest financial commitment of your life. I mean that very seriously. It's SOOO easy to get swept away by beautiful finishings and fixtures. Please read up on "The Smartest Money Book You'll Ever Read" and "Your Money Ratios." It's a weekend's worth of your time and it will save you thousands of dollars by giving you info to make good choices. [/quote] You make this comment a lot, but I disagree with your statement. You may think it's a more conservative investment, but it's still an investment. And some people will do much better than others.[/quote] You can "disagree" with what I "think" -- but your disagreement is based on nothing more than your opinion. The data hold otherwise. You don't have to agree with me. That's the beauty of knowing I'm right -- I have data and the support of people with PhD's in finance and ecomonics on my side. So I don't really care whether you agree or disagree. Not only am I right, but I'll also be richer for it! Living well is the best revenge. Enjoy![/quote] OK, so explain this to me. We bought a house in early 2009. It was $420k. The gov't gave us an $8k gift to go with it (first time homebuyer credit). Over the course of four years, we put in about $10k in improvements/repairs. We sold last year for $500k (and house is now worth $525k). We didn't pay realtor fees when we sold or closing costs when we bought, so the profit was pretty straightforward--about $80k, give or take. Our down payment was $80k, so we doubled our "investment" in less than 5 years. Even if we had paid realtor/closing cost fees (to the tune of $40k), we still would have done OK for ourselves. This is not factoring in tax breaks or anything, either. An investment is defined as "a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price." This is what we did, is it not? Maybe not everyone will have a positive outcome or realize significant gains, but investments carry risk. I know there are people in the DC area who extended themselves more and did way better than us, and people who are underwater in the Midwest. Maybe we're arguing about semantics, but I really don't understand your black-and-white viewpoint, and nobody ever calls you out on it when you trot it out on these forums. [/quote] I think the 10:30 poster called her out on it perfectly. the PP ignores leverage for some bad reason.[/quote] NP here. You bought at the depths of the housing crisis. Appreciation since then has been crazy (whether recovery or Fed pumping who knows). But we are unlikely to see appreciation like that again. Multiple studies have shown over long long term renting and buying flip flop as best course dependent on a variety of factors. And leverage works both ways, so even a small dip in prices can wipe out all their equity. |
Anonymous
| Hi OP. In a similar boat. Our HHI is $260K, and the bank approved us for $1.2mil... We are currently renting as well, happily, and the idea of purchasing scares us a bit. We put our max at $750k, which would get us a home in Vienna in a good district. We don't want our expenses to be so high that if something happens to one of us it's more difficult to stay afloat. Figure out what mortgage number makes you most comfortable, and stick around there. You can always upgrade down the road if you want more house. |
Anonymous
Sounds very wise to me. I love some of those Vienna neighborhoods. |
Anonymous
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For those arguing about whether a home is an investment or not, I recommend checking out this calculator: http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0
It compares renting to buying, and has a number of factors you can change. At a home price of $800k, renting is better (after 9 years) if you can rent at $2,686 a month or less (to begin with, it factors in inflation). That's with default values, so you may find the answer change significantly with specific inputs that fit your case. |
Anonymous
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You have the income to have lots of choices OP, but I'm pretty risk averse myself. My single greatest comfort in life is that my husband and I live WELL within our means.
While I occasionally have a pang at not having the home theater, or the two car garage, or an acre of land, or whatever... I never lose sleep over money stress. And we have worked hard to ensure that if one of us loses a job, or dies, or something awful, we have ways to sustain our lifestyle on one income. I cannot tell you the comfort that gives me. I know people always say buy the most house you can afford, but the flip side of that is to buy the house you need, that also affords you financial peace of mind - whatever that means for you. |