Reply to If you don't have a 15 year mortgage, you're living beyond your means?

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[quote=Anonymous]Let’s make this nice and simple. Assume we buy a new home that costs $Y with a down payment of 20%. At the 2.5% APR that everyone on DCUM seems to have, this means a mortgage of $0.8*Y over either 15 or 30 years. At 30 years, the fixed monthly principal + interest payment is $0.003160*Y. At 15 years, the fixed monthly principal + interest payment is $0.005334*Y. Monthly property taxes might be around $0.0009*Y. Monthly homeowners insurance might be around $0.0001*Y.

PITI for a 30 year mortgage ends up at $(0.003160 + 0.0009 + 0.0001)*Y = $0.004160*Y

PITI for a 15 year mortgage ends up at $(0.005334 + 0.0009 + 0.0001)*Y = $0.006334*Y

The rule of 28% tells us that PITI should be no more than 28% of gross monthly HHI (MHHI).

Now, let’s solve for Y as a function of monthly gross HHI (MHHI) and annual HHI (12*MHHI):

30 year mortgage: $0.004160*Y < 0.28*HHI: Y < 67.31*MHHI: Y < 5.61*HHI

15 year mortgage: $0.006334*Y < 0.28*HHI: Y < 44.21*MHHI: Y < 3.69*HHI

Multiple your HHI by 3.69. If your house cost more than this when you bought it, and you’re dependent on a mortgage for financing, you’re living beyond your means. These people can’t get approved for 15 year mortgages, so they regress to buying a home with a 30 year one. Now, according to the bank, you can afford a home that is 5.61X your HHI. Buy, of course! Awesome way to impress your friends and family until you realize you didn’t budget for a 1.5X increase in maintenance costs and now can’t afford to spend a few hundred dollars to even remove a fallen tree.[/quote]

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