Another housing/finance question

[Via]

Spending that much of your income on housing expenses seems pretty risky to me.

But every situation is unique.

Regardless - I would'nt buy at that % unless I had at least a 6 month cash emergency fund saved up.

 

[mshan]

Generally speaking, you should view a house as a hedge against inflation, not a way to get rich quick or even over a couple years.

Despite stock market volatility, 10 or more years down the road, you will probably look back and wonder why you didn't invest more in the stock market when quality mutual funds, retrospectively, were so "cheap" (but you have to be able to distinguish between what is truly cheap, for a good long-term reason, and what represents good value, i. e. temporarily depressed by macro factors): http://selectedfunds.com/pdf/SFSuccInv4Q08.pdf

If you plan on living in the house for say over 10 years, really love the house, location, etc. (i.e. you will really enjoy it, vs thinking you are just throwing away money on rent), then perhaps it is a smart financial decision, not necessarily in terms of optimal rate of return, but in terms of enjoyment you got out of the money you put into it. Also can provide some diversification of your financial assets, and I think may be protected from lawsuits (I don't think they can take away your home or retirement accounts), but I wouldn't make decisions based upon those factors unless you are a really high net worth individual who already has a diversified portfolio of assets already.

 

[tk149]

Generally speaking, you should view a house as a hedge against inflation, not a way to get rich quick or even over a couple years.
QUOTE]

Yes, you are basically locking in the cost of living when you set up a FIXED rate mortgage.

OP, If I were you, I'd live cheap, build up a huge down payment, then buy a home. That's what I did, but I'm pretty risk averse.

 

[tk149]

Came across this article.

http://biz.yahoo.com/pfg/e10buyrent/art011.html

The base mortgage is just the beginning of your housing costs. On average you need to add another 40-45 percent to get a more realistic total monthly cost. Yes, you read that right: 40 to 45 percent. So if your mortgage payment is $1,079, the true total cost is about $1,519 per month. Let me show you how the costs pile up.

 

[Tweak155]

I was in a similar situation when my apartment lease was ending. I initially just picked something WELL within my budget (like... not even 10% of my gross), paid off cars, etc (which you don't need to do).

After I wasn't quite comfortable buying just yet as leasing just leaves your options open if you aren't 100% sure. I got married and my wife graduated and started working and our incomes combined are a chunk into the 6 figures, and we still chose to move to a condo simply because we are just not 100% where we want to live and how things will pan out. While I hated the idea of doubling my rent, we picked somewhere we knew we would like to at least temporarily stay (feel out the neighborhood, etc) and now the doubled rent does not bother me. I hate the idea of wasted rent money, but the flexibility it provides is well worth it to me at this point.

I would never rent for more than $1500 a month though, I have set my limit. $1250 gets me 1250sqft, full matching basement and a 2 car garage in a condo setting. I'm loving the perks and not feeling the lost money so much anymore. And my options to buy are still open.

I don't see me buying a house in this area and I figured this out after 2 months. Only thing that makes me love the situation is knowing I'm not stuck.

 

[KillerCharlie]

I have to ask...how nice of a place can you rent for 25% of your income? That's what I'd do if in your situation. You never know if you'll wind up getting married in a few years...decide to start a family and decide you want something bigger.

Then you are coughing up tens of thousands in realtor fees to get out negating any gains you had.

If you think you'll be single for years to come and think you'll be staying put job wise for the 5-10 years then maybe it's not so bad. Otherwise I'd stay liquid, bank some money and let somebody else deal with the upkeep.

25% after taxes/401k, or gross? 25% after taxes would get me a a very mediocre 1-2 bedroom apartment in the suburbs (~$1k/month).

Who knows how long I'll be single, but I will be staying with my job for quite a while.

It's just hard to pass it up when prices are down 30%-40% and rates are rock bottom. If I do eventually get married I might not be able to afford anything more just because prices and rates will be going up.

 

[Patranus]

Total debt payments should not exceed 38% of your monthly income. Period.


You have to figure in insurance, property tax, mortgage insurance (depending on your down payment), ect.

 

[KillerCharlie]

Total debt payments should not exceed 38% of your monthly income. Period.

What do you mean by monthly income? Gross income, or after taxes?

 

[Tweak155]

What do you mean by monthly income? Gross income, or after taxes?

Monthly income would be after tax, I would assume.

 

[KillerCharlie]

It used to be that lenders looked at two debt ratios, which were guidelines to how much you should spend on a house. The front-end ratio was only your housing costs (i.e. mortgage, taxes, insurance) as a percentage of your gross income, which ideally was 28% or less. The back end ratio was a snapshot of your total expenses (i.e. credit card, student loan/personal/car loans, etc) and 36% was the magic number, as a percentage of your gross income. These ratios didn't seem to apply much anymore when the housing market was hot, but these days, I would think that they are back in play, or even lower.

EDIT: If a lender is comfortable with those ratios, I would probably be as well, assuming that my job was fairly stable, and I was able to stick to a budget. Also, check to see how much RE prices in your area have fallen, and if they are continuing to fall, or staying more or less flat, or even recovering (unlikely). One other general real estate thought - buy the cheapest house in the best neighborhood, and not the other way around,.

I don't know how much to trust the lenders... I got approved for $350k.

 

[mshan]

http://www.amazon.com/Home-Buying-Du...5535663&sr=8-1

http://www.amazon.com/Mortgage-Ripof...5535586&sr=8-1

Personally, I wouldn't view how good a "deal" you are getting based upon percent discount from peak bubble prices. I think it is smarter to look at historical, pre-bubble prices, say 2003 prices or so, plus look at other metrics for affordability and do comparisons for how much you can get if you rent for same amount.

And if you can only squeak into an older, possibly not well maintained home, it could become a money pit. What I read was that once any home hits about 20 years old, how well it holds up depends upon how well previous owners maintained it.

 

[*kjm]

With me and my wife we double your income and we bought our house for $150k. We have money for anything that goes wrong and still take our vacations every year. If you want to not go anywere and be locked down to your home go for it. If not rent and look into getting some land you would like to build on some day. A lot of times your morgage is the cheep part of owning a home

 

[Dirigible]

My numbers weren't the same as yours, but about a decade ago I bought a house that cost (counting mortgage, taxes, and insurance) 40% of my gross income. So not only would I, but I did. Still contributed max to 401k and saved lots of cash every year.

It's risky though. Turned out well for me but I've been lucky.

 

[KillerCharlie]

Part of me wants to buy a place (and rent out a room), which would probably make me financially better off in the long run since prices have bottomed out here and rates are low.

The other part wants to move closer to the city with a bunch of similar-aged roommates, while saving more and spending more having fun.