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Question: What ratio do you use for housing expense?
Old 01-17-2018, 01:12 PM   #1
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Question: What ratio do you use for housing expense?

Good morning all! I wanted to pose a question to everyone regarding what ratio do you use when looking at housing expenses? There are plenty of articles saying the banks use 28-36% of gross income, other frugal experts say 20%, but just wanted to see what everyone uses here?

The question stems from my better half looking at a house that seems to be our dream home. The only issue is I am a VERY frugal person who tries to limit debt and protect my downside in EVERYTHING.

Current situation:
Current loan: $140K, 15 year with additional $4k payments a year
Current home value: Conservative $385K
Current home expenses: $29K/year (mortgage, taxes, bills)
We max out 401k and traditional/roth IRA contributions
Gross Income $200-270K depending on bonuses

New home loan: ~$400K, 30 year
New home asking: $570K (yes the math doesn't add up because we still would have to sell our house before we could use the equity for a down payment)
New home expenses: $43K/year (mortgage, taxes, 30% increase on bills)

That being said we currently live under 15% of our gross income and would be going to 20-25% depending on bonuses.
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Old 01-17-2018, 01:29 PM   #2
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Iím in a similar situation. I keep analyzing the option of buying a new house. Our current house is fine, so the new house would be purely a luxury.

For what it is worth, I donít bother looking at the percentages - I look at the dollars. Specifically, I look at the impact it will have on my portfolio and on the amount I can withdrawal each year. A good retirement calculator can help estimate the impact.
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Old 01-17-2018, 01:44 PM   #3
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Quote:
Originally Posted by nerdyJON View Post
Good morning all! I wanted to pose a question to everyone regarding what ratio do you use when looking at housing expenses? There are plenty of articles saying the banks use 28-36% of gross income, other frugal experts say 20%, but just wanted to see what everyone uses here?

The question stems from my better half looking at a house that seems to be our dream home. The only issue is I am a VERY frugal person who tries to limit debt and protect my downside in EVERYTHING.

Current situation:
Current loan: $140K, 15 year with additional $4k payments a year
Current home value: Conservative $385K
Current home expenses: $29K/year (mortgage, taxes, bills)
We max out 401k and traditional/roth IRA contributions
Gross Income $200-270K depending on bonuses

New home loan: ~$400K, 30 year
New home asking: $570K (yes the math doesn't add up because we still would have to sell our house before we could use the equity for a down payment)
New home expenses: $43K/year (mortgage, taxes, 30% increase on bills)

That being said we currently live under 15% of our gross income and would be going to 20-25% depending on bonuses.
I do not use percentages. When I bought my first house with my wife, we put 20% down and qualified for the loan on just my income. Then subsequent homes, we did not increase the total mortgage debt.

So debt service remains a tiny percentage of income, and we have never been tempted as many were to buy more house than they needed in 2005-6.

Just another view.
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Old 01-17-2018, 02:19 PM   #4
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Thank you for the two perspectives. If I was to transfer the money with the sale of our current house, our Loan would only increase by $150K, which is not bad but at the same time I see your point.
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Old 01-17-2018, 02:26 PM   #5
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I guess that I have never been a slave to the notion that housing should be a certain percentage of our income. Back when I was first married, the rule-of-thumb was that you could afford a house equal to twice your income.

When I was 31 we moved back to our home town and i took a ~20% pay cut to do so. It turns out that DW found a nice 4 bedroom split ranch on 1.7 acres that needed some sweat equity but was a bit over twice our income so we made the jump. We stayed in that home for 25 years and did a number of renovations and improvements... however, my career took off and using that silly 2x income rule-of-thumb we would have upgraded to much more house than we really needed... so we stayed where we were because it was nice and it met our needs.

I am certain that if we had upgraded one or more times in that 25 years that we would not be retired today.

I think at the end of the day it all comes down to a decision between living in a nice house and retiring earlier or living and a really nice house and retiring later.

One thing to consider though .... in our area at least, it was a lot easier to sell a mid-to-high end home than a really high end home.

In your case, that $14k a year annual cost difference with earnings at 6% after 20 years would be over ~$515k... would it be easier to retire with an extra $500k?
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Old 01-17-2018, 02:38 PM   #6
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We never used a percent. IMHO, once you have a roof over your head, a house is a lifestyle decision. We always looked at our overall finances and determined where housing expenses fit. Money spent on housing reduces other budget items like travel, college funding and savings. Without knowing your entire budget, it looks like you can afford the house. The real question is do you want to make the trade offs. There is no wrong answer. Its a personal decision.
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Old 01-17-2018, 03:01 PM   #7
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We have no mortgage. But we still live in the "dream house" we bought 15 years ago when the kids were 10 and 13. It's way too big for the two of us now, but we stay because we love the place. We talk about downsizing, and I'm sure that day will come, but for now we're staying put.

FWIW, our housing expenses (property tax, insurance, maintenance, and utilities) are just under 25% of total expenses. When we eventually downsize, that percentage should drop to about 15%.

While working, when we bought houses, I recall that we always bought significantly less house than the lenders qualified us for on the pre-approval. This was based on some % of income that I don't recall and didn't really care about at the time.
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Old 01-17-2018, 03:28 PM   #8
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I hope your estimate of new home cost includes annual allocation to reserves for aperiodic major expenses (roof replacement, etc).

In your case, the decision looks more lifestyle-related than money-related. Would your increase in 'happiness' be worth the additional expense?

In my case, I can definitely afford a nicer house but I wouldn't be the slightest bit happier there; in fact, the additional expenses would drive me crazy. YMMV.
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Old 01-17-2018, 03:51 PM   #9
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We have several personal use properties. The expenses relating to these are about 20-25% of our total spending except when we do something big like renovations, etc. No debt. These houses are worth about 18-20% of our total net worth. We are retired 67 years old. A lot depends on you stage of life and future plans. Don’t view these as “investments” rather lifestyle choice.
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Old 01-17-2018, 04:06 PM   #10
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Thank you for all the input. Sounds like its a personal decision and I thank you all for your experiences. We will definitely sit down and weigh the pros and cons.


Look forward to hearing more experiences.


PS we are looking at the house in 1 hour, then discussing over dinner.
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Old 01-17-2018, 05:05 PM   #11
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When I was still working, back in 2002, I bought a house. The P&I was around 15% of my salary. I suppose that was low but it helped me to save for retirement.

Good luck in your house search!
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Old 01-17-2018, 05:32 PM   #12
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We never used a ratio. It would depend on COL where you are, and how important a house is to you personally. I know we’d never buy at the limit any bank or lender would lay out for us, our current house was about half what the bank said we could afford, 25 years ago. YMMV

And ongoing costs of home ownership are significant, as you know with insurance, property taxes, routine maintenance, yard care, HOA fees, periodic appliance/roof/HVAC replacement/remodeling, etc.
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Old 01-17-2018, 05:42 PM   #13
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I never used a ratio either. The bank was willing to loan us twice what we ended up using, but we wouldn't have been comfy with the payments.
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Old 01-17-2018, 07:38 PM   #14
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Canít imagine any financially thoughtful person would need a ratio for their own spending decision. The ratio is meant to measure risk for banks/economists, not so much individual situations.
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Old 01-17-2018, 07:57 PM   #15
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Just finished looking at the house and thankfully we both agreed if we are going to increase our spend on housing that it would need to be something that made sense.

The house was beautiful but needed work and for that much money we wanted something to our style and not needing updates (style updates but unnecessary).

Thanks for the conversations.
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Old 01-17-2018, 08:17 PM   #16
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Be careful when you think itís a ďdream house.Ē Thatís when stupid money decisions are made. Iím glad you used good financial sense in this case.
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Old 01-17-2018, 08:39 PM   #17
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We did something like that about 30+ years ago-dream home.

Don't believe what the bank says you can afford. So you can "afford" it but you will be glued to your house.

Bank (Citi-BOO!) approved us and we were young and bought our "dream home." The ratio was about 37%!! (maybe even more). Sure the bank said we could afford it but it was really tight.

Oh also, it was negative amortization!

Luckily my DH was transferred about a year later, company paid for moving expenses, etc. Lesson learned!
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Old 01-18-2018, 10:27 AM   #18
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Donít view these as ďinvestmentsĒ rather lifestyle choice.
Exactly. We have been faced with construction next door which makes us want to move after 10 years in our snowbird property. There were already some underlying things that pointed towards a move so this acted as a catalyst.

Never a dull moment. Onward and upward!
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