How Much House Can You Afford?

[kevink]

Posting this as a "bookend" to the current thread about % of net worth tied up in a house as it looks at housing from an ER perspective and takes into account a few key options (e.g. HELOCs, reverse mortgages as a hedge against sequence-of-return risks) I hadn't really thought about.

Obviously no one-size-fits-all answers here but between the post itself and some of the comments on it there's a lot of good stuff here:

https://www.caniretireyet.com/how-much-house-can-you-really-afford/

 

[Surewhitey]

We have moved 7 times in 25 years. We haven't found our forever home (or town apparently). We consider location, then purchase in the lower range of there & then remodel to fit us. You can almost make any home, home. We try for 80-90% of current needs from footprint and go from there.

I'd like to stay in the $200-350k just to have a balance of assets never thinking of things like reverse mortgages down the road.

 

[Ronstar]

Don't know how much house I can afford based on the article. I would pay cash, in which the article states that the amount of house I can afford is based on "prudence and common sense". I have neither.

 

[38Chevy454]

I looked over the article. It makes some good points for discussion. Nothing that most here would find anything new as most here are quite financially capable. Probably a good article for those nearing retirement and thinking about moving and a new house.



I think one of the best points in his article is that of true real estate returns are many times only near the rate of inflation. Except for some markets mainly on the coasts, most of the US housing prices are not increasing as much as people believe once they use actual inflation rates vs the house value increase. What is true is that you increase equity in your house due to the portion of the mortgage going toward principal which if take n to the end of the mortgage term will result in being paid off. While at the same time over those years it has put a roof over your head and provided the stability of being your place to live. Yes there have been costs along the way, and likely some improvements. It is all part of that financial awareness.



Just as an example, in my early years my mortgage was close to that 28% rule when I started out. Then over the years I accumulated equity in the houses that transferred to newer houses as I moved around. Ultimately ending with no mortgage at all and where I sit today. It is nice to not have a mortgage; I fully understand the financial tradeoffs with this decision.

 

[Bigdawg]

we are in a 800K house and owe 540K on the mortgage. Our yearly mort/taxes/ins comes to just under 34% of our pension income. It is 22 months old so no huge house costs as of today but I do assume 1K month in long term costs (HVAC,roof, paint, etc.. over the life of the house). This situation doesn't take into account the fact that DW at 49 is still working and wants to work a few more years (1200/mo pension when she turns 63). Nor does our current situation take into account SS. @ 2.75% we will carry this mortgage for the duration minus the extra $ I throw in each month (usually 200-600). Our current pensions and all three future pensions are COLA so no worries there. Currently adding 4-6K/month to the nest egg. Have to drag us out of this house. That's my Jeep Scrambler in the front yard under the cover.

 

[kevink]

As is discussed in some of the comments on the article, you might learn pretty quickly what "prudence and common sense" is if you try to apply for a loan when ER'd with no income other than investments and SS or a pension. Having to pay cash for a house and no longer having those funds included in your investment nest egg for annual withdrawals can often make the decision for you.

Obviously everyone's situation is different and the article makes that clear. The author has just bought a place in a particularly "hot" real estate market (Santa Fe NM) and is assuming that current pandemic-driven flight from the coasts and work-from-home mania will continue to drive property values and rents higher in his area. And of course he hasn't taken SS yet.

 

[Out of Steam]

When a house goes money pit, assumptions regarding affordability can change quickly. Having had that happen in real life, adding the expenses to 28% of gross income on a mortgage would have been scary.

 

[Bigdawg]

When a house goes money pit, assumptions regarding affordability can change quickly. Having had that happen in real life, adding the expenses to 28% of gross income on a mortgage would have been scary.

Depends on the source of the income. The 34% we are currently paying comes from three federal government (military) pensions that are COLA adjusted. If the federal government stops paying pensions our (the whole country) problems are much worse than making the monthly payment.

 

[Ready]

I hope to never need to use a reverse mortgage. But I know it’s there is we have a horrible sequence of returns and I run out of money before I run out of time. It’s one of the things I consider when I think about the 5% historical failure rate of a 4% withdrawal strategy.

 

[ExFlyBoy5]

That's actually a pretty good article. We have paid cash for our last two homes and established a HELOC on the last one right before I retired...as an insurance policy of sorts. We never tapped it, so we haven't established one on our current home but it's not out of the running if we needed a pretty big chuck of change.

 

[Teacher Terry]

They are letting my ex husband have a mortgage that’s 50% of his gross income because he has no other debt and is retired.

 

[W2R]

I am living in my "Dream Home", which is hopefully my forever home. It is completely paid for in cash. When I was looking for it, I was prepared to pay up to 3x as much as it cost, if that was necessary. However, I lucked out.

I also have good credit so I suppose I could probably get a mortgage if I wanted one. So my guess is that I could afford a house that was 4-5 times the cost of my Dream Home. Or, if I was willing to ramp up the LBYM, maybe 6x.

But for me, buying a house like that would be the stupidest decision ever! I love this house and always will. The only way you can pry me out of it, is if it is destroyed in a hurricane or if the crime situation worsens and becomes impossible to deal with.

My point is NOT "Look at me, I'm rich!" My net worth is less than that of most forum members. The point I'm trying to make is that I don't like the assumption that spending more money automatically would result in a more suitable home that would be more pleasing.

 

[Out of Steam]

Depends on the source of the income. The 34% we are currently paying comes from three federal government (military) pensions that are COLA adjusted. If the federal government stops paying pensions our (the whole country) problems are much worse than making the monthly payment.

In our case, the income was secure. The concern would have been repair costs crowding out essential spending, requiring an early raid on retirement savings.

 

[Hermit]

I have been buying my house one 2x4 at a time. Its kind of a slow process, but no debt. The kitchen cabinets will be here in a couple weeks. (OK. I blew some dough on those.) I'm glad I don't have to mess with a mortgage.

 

[street]

I have been buying my house one 2x4 at a time. Its kind of a slow process, but no debt. The kitchen cabinets will be here in a couple weeks. (OK. I blew some dough on those.) I'm glad I don't have to mess with a mortgage.

So much gratification in building our own home. I hope someday we get a peek at it.