How can we possible afford the mortgage on a 500k house with only ten percent down?
September 26, 2011 8:47 AM   Subscribe

Home Loans Question: How can we possible afford the mortgage on a 500k house with only ten percent down?

I am giving the following background only to explain WHY we would possibly want to attempt this feat. We are trying to buy a home in a particular neighborhood that is in the heart of one of the largest transportation/redevelopment project in America. The neighborhood is already very nice, but will be substantially nicer once the project is completed. We would like to live in this area very long-term as this area will have features/amenities that would not be available anywhere else in the metro-area. There is one small neighborhood in this area with houses, the rest is massive condos and other developments. For a variety of reasons, we do not want to live in a condo, particularly long term. The values of the houses in this particular neighborhood have began to increase, from around $600,000 to the 800-950s over the last ten years--which is amazing considering the last ten years. There are also some outliers in the 300k range and in the 1.5 million+ range. We are trying to buy one of the few houses in this area before we are priced out of the market and would like to live there 20+ years.

We are focused on purchasing a house in the 400-600k range. We only have about $50,000 for a down payment. My wife and I are both highly compensated, but are very young in our careers. When we met with a real estate agent, he said that it would not be a problem and could definitely get into a house in this neighborhood with our employment and the down payment. I don't understand how we can possible afford the mortgage on a $500,000 house with only 10% down. Are there programs/types of loans that I simply don't know about as a first-time home buyer. We are comfortable with paying an interest only loan, or anything else that would allow us to get in the house, because we would expect the value of the house to raise proportionately with whatever additional expense that adds, in no case are we willing/able to spend more that $3,000 for the next five years.
posted by 2legit2quit to Work & Money (36 answers total) 3 users marked this as a favorite
Response by poster: I should also add, that we do not particularly care whether the value of the houses in our neighborhood continue to go up from an equity/refinance standpoint as we want to live here very longterm. I am only saying that if they DO go up, we won't be able to afford a house in this neighborhood in the future. Also, our income is incredibly stable and will continue to go up.
posted by 2legit2quit at 8:52 AM on September 26, 2011

You can get fixed rate mortgages for up to 95% of a home value. You will be paying an additional fee called PMI that is essentially insurance for the bank. This will be on top of the interest you pay for their lending risk. You will continue paying this fee monthly until the you get an appraisal demonstrating to the bank that your equity in the property is more than 20% and thus their exposure is less than 80% of home value.

This is not an unusual or "shady" transaction. If you have the cash flow to support payments it is a fairly standard way to enter the housing market (although pricier than a typical starter home). You should consider your long term job security, and make sure your mortgage has good, fixed, rate.

If you can afford it, now seems to be a great time to buy.
posted by meinvt at 8:55 AM on September 26, 2011

we would expect the value of the house to raise proportionately with whatever additional expense that adds

I'm not sure why you would expect the value of the house to go up just because you paid more for it. Expecting a house to go up in value, for almost any reason, has proven to be an extremely risky assumption to depend on. In addition, house value increasing is only really useful for when you go to sell the place, and you're specifically talking about being in for the long haul. Affordability is a short-term issue; resale value, a long-term one. Your problem is affording the place in the short term.

in no case are we willing/able to spend more that $3,000 for the next five years.

If you get a pretty cheap loan, you might be able to squeak under this limit. For mortgage alone, that is - if you're also including taxes, insurance, and the kind of maintenance you'll need to keep a $500,000 house in good repair, I think you're just not going to find numbers that work.

Remember, a real estate agent's whole goal is to get you to buy a house. Of course they're going to tell you you can afford it, if you even remotely sort of kind of can. They're not interested in you being comfortable with your lifestyle. They're interested in you buying a house.
posted by Tomorrowful at 8:55 AM on September 26, 2011 [4 favorites]

You will probably be required to get PMI, which will add to the cost of your loan and also limit the loans you can qualify for. On the other hand, in some cases you can get a refund of your premiums for mortgage insurance once you have paid the principal down to 80%.
posted by TedW at 8:55 AM on September 26, 2011 [1 favorite]

I'm a bit confused: your question is can you get a $450,000 mortgage where the payment is less than $3000/month? If that's your question then... yes, you probably can. Here is a mortgage calculator -- a $450000 mortgage and a 5% interest (which is totally reasonable right now) is <3000/month, and that includes Property Tax and PMI. Is your question can you afford to pay $3000/month? because if so, that a different question and one for which you do not supply enough information.
posted by brainmouse at 8:55 AM on September 26, 2011

That's what, $5000 per month with taxes? Why can't you do it if you and your wife are both highly compensated? If you don't make enough to afford this, then you can't do the mortgage. If you do, you can.
posted by michaelh at 8:56 AM on September 26, 2011

oops, here is the mortagage calculator. There are others if you google.
posted by brainmouse at 8:56 AM on September 26, 2011

Right now, 30-year fixed mortgages are running lower than 4.5%, which is pretty amazingly cheap. If you took out a 450,000, your monthly principal + interest would be about $2300. Note that this leaves out mortgage insurance (which you'll probably be required to get) and property-tax payments—depending on what state you're in, that may be a minor or major consideration. In my state, Texas (where property taxes are high and can rise quickly), I was priced out of my last home by property taxes.
posted by adamrice at 8:57 AM on September 26, 2011

These are questions that you need to ask a loan officer. You haven't stated your income at all, so while I could guess at the monthly payment on a 30-year loan, I don't know if that would be affordable to you.

Also, you have to factor in taxes and insurance. A loan officer in your area can give you conservative estimates as to what these would be monthly.

You will also need to factor in closing costs, which are generally paid up-front and can take a big bite out of your down payment (unless you get a seller's concession to pay the costs, but generally banks will only allow them to pay a certain percentage of the home price). In other words, you really need to talk to a loan officer.
posted by muddgirl at 8:58 AM on September 26, 2011

Response by poster: 1. We have massive student loans, and while we CAN afford more than 3k a month for a mortgage, we can't do it in a way that would allow us to cover unexpected life expenses without going into more doubt.

2. If the agent is referring to a PMI, are there any specific questions we should ask or pitfalls we should avoid?

3. Income is around $150k combined.
posted by 2legit2quit at 9:07 AM on September 26, 2011

Seconding the comments about PMI, which you'll be paying until you have 20% equity in the house, which will be a long time if you take out an interest-only loan. That will add $350 or so to your monthly payment, and is essentially money down the drain.

You haven't mentioned property tax. That's a huge variable. And beyond that, the costs of home ownership are much greater than the mortgage and property tax. To be safe, tack another $500 or so per month to give you a better estimate of what you'll be paying.

You're making a lot of assumptions about the neighborhood and your future earning potential and the attractiveness of interest-only loans. Be warned: That's the kind of thinking that got a lot of people in trouble a few years back. If you can't afford the house with a traditional 30-year fixed mortgage, I don't think you shouldn't buy it.
posted by bassomatic at 9:07 AM on September 26, 2011

1. We have massive student loans, and while we CAN afford more than 3k a month for a mortgage, we can't do it in a way that would allow us to cover unexpected life expenses without going into more doubt.

3. Income is around $150k combined.

Unless your taxes are extremely and you never have to repair anything, you cannot afford this house without receiving a financial windfall from somewhere.
posted by michaelh at 9:12 AM on September 26, 2011 [1 favorite]

Unless your taxes are extremely low*
posted by michaelh at 9:12 AM on September 26, 2011

Response by poster: michaelh, that is my thinking also.
posted by 2legit2quit at 9:14 AM on September 26, 2011

I'm in the process of completing a mortgage application, and another zinger you should know about is you may have to show that you have 6 months of payments sitting in the bank on top of the down-payment. This can be in relatively illiquid assets, like a retirement account you could crack (with penalty), and you do NOT have to actually cash it out, but you do have to show that you have the assets and could get to them if you needed them.

Nthing, you're probably going to get hit with PMI.

Nthing, you really need to talk to a mortgage expert, not a realtor. Do not rely on a realtor's advice about this, nor random people on the internet. A good realtor will ADMIT they're not an expert. I've been tripped up by BANKERS who were not in their own bank's mortgage department.

If you're concerned you're getting in too deep but you're thinking you can't resist because it's such a great opportunity, you probably are (getting in too deep). A lot can happen, especially when you're young. You can get a great opportunity for a job that requires you to move. You can divorce (especially when the financial strain sinks in) or one of you can die.
posted by randomkeystrike at 9:16 AM on September 26, 2011

Check out first time homebuyer programs, though! I bought my place with 5% down - without PMI and with a low interest rate - thanks to state-sponsored first-time homebuyer programs.
posted by ldthomps at 9:16 AM on September 26, 2011

As others have said, depending on the interest rate you get, taxes, escrow, insurance, and maybe pmi and closing costs, you certainly could get a total mortgage payment of less than $3000 per month on a $450000 loan. You need to shop around and crunch the numbers.

You might be able to avoid pmi by shopping around aggressively and getting an 80-10-10 mortgage. That would be $50k down, 40k with a great rate, and 50k with a terrible rate (like 9 or 10%). This may end up being cheaper than a 90-10 with pmi. Will be harder to refinance though.

I have friends with this exact mortgage (500k house, 50k down) who make 210k per year and they comfortably afford their mortgage (no loans, kids, or car payments though).
posted by n'muakolo at 9:16 AM on September 26, 2011

I would take a look at your future. Is there kids in your future? Will both of you be comfortable working high paying jobs for the life of your house? You say you are young. How young is this? What is special about this neighborhood? Will you ever have children? If one of you get laid off, could you still afford the house?

Lots of questions I know, but these questions are needed to really ask yourself what is important. The last thing you want to do is be a slave to a morgage payment every month. You can afford it NOW, but what about 5 years from now, or 10 years, or when one of you have had enough with the high-paying careers and wants to a move.

If your anwers are all geared towards buying in the nieghborhood, then buy the cheapest one on the block, and since you plan on living long term, you can fix it up as you go. Rates are great right now so go for it.
posted by amazingstill at 9:16 AM on September 26, 2011 [1 favorite]

I don't think you are going to save enough with an interest-only option on a fixed-rate loan to cover taxes, insurance, and PMI (but again, I don't know tax and insurance rates in your area). Looking at a couple online calculators (here's one), your interest-only monthly payment is still going to be $2000 with PMI (and since you're not making principal payments, you will be paying PMI for a long time). That leaves $1000 per month for taxes, insurance, and upkeep. I would pick an address and get a rate quote for home insurance, and look up how much representative homes in the area are paying for taxes (this SHOULD be available online - it is in my area - but if not or often have decent estimates for taxes).
posted by muddgirl at 9:18 AM on September 26, 2011

You said there are some outliers in the 300K range. Why not search for and purchase one of those? Are these houses literally falling down, or just slightly smaller or less modern than you would like? You can always pay to upgrade a home if your financial situation improves, but you can't easily reduce a mortgage.

I agree with previous comments: it is absolutely true that the real estate agent will try to convince you that you can afford more house than you reasonably can. A real estate agent often gets paid based on the purchase price of the home. As in, if your agent sells you a more expensive home he or she will make more money. There is very little incentive for an agent to consider the practicalities of your financial situation. There is a strong incentive for even a nice, well-intentioned agent to sell you a home priced above your ideal range, if you, the buyer, have made it clear that you really really WANT an expensive house and are willing to sacrifice to get it.

If you have good credit, banks also have an incentive to convince you to spend more than you can reasonably afford -- a bank will make more money off a larger loan, and they'll be willing to bet that if you've been responsible in the past you will make big sacrifices (like selling a car or getting a second job) before defaulting on a home loan.

So please, don't take financial advice from ANYONE who will make money off of your home deal at face value. I felt like I was going into the home buying process with my eyes wide open and my skepticism on high alert, and I still got swindled to a degree by our agent (who came with good recommendations) into paying more than I should have for my first house.
posted by BlueJae at 9:25 AM on September 26, 2011

Response by poster: BlueJae,

The 300k houses are of the literally falling down variety and I imagine are just waiting to be demolished and rebuilt. I just can't see myself paying that much money for just a lot.
posted by 2legit2quit at 9:28 AM on September 26, 2011

Other possibility that might let you avoid the PMI, an 80/10/10: First mortgage 30 year fixed for 80%, second mortgage shorter-term variable rate for the remaining 10%. Both are deductible, if you can afford the full $3k/month you can put the extra towards that second mortgage to pay it down, and if you run into an unexpected life happening you'll be able to tap that as a loan.

For the foreseeable future that second mortgage can be an amazingly low interest rate, but my personal bet is on Reagan-era level inflation somewhere in the next decade so I don't think you want to be holding that second mortgage for forever.

However, that gives you deductible interest that may avoid PMI, and gives you a potential emergency buffer, though you don't want to tap it unless you've no other options.
posted by straw at 9:37 AM on September 26, 2011

These are very average numbers for the city I live in (Calgary, Canada). $468k average house price with an average household income of $122k. There's nothing special about it or what you'll be paying. That being said, as with any financial commitment, make sure you have adequate savings outside of your downpayment, get a really good home inspection, and proper amounts of insurance.
posted by blue_beetle at 9:38 AM on September 26, 2011

If you are asking yourself, "Can I really afford this house," the answer is usually no. Also, don't discount possible life changes down the road. You may both think there is no way your wife will ever want to stay home with the kids. She may really believe that too. But pregnancy and childbirth create permanent changes in both of you, but mostly her. I've known more than a few women that went on maternity leave expecting to come back to work, and never did. It happens, and not infrequently. Given that you are young, you should really be buying a house that you can afford on only one income. There are way too many variables in your future to pin your credit rating, not to mention sanity, on both of you continuing to to earn at the top of the income ladder.
posted by COD at 9:43 AM on September 26, 2011

Best answer: My husband and I make a similar combined income, and last year bought a house (with 5% down, an FHA loan) for a lot less than you are talking about. Our interest rate isn't quite as low as you can get now but is certainly respectable. We have some, but not crippling, student loan debt.

I can imagine maybe spending a *little* more on the mortgage than we do, but frankly I wouldn't want to. We went well below what the mortgage guy said we could afford, but I think they are crazy and don't take into account lifestyle. Do you want to be able to travel? Do you want to be able to make large purchases (new furniture for the house, a new computer, etc.) without having to save up for years or put it on credit and pay it off for years? We are building up our savings without living all that frugally, all because we chose a less hip neighborhood and more affordable home. Also, although our jobs are pretty solid, we could make do for quite a while on one income (+ unemployment) if we needed to.

Other things to think about: Our roof leaked on our second night in the house. Total tear off and replace, and roofing companies only take checks, not credit cards. Thankfully we didn't spend every last dime on our down payment and closing costs so we could fix it right away. Also we were able to do some small improvements (mostly painting and pulling up carpets and having the hardwood refinished, getting a fence installed for our dog) to make it feel like our home.
posted by misskaz at 9:46 AM on September 26, 2011 [2 favorites]

The people who write mortgages have a standard they will allow that is, frankly, to me, insane. When my wife and I started the process of buying two years ago (and closed almost precisely a year ago now) the amount of money they were willing to loan us was just... stunning.

And I say that as half of a couple that earns a sizable combined income. We took probably half of what they'd have lent us and as it was felt we were pushing our comfort zone. I have to believe that the people leveraging themselves that hard are not aggressively saving for retirement (we do 10% pre-tax) and aren't allowing themselves the amount of entertainment/discretionary spending we do.

So my advice absent everything else is to pay absolutely zero attention to the loan you can GET. These people are not your friends. They are not looking out for your interest five years down the road. They may well be paid points that mean they make MORE money if they get you into a larger loan. Since almost nobody carries a jumbo loan (or any loan really) on their own books they don't even have to care if you can still pay it in a year so long as they can sell it off.

Look at what you can pay, particularly what you could pay if one of you got canned suddenly and was out of work for 6+ months. Because if you have to walk away from a mortgage you'll bare minimum be walking away from that down payment forever.
posted by phearlez at 9:47 AM on September 26, 2011 [4 favorites]

You are looking at best case scenario for a lot of variables - you're assuming the redevelopment project is fully completed and completed in a way that ensures that you'll have all of the amenities you expect (I assume you mean the Beltline, which I only know a bit about), that you and your wife will stay together, neither of you will ever want to be a stay at home parent, you'll both keep your jobs and keep them in the same location, continue to increase your incomes, not have any unexpected expenses, the home's value will increase enough to make even a risky mortgage (e.g., interest only) a good deal, in 20 years this is still where you want to be (a lot changes between early 20s and early 40s), etc-

It's not necessarily unrealistic to assume all of that works out in your favor, but I would suggest thinking it though and having some contingency plans. Usually the answer to "can I really afford to ..." is no.

There are often income limits to first-time buyer programs, but it's worth looking into - it's something you should talk over with the mortgage guy. Usually there's a home buying counseling requirement, which I would have thought would be BS and kind of not useful but I knew someone who went through it and was pleasantly surprised - I'm sure it differs quite a bit by who's giving the program, so I'd research that or see if the mortgage person can give you any insight.

Take what your agent says (and to some degree the mortgage person too) with a grain of salt. What's realistic to them can be realistic because they don't have to live the decision after the fact - on paper, yes, you can afford $x and yes, it's reasonable to assume all of these variables will go your way - and their job is to close the deal, to match you with a house you love and that you agree to pay for. So even if they have the best intentions, they have a far different perspective. My agent thinks I can "afford" twice what I think is reasonable as I am looking at my budget without even being really conservative but just allowing money to have some fun and still save a little.

Consider also that if your incomes continue to grow and you save/invest wisely, you might not be priced out of that neighborhood long-term even if the houses do continue to rise in value.
posted by mrs. taters at 9:49 AM on September 26, 2011

Raise your income by renting out a room or two for a few years until you both feel secure enough to just take it on yourself. It's a good security blanket to know that you can use the house to generate some income if needed.
posted by Vaike at 9:53 AM on September 26, 2011 [1 favorite]

Um, are we talking about Atlantic Station (land use economist geeking out here) proper or the adjacent neighborhoods? Big difference.
posted by carmicha at 10:03 AM on September 26, 2011

I guess I am a little confused by your question, but it seems pretty straight forward. Tell your mortgage broker that you can afford $3000 a month for all fees combined, and have them run the numbers with the estimated taxes for the place you are looking at. They will be able to tell you what the monthly payment will be, and whether it fits into your limit or not.
posted by markblasco at 10:21 AM on September 26, 2011

It sounds like you can afford it. What I'd recommend, though, is perhaps trying to live like you have those payments for a while, then buying. (Unless house prices are going up like crazy and you can't wait.) But, really, if you are each making $75k, you should be able to scrape by with this house on one income. I'd recommend setting aside another $1k a month for emergencies and $2k a month for future balloon payments. Once you have $24k in the emergency fund, you can shift some of the balloon payment fund to actually use as a balloon payment or wait till refinancing time and do it then. If you are aggressive with your savings, you can make sure you will be in a good position if rates rise, the economy shifts, one of you loses a job, etc.

Also, would you consider buying a home where you can rent out the basement? If you did that for a year or two or longer, you could take off a lot of stress.
posted by Chaussette and the Pussy Cats at 11:00 AM on September 26, 2011

Also, our income is incredibly stable and will continue to go up.

I'd love to know what your jobs are, because I honestly don't think that any American can comfortably make that claim right now, especially if you take externalities such as inflation into account. (And, to be fair, if we encountered an inflation crisis, being locked into a fixed-rate mortgage might almost be an enviable position. However, you'd also still need to make the rest of your ends meet, which it sounds like you'll only barely be able to do at things are now.)

Also, there will inevitably be another new, hip, up-and-coming neighborhood in 5-10 years time.

(And, yeah. Is this in Atlanta? I'm not an expert on that real estate market, but based on anecdotal evidence from some friends, 500k for a house for a single couple sounds crazypants for Atlanta. Hell, it'd be a bit nutty for DC, which seems to be the current go-to example of housing prices gone wild.)
posted by schmod at 12:03 PM on September 26, 2011

Best answer: Borrowing 450,000 at 5% gives you a mortgage payment of 2416. Add taxes and repairs. I wouldn't do this. I don't think it's affordable or reasonable with your income.
posted by theora55 at 12:57 PM on September 26, 2011

You could buy it now, rent it out, and live somewhere that costs less than the rent you are getting.

Pay the mortgage using your personal income plus the difference incoming and outgoing rent.

Move in in ~10 years when you have paid down the loan etc...

This way your expenses (including mortgage) are tax deductible (assuming the US works in the same similar way). Of course the rent is also taxable.
posted by trialex at 2:59 PM on September 26, 2011

If you want to make it work, don't give up so easily because people on the internet are telling you - based on hypothetical numbers - that you can't. You need to contact a bunch of mortgage brokers and find out what rates/packages they can give you personally. Depends on your credit score, for example. Then actually crunch your numbers, including your loan payments. Be realistic about how much you want to spend on other expenses, save for retirement, etc. Then decide.

I will say that if you are a big firm lawyer, I would not consider that the kind of salary one can count on for the long haul. Times are tough with big firm layoffs and the burnout rates are high. And it's smart to buy a place you can afford on one salary. But you need to think through all that.
posted by n'muakolo at 3:45 PM on September 26, 2011

It doesn't seem that difficult to me *shrug*.
If you want to live there and are prepared to save in other areas (eating out etc.) it should be quite achievable. The long term price to income ratio is something like 3 to one, so you would be pretty close to what people have been paying for houses for decades (i.e. not bubble prices).
Judging by the best answers, you don't want to live here, but consider too, the substantial costs in buying and selling if you move in to a less ideal property now and trade up a couple of times. You might do better with the long term higher price now.
Also, as you are young with rising incomes any financial pain will be short term. It takes about 5 years for inflation/pay rises to take the edge off a mortgage so it feels more manageable (just a rule of thumb). Where I live, after about 10 years your mortgage will be less than the rent would be.
Can you put up with 5 years of frugal living to get this long term house?
Consider too the regret you might feel if you do not buy and you are unable to in future. Will you always be kicking yourself when you drive by?
All that said, I wish I had bought lower priced houses and invested my saved income. Once you become used to a certain standard of housing, it is very difficult to convince other family members to downgrade.
posted by bystander at 4:43 AM on September 27, 2011

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