How much home can I really afford?
January 24, 2015 7:23 AM   Subscribe

My partner and I want to buy a house in DC this fall but are having some difficulty understanding how much house we can actually afford. We haven't applied for pre-approval yet because we're likely won't start looking until September or October. (Though if there is a reasoning for why we should get pre-approved and buy a house in the next few months, we're open to hearing it. But we currently live in NYC and it would be logistically complicated). Financial details inside.

Income information:
---- Our current combined incomes are 190k a year. We both have the potential for increased learning, and both are likely to always have COLA increases. It's not inconceivable that in next ten or so years combined income could be around 250k.
---But I'm also planning on going down to 60% time when we have kids (and take 60%) of my salary. I'll probably be at 100k when that happens, so my income would go down to 60k, and our combined income at that point would probably be around 170k.

Savings information
---We have 100k in savings accounts now.
---We have an additional 300k in retirement accounts (a mix of Roth and 401s).

Personality information:
---We both are frugal and like to save. It feels psychologically important to me that if one of us lost our job, we wouldn’t be immediately in risk of foreclosure. We are both pretty employable, but I don’t want to spend the max that we can afford. (And according to some online calculators, we can afford 700-900k which seems like a fortune to me).
--We spend 26% of post-tax and post-401k income on rent now and really like that amount. But we could live on less. About half of the other 74% just goes right into savings.
-- But, we’re also used to a nice standard of living. We wouldn’t do well with a fixer-upper or something in an actually unsafe neighborhood. (But it definitely does not need to be luxury either).

Other factors:
--- We're planning to try for baby #1 in one year, and hope to eventually have two kids.
---We’re not sure how heavily to weight school district. We’d like to buy a house near schools that are at least good. We don't want to spend $$$ to get kids into a great school district if they end up going to a charter school or something, and we wouldn't have a school-aged kid for at least 6 years. But a good district seems to add about 100k to the house price.
--We’d like to not have to move again until the house is paid off. We don’t want to consider this a starter home.
--We’re not sure to what extent we should consider low-interest rates, mortgage tax deduction, etc. as meaning it’s okay to spend more because we will be saving more in other respects.
-- We understand in a city you might have to spend more that you are comfortable with. That’s OK if we are still being financially safe.

Basically – we want information around either 1)what is the right number for us to have as a mortgage payment (or better still a mortgage/tax/insurance monthly estimate) and 2)what are the questions we should be asking to figure out what we can afford on our own. Any information would be welcome. Thanks!
posted by anonymous to Home & Garden (23 answers total) 9 users marked this as a favorite
Honestly, if I were you, I'd go talk to a mortgage broker and ask then to how much you qualify for on one income.

I also do not think that you HAVE to spend more than comfortable. Compare your potential mortgage payment (PITI, not just principal and interest) to your current rent, to see how comfortable that payment would be.
posted by ethidda at 7:54 AM on January 24, 2015 [6 favorites]

I recommend checking out the HUD website for information.

One thing you need to figure into your housing costs is maintenance and upkeep. What will you pay to folks for the inevitable stuff that will need repairs or replacing? That will highly depend on the age of the home you buy and the condition of the appliances, HVAC/Furnace, etc.

The other is property taxes. Yes, the interest you pay on the home and the property taxes are deductible, and they may put you in another tax-bracket, a lower tax-bracket, and that indeed is something worth considering.

I would work this backwards. You have a monthly figure that you're comfortable with. Let's say $3,000 (for grins.) Then deduct about $300 from it for monthly stuff you'll pay for because you own it, so plowing, lawn, garden, gutters, pest control, semi-annual HVAC servicing, random replacement of things that break. That leaves $2,700 for your monthly payment.

Out of that $2,700 you'll pay:

Principle and interest on the mortgage
Property Tax
Property Insurance

So, you'll need to know what the tax rate is, and what the property insurance will be. Once you have those figures, subtract them from the $2,700. Lets assume that taxes and insurance will be $500 per month (into escrow.)

That leaves $2,200 for your Principle and Interest payment. So at 5% interest on a 30 year mortgage, that's a $410,000 mortgage. So that, plus whatever you choose to put as a down payment will be the cost of the house you can afford. If you'd rather do a 15 year mortgage, then the mortgaged portion would be $280,000.

The tax break is reasonably simple math. If you're in the 32% tax bracket, and your annual interest payments would be around $25,000 (assuming interest and property tax deductions) then your tax savings would be $8,000. So theoretically you could spend about $8,000 annually/$667 monthly more for the house payment. That puts you at $2,900 for a monthly payment on Principle and Interest. You may want to scale that back a hair, as a more expensive house will have more expensive taxes, so let's be conservative and go with $2,500.

Here's a calculator, you can play with the numbers until you get where you want to be.

You don't have to buy more house than you need. I like keeping the payments to something we can manage on just one income. That's where I feel comfortable.

The other thing is that if you buy a lower priced house, one that you love and see yourself in as your 'forever' house, then you can put extra money towards paying it off early. What does your life look like with a paid-for house? How much could you contribute to your retirement and education funds for your children?

Being frugal is wise and the right answer. I wish I had been frugal sooner.

You are both in an enviable situation. Don't let anyone talk you into more than you want or need. You will qualify for all kinds of mortgages (like those $700,000 ones.) You seem to have a good head on your shoulders, with an ability to do simple math. Don't let anyone trick you with smoke and mirrors.

As for schools, honestly I despair of public schools. If you can find a home in a district that seems "good" then bonus, but you may opt to send your children to private schools, and that can be a different budget consideration.

If you can pay your home off in 10 years (and it's really do-able) then you can send your children to private school with no budgetary pinch (and we'll assume that grades K-4 are no big deal and that a semi-decent public school would do just fine.)

You see how this all plays out. School district really only concerns you if you have a thing about sending your kids to public school, or when you sell the home, presumably to another family who has a thing about sending their kids to public school.

Read The Two-Income Trap, by Elizabeth Warren and her daughter Amelia Warren Tyagi. It's masterful at breaking down the economics of this whole thing. I think you'll really enjoy it.

Mazel-Tov! I know that your house will be a blessing to you, not a curse.
posted by Ruthless Bunny at 8:10 AM on January 24, 2015 [13 favorites]

I would look for something up to $600,000 with a garage you can convert to a studio apartment. You will probably be able to get a nice three bed walk up in SE if you look hard. Brookland / West Hyattsville are both worth a look too, being on the red and green lines and near to major roads. Being there will get you into Montgomery Country and its weird tax laws so think hard about this. You really have to look at commute times before you settle on a house.
posted by parmanparman at 8:11 AM on January 24, 2015

We started out working with a realtor that we trusted about a year before we were interested in buying a home. She took us to three homes just to give us an idea regarding what's out there. We got a sense of what the price range was for homes that felt liveable to us. She put us in touch with a great mortgage broker who walked us through the preapproval process, and who also was very frank with us about how much we could spend given the percentage of our income that we were comfortable parting with on a monthly basis.

We started contemplating a house when we began having thoughts of breeding, too. We started poking around a little bit early, which worked out for us in the end, as we wound up falling in love with a short sale that took us 10 months to purchase. The bank dragged it heels on approving the sale. Had we not started looking for a home a bit before our timeframe to buy, we wouldn't have been able to purchase the house in which we now live.

Also, said house is a cottage. Small homes are snapped up incredibly fast in our region. YMMV, but if you're looking for a property that is a type that is especially hot, you might want to start looking sooner rather than later, as you may get out competed for the first few that you see as possibilities.
posted by batbat at 8:17 AM on January 24, 2015 [1 favorite]

The 700-900K range seems reasonable to me, having just been through this process in northern Virginia with numbers that don't look terribly different from yours. While it's a staggering number for a house price if you're coming from another part of the country, interest rates are low, and under AMT, state and federal governments will pay some 40% of your mortgage interest. Like you, we wanted to be able to stay in the house for at least a couple decades, and concluded that the surest way of future-proofing the house was both to get three good nearby schools (we currently do not have kids), and to buy a nice house that wouldn't leave us wanting to upgrade in a few years.

Rent/buy comparisons are extremely complicated and specific to individual circumstances, but in case a quick and dirty comparison helps: at the beginning of a loan, the mortgage interest component of your monthly payment for a $675K loan is ballpark $2K/month at current rates; property taxes and insurance on such a house are about $800/month in VA. The mortgage interest deduction is worth about $800/month. So, total you're out about $2K/month, plus maintenence/improvements/HOA (certainly not to be minimized!), plus a whole bunch of forced savings which shows up as reduced principal and increased tax refund (also not to be minimized). Given your income and savings rate, this is affordable.

Things to research: -How the AMT hits you and what fraction of your mortgage interest will come back to you as a tax refund, -State/local income/property taxes in DC, MD, and VA (we avoided MD in large part because of Montgomery County's 3.2% local income tax), -Likelihood of being redistricted to a substantially worse school (can be mitigated somewhat by moving to a place with consistently goods school), -how affordability changes with interest rates.
posted by deadweightloss at 8:21 AM on January 24, 2015

I hear the frugal thing, that is me all over. Some additional things to consider is that as a home owner you'll have additional costs:
Taxes, water/sewer, utilities, repairs, appliance replacement, some repairs like a new roof could be $$$

You might consider getting pre-approval now just to see what is available in your price range and below - you can start scouting neighborhoods, schools etc. and see what you'd be comfortable with.
posted by Toddles at 8:46 AM on January 24, 2015 [1 favorite]

We don't want to spend $$$ to get kids into a great school district if they end up going to a charter school or something, and we wouldn't have a school-aged kid for at least 6 years.

Do you mean "if they end up going to private school"? Charter schools are (special in some way) public schools within the district you live in and don't charge tuition. There are a lot of charter schools in the Washington DC public school system but essentially none in the Maryland and Virginia suburbs.

IMHO, you need to weight school districts heavily if you plan to have a couple kids and don't want to move when they hit school age. An extra $100,000 on your mortgage is almost certainly going to cost you less over the life of a 30 year loan than 2 kids x 12 years of tuition in the DC area at private schools with a quality equivalent to the better suburban public schools. Private school tuition right now is bare minimum $10,000/year per kid but in 15 year's time when your hypothetical kids are in HS it may be double that, while the extra mortgage burden of buying a house in a good district (and a good neighborhood within the district) will remain fixed (and after you pay off your mortgage, you'll have a house worth more, to boot).

There are ways you can honor your frugal values and still buy in an area with good schools. I live in oft-recommended Takoma Park, and I have friends raising families in modest $400,000 1200 sq ft homes (not fixer-uppers, but maybe with "dated" bathrooms or kitchens, e.g.) and friends raising families in big-ass million-dollar 3,000 sq ft Victorians with all the trimmings. If you buy into a one of those older suburban neighborhoods you'll get a wider range of prices on housing stock than if you buy into a new subdivision, and yet everyone is going to the same schools.

I'm most familiar with Montgomery County, and I'd say as a ballpark figure you can absolutely get a decent 3 br in a nice residential neighborhood with good schools starting around $450,000, and for an additional $200,000 you can find something even nicer house/even nicer neighborhood/even better schools. I honestly don't see any reason other than "house pride" to spend more than $700,000 in this area.
posted by drlith at 9:48 AM on January 24, 2015 [3 favorites]

While Ruthless Bunny may despair of public schools, there are truly excellent public schools in the DC area - in Montgomery County, as parmanparman brings up, as well as in Northern Virginia. Charter schools are no better than public schools overall, which means private school, which means $$$$$. Also, even people who don't have a "thing" about public schools would rather send their kids there than spend six figures on private school, so your resale value is higher. It is worth spending extra money to get a house in a good school district.
posted by goodbyewaffles at 10:07 AM on January 24, 2015 [5 favorites]

It's a little unclear to me from your question whether you are restricting yourself to DC proper. It will make a big difference to how you figure this out. The DC housing market is weird. Most schools are bad, but houses in "desirable" locations are really expensive. The people I know who have schooled and are schooling their kids in DC either spend a LOT of money for a private school, or work hard to navigate the school system.

The schools in Montgomery county in MD and Fairfax county in VA are very good overall, and I think desirable housing stock is actually cheaper at this point.
posted by OmieWise at 10:28 AM on January 24, 2015

We’re not sure how heavily to weight school district. We’d like to buy a house near schools that are at least good. We don't want to spend $$$ to get kids into a great school district if they end up going to a charter school or something, and we wouldn't have a school-aged kid for at least 6 years. But a good district seems to add about 100k to the house price.

Having a kid myself, I think this is very important--not just because your home will be worth more when you sell it, but because I feel an enormous sense of peace of mind knowing that my daughter will grow up in a district with some of the highest rated schools in the area. While I'm not a huge fan of public schooling, and in an ideal world would send my children to private school, the cost ($5,000-$11,000 a year in our area, depending on the school, probably more around DC) especially if we have more than one child, is absolutely prohibitive.

If you're really as frugal as you say, I would wonder if you're dead set on the DC area, since it's one of the most expensive in the country. The suburbs might be a decent option to get better value for your dollar, at least. But we moved away from the area in part because of the prohibitively high cost of living, so I'm biased.
posted by PhoBWanKenobi at 10:32 AM on January 24, 2015

I just want to add that a 100k premium for a great school is actually a bargain. If you are unhappy with your local school you could be looking at 15k per year, per child for private or moving. 100k at mortgage rates over 30 years is not such a bad deal. BTW I live in SV where the good school premium is 200k-400k (looking at you Los Altos) it makes me want to throw up.
posted by saradarlin at 10:35 AM on January 24, 2015 [1 favorite]

DC real estate is crazy, as I am sure you know. A huge number of people move the Montgomery County when kids enter school in order to take advantage of the very highly rated school district. Considering the uber high achieving and competitive nature of many folks here, that means houses in the top districts are very sought after and come at a premium.

You may want to check out DC urban mom (DCUM) if you can look past the nastiness of many of the posters. There is a real estate forum where many people post questions just like yours and will help you get a sense of the different neighborhoods and suburbs.

Also agree with another poster it really matters your preference for closeness to DC. Technically both Capitol Hill and Centerville could be considered the DC area but they are nothing alike. Where you will be working is a huge factor since commuting is generally considered among the worst in the nation. You don't want to live in Bowie MD and have a job in Reston VA or live in Centerville and work in Suitland.

Good luck and feel free to message me if you have any specific questions. I don't have kids but have lived all over the area and have friends scattered everywhere from Reston to H Street to Upper Marlboro.
posted by seesom at 10:43 AM on January 24, 2015

As someone who moved to the DC area a few years back, I would recommend renting first. At your price point, you'll be making some very significant trade-off (space, schools, transit access, crime, etc.) in DC proper. You can easily afford something close to ideal in the suburbs and I've found the DC suburbs way more interesting than the NYC ones, but they're still the suburbs.

There's also a long history of New Yorkers moving to the DC area and then moving back as quickly as they can.
posted by backupjesus at 11:01 AM on January 24, 2015 [1 favorite]

As has been asked above, it's unclear whether you mean just the District or if you are including suburbs. There are very good public schools in DC if you live in the right neighborhood, and housing prices in those feeder neighborhoods are elevated because of it. So if you want to live in a more urban feeling neighborhood with nearby amenities and get the good schools, right now that means something like Mt. Pleasant (which feeds to the same middle and high school as the toniest neighborhoods in upper northwest). You can also look at, say, Chevy Chase or Tenleytown, where there are large houses with yards, but less stuff you can easily walk to.

We bought a house in Petworth (which doesn't feed to one of the best schools), and the comps around us are now selling for about $625K-$650K depending on specific amenities, while older, non-maintained properties go for about $350-$400K (generally in cash sales, after which they promptly get remodeled and flipped). In the District itself I'd put the premium for being in the "right" school territory in the $200K-$400K range, not just the $100K range, knowing what I know about both our house and houses in (again) Mt. Pleasant. I would not expect a large house that feeds to the good schools to sell for less than $800K, really, and $1M and up wouldn't be a terrible surprise.

If you don't live in a neighborhood that feeds to the desired schools, there are lotteries for the various charter schools and your kids may or may not get the particular ones you/they want. But that's also how things are now, and by the time your kids are school age, the patterns and charters may be completely different.

And if you're considering suburbs, that's a whole other ballgame, and as a child-free adult I couldn't begin to tell you where to start looking other than a generic "I hear Fairfax County is good." The suburban counties surrounding DC are among the wealthiest in the country, so in general they are more likely to have good public schools than DC (right now). Virginia has a lower tax burden than DC and Maryland (which are roughly equal to each other, in the end), so if I were basing my decision solely on the ratio of tax burden to quality schools, I'd be looking in Fairfax County, but then I'd probably also be stuck in traffic all day with all the other people dropping their kids off at soccer practice and piano lessons.

As for timing: you should get pre-approved and start working with an agent right now. Most houses for sale here are under contract after their first weekend on the market. You don't have to start making offers, but you should be looking at houses and neighborhoods so you are ready to jump the moment you see something you like. Your timeframe gives you the opportunity to pass on a lot of things that are close-but-not-quite, and most of the people we know who have bought had numerous failed offers before their purchase. You can always change agents if you don't like the first one, so this gives you a bit of time to shop not only houses but agents.
posted by fedward at 11:02 AM on January 24, 2015

monthly payment for a $675K loan is ballpark $2K/month at current rates; property taxes and insurance on such a house are about $800/month in VA. The mortgage interest deduction is worth about $800/month. So, total you're out about $2K/month

That math seems off. A $675k house is going to cost you more than $2k/month.
posted by fshgrl at 11:44 AM on January 24, 2015

I think the sooner you start looking and researching the better, since you can get so much closer to your ideal if you spend a year looking/considering/etc. I'd also endorse the idea of finding a rental for the first year you're here, while you don't need to factor in school district, just to get the lay of the land.

Two things to know about the DC area:

1) Traffic is insane, and the Metro is good but has nothing like the reach of the NYC subway system. I would strongly recommend restricting your search based on where your jobs will be, where is going to give you a reasonable commuting time. Do you know already where you'll be working?

2) The good public schools in the VA and MD suburbs are among the best in the country, and there are a bunch to choose from. IMO there's no reason to expect you would want to send a kid to private school if you live in one of these really good school districts, unless you or the kid have some idiosyncratic needs (eg a religious element, highly specialized programs).
posted by LobsterMitten at 11:54 AM on January 24, 2015

I would strongly recommend renting first for the following reasons (former DC resident, with a child):

- Commuting distance is no joke. If you aren't 100% sure where both of you will be working and if it will be a long-term decision, it would be difficult to select a neighborhood.
- DC schools are really difficult. I lived there when my kid was 2-3 and the whole neighborhood was obsessing about what schools the kid would be in for kindergarten. And I was in a very desirable neighborhood with decent elementary schools. However, nearly everyone I knew was planning on leaving the District before their children would attend middle or high school. The lotteries are insane. Chance of getting into the school you want - charter or otherwise - is not very good.
- Crime! I was in a nicer part of a gentrifying neighborhood and I got really effing tired of crime. I got tired of cars being broken into daily. I was upset when a guy was hit over the head with a brick at 3pm on a Wednesday around the corner from me. I was upset when someone was robbed and assaulted while she had a toddler in her arms while loading groceries in her car at the supermarket 4pm on a Thursday. I know that this isn't stuff that happens daily, but I was really over it by the time I left.
posted by k8t at 12:10 PM on January 24, 2015 [2 favorites]

For what it's worth, I'm interested in buying a place in DC and trying to have a kid within the next year. If I had the money and wanted to be in a place where my kids could go to a good public school, I'd be looking at Kalorama, Cleveland Park, basically off of Connecticut Ave NW north of Dupont Circle. Living there would put you in a position where your kids would likely have some of the best schools in the city as their neighborhood schools (Oyster, Deal, Eaton, Hearst, Murch, Wilson). It's also that sweet spot of close to city stuff but almost suburban, walkable, etc. you could go further north towards Chevy Chase but then you're farther from the city.

It's also worth noting that DC has universal pre-K unlike Montgomery County (I think?) but the pre-K location is based on a lottery.

You're coming from NY so I trust you're not scared of commuting or crime but I will say, as a person without kids who has lived in DC for 10 years, neither of those are things I have found to be problematic (knock on wood).
posted by kat518 at 12:25 PM on January 24, 2015

That math seems off. A $675k house is going to cost you more than $2k/month.

The interest for the first month of a $675K 30-year loan (not house) at 3.625 interest is $2,039.06.
posted by deadweightloss at 1:15 PM on January 24, 2015

I've seen estimates that you should plan to put aside about 3% a year for maintenance. Also don't forget that home ownership can be a time sink - mowing and watering lawns, shoveling driveways, gardening, neighborhood politics, etc....
posted by srboisvert at 3:07 PM on January 24, 2015

If you have never lived in DC or the DC metropolitan area before, I really recommend you rent for a year or two, like others have said. During this time, I'd visit different neighborhoods, talk to colleagues and even people on the street, and find a good real estate agent.

DC, VA, and MD are so diverse in terms of neighborhoods: types of homes, types of commutes, etc. People have made awesome suggestions above and you two have done a lot of smart financial and long-term planning. Still, living there for awhile will make the decision much, much easier. I'd hate to see you stuck with a place that you bought before really living and working in DC when a bit more time could yield you the home and neighborhood you absolutely love.
posted by smorgasbord at 5:49 PM on January 24, 2015

When Husbunny and I bought a house last year, we decided to stick within a budget that we could afford on just my salary, so that if one of us lost our job we'd still be ok. That includes the mortgage payment, property tax, and utilities bill.

We had about $100K in savings and decided we were willing to put about $80 of that towards the house, downpayment & renos. We ended up finding a house that needed minimal work right away, could use some updating in the near future but nothing urgent. It cost more, but we put all that money towards the downpayment, keeping the monthly payment in my affordable range. And I can increase the amount of the payment as my salary increases, to pay it off faster.

I like this house and its location a lot, and I hope we live here for a very long time. My commute to work is good, it's within walking distance of stores and schools, easy access to two major thoroughfares, and his brother's family is ten minutes away. The house is a bit small, my only concern... We're trying for kids now, and our needs may change when our future children are teenagers, or if we have more than two.
posted by lizbunny at 8:42 AM on January 25, 2015

I thought you might find this recent Washington Post article interesting: D.C. Neighborhoods Where Homes Sell Fast
posted by smorgasbord at 8:01 PM on January 27, 2015

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