Can we afford this house?
December 4, 2016 12:24 PM   Subscribe

Help me figure out if we're thinking clearly about a house purchase ...

We are middle-aged first time home buyers. After 25 years of living in a rent stabilized apartment in NYC ($1400/mo) we recently moved to a college town for a job. We pretty much have to buy a place because there aren't many rentals. We've found a town we like, with amazing schools, beautiful, close to work. And we've found a house we love, which we think we can get for $500,000. It sounds expensive to us, but we're not sure we're thinking clearly about this. Combined income is $190k/year, we have one kid, and excellent and cheap benefits (health insurance, tuition credit for the kid, etc.). We have no debts at all. We have around $160k in cash for down payment etc. We put the max into 401k and want to countinue doing that. We are in an area where house prices are not increasing and where tax rates are high ($8,500/year for that house, for example). House prices in this area run the gamut from $8 million beachfront estates to $325k ranches in need of "updating."

Can we afford this house? According to all the online calculators we can, but they also tell us we can afford a $700k house which sounds patently absurd. How should we think about this purchase?
posted by agent99 to Work & Money (15 answers total) 7 users marked this as a favorite
IMHO the only accurate way to do this is to model out your specific budget. This is what I do every time we buy (or consider buying) a house, and it has served me very well. The online calculators mostly just look at percentage of income without consideration for your other expenses, and many are really aimed at how much you can get approved for, not how much you can afford. The two numbers are rarely the same.

Create a spreadsheet that outlines all of your expenses under the proposed purchase. You'll have to make estimates on some things (utilities, commuting costs if your commute is changing, etc.), but usually you can get fairly close. Whenever I'm forced to estimate, I always err on the high side. I'd much rather be surprised that something is cheaper than I thought than vice versa. Don't forget about things like food, clothing, car and home repairs, vacations, etc. -- all the stuff you'd put in any other budget. I don't run a strict budget normally, so I have to construct this each time I'm modeling a home purchase (though I use the previous models as a starting point). I'll skim through a year's credit card statements and bank statements to make sure I don't forget anything, and that I use accurate numbers. Also make sure to account for the amount of savings you need to set aside for retirement (including if you want to anything beyond maxing out your 401k) and emergency fund.

It's ok to decide you're going to cut back on something to afford a house, but BE REALISTIC with yourself both in terms of how much you'll be able to cut back, and whether you will be able to stick to it.

Once you've added up the expenses, and subtracted them from your income, you'll have a good sense of where you would stand if you bought the house. And you can of course keep tweaking the house numbers to figure out what you're comfortable with.

Don't use all of your cash savings for down payment and closing costs. Even with a well-maintained house, there are always some surprises that require repair shortly after you move in. You'll need some money for stuff like that. And you of course want to make sure you're maintaining an overall emergency fund. You really don't want to close on a house and have a zero balance savings account.

This process is a bit of work, but buying a house is a big commitment and I think being diligent about it is well worth it.
posted by primethyme at 12:37 PM on December 4, 2016 [11 favorites]

If you have that much for a down payment and that high a combined income, you should be fine. 20% down is excellent, and you have well over that. Your monthly payment (plus taxes) will be substantially higher than what you're paying for rent now, but you should be able to afford it.
posted by Slinga at 12:39 PM on December 4, 2016 [2 favorites]

ignore the online calculators, they are horseshit. According to those my husband and I (who make a bit less than you) could have afforded 800K and we got approved by our bank for 800k. Needless to say the house we bought back in may was way less than half that.

What you need to do is calculate all the costs that come with the house in addition to the monthly mortgage costs.
- electricity
- heat (which may be separate from electricity)
- utilities
- property tax
- new insurance rates
- 1k a year (at least) for general repairs
- transportation from that new location
- all the house maintenance things you may not have now, like a lawnmower/snowblower/etc.
- furniture you may be lacking, like a guest bed, etc. Unless, of course, you're cool with having a ton of empty rooms.

You need to get a VERY detailed breakdown/budget done up, including all that, plus food and gas and RRSP and savings and kid's allowance and car payments and debt repayment and desrectionary money for each of you and absolutely everything. Account for every penny you have coming in, and then account for absolutely everything you would be paying for. Be brutally detailed. Then see how things look. I know for us we could have afforded a much more expensive house, but we couldn't have afforded to heat the effing thing.

and do NOT look at a house purchase as an investment. It just isn't anymore. There is no reason to believe that you will be able to turn a profit on it in the long run. Hope to break even.
posted by PuppetMcSockerson at 12:41 PM on December 4, 2016 [7 favorites]

With taxes and insurance you're probably going to double your monthly housing cost. If everything else is equal, can you afford to double your housing costs while still saving at a reasonable rate? Does the house need any major upgrades that you'll need to bankroll? And whenever you decide to move, can you get your money back? Those are the questions I'd ask.
posted by cabingirl at 12:44 PM on December 4, 2016

It depends on your personal risk assessment. I opted for a house that my then-husband and I could afford even if one of us lost a job, which gave us a lot of flexibility when we took time off to parent and when he lost a job, and allowed me to be able to keep the kids in the house when their dad left. Other people are much more willing to stretch themselves.
posted by metasarah at 12:48 PM on December 4, 2016 [7 favorites]

FWIW, I just did one of the popular mortgage calculators, and it told me that I could afford a house 2.5 times as expensive as the one I have. It's true that we could afford a more expensive house, but that's ridiculous....
posted by primethyme at 12:51 PM on December 4, 2016

I want to echo metasarah. My husband and I were very conscious of the whole "what if one of us lost our jobs", and we both have very stable jobs. We ensured that we would be able to afford our house, one way or another, even if one of us were unemployed. Plus, our house has a granny suite that we currently use (as our guest room, my craft room, and his home theatre) but could rent out pretty easily if we had to.

Being able to afford your house even if your situation changes is a very prudent consideration most people should take in to account. Because shit happens.
posted by PuppetMcSockerson at 12:55 PM on December 4, 2016 [7 favorites]

Echoing the idea of buying a house that you can afford on one income - we have always done this and although our house is more "comfortable" than "amazing" it's really helped us a lot in terms of daily stress, having enough money to have the kids in activities, etc. We did use the higher earner's income, but we don't have a huge earning gap between us.

One thing I would caution about is being sure that you budget for maintenance costs. Simple things like needing a new lawnmower, minor repairs, appliance failures can really add up. The rule of thumb is 1-3% of the price of the house annually (depending on its condition) and I would definitely include that in your planning.
posted by warriorqueen at 1:08 PM on December 4, 2016 [1 favorite]

Maybe ignore the "how much house can I afford" calculators and look at a *mortgage* calculator? You can get a really good sense of what your monthly expenses will be, that way. Crunch the numbers, and don't forget all the stuff you don't have to pay for when you rent in NYC, like a car, and property taxes, and water...

Don't put more than 20% down if the house won't really appreciate--that money will be more useful somewhere else. You want 20% so you don't have to pay PMI, but otherwise, it's good to have some cash handy. Or invest it, if you have enough already to cover house-related and other emergencies.

So, you'd borrow $400K. At 4% interest, for 30 years, a $400K mortgage costs $1910/month. How's your credit? That will affect your interest rate, which will affect the results of your number crunching; go talk to your bank about that. And don't forget, you can deduct mortgage interest payments at tax time. Also remember that, unlike your rent (even stabilized rent), your mortgage payment will never increase. (Although your tax deduction will decrease over time.)

In short, look at the cold numbers. They will tell you what you need to know.

By the way, consider this: you have been incredibly fortunate thus far. $1400 for an apartment that can hold two adults and a kid, in NYC? And your combined income is $190K? That's a goddamn miracle. What I mean is, your income is high and your expenses have been unusually low. You're going to have to get used to market housing costs, which will mean a different budgeting strategy than you've been accustomed to.
posted by the_blizz at 2:37 PM on December 4, 2016 [8 favorites]

$500,000 - $160,000 = $340,000 which is close to what we paid for our house and I come in around $1400. So depending on what interest rate you get for your mortgage loan it's probably going to be around what you're paying now, plus taxes, plus home insurance, plus maybe flood insurance? Plus water/sewer, plus all of the utilities, plus maintenance, plus, plus, plus....

Have you met with a mortgage lender or broker. They will give specific numbers and from there you can decide what you can afford. And yes, they will probably tell you can afford a gajillion dollar house because the more you spend, the more the agent, broker and bank make. Sounds like you're being smart about it though.

The only thing I would consider is that taxes. Are you moving to this town because of the school system for your child? You'll be thinking about that every quarter when you write that tax check. How long will your child be in the school system. If he/she is going to be in the system for the next 18 years are you ok with paying higher taxes for that period of time?
posted by eatcake at 2:38 PM on December 4, 2016

Also consider: while a house is not an investment, it is a forced savings vehicle of sorts. Your mortgage payments don't disappear into the aether, like rent; some of that money becomes equity. If you're worrying about your decreased ability to save, at least keep this factor in mind.
posted by the_blizz at 2:40 PM on December 4, 2016 [4 favorites]

I agree with the general theme that you can afford this house. I'd try to keep some of the 160k in reserve- come up with a solid down payment based on the eventual price and see if you can keep 20 or 30 grand in reserve, and don't forget you'll need to cut a big scary check at closing. I'd also recommend a buyer's agent who reps buyers only.
posted by vrakatar at 6:16 PM on December 4, 2016 [1 favorite]

I agree that you can afford the house. The online calculators are ridiculous. 2.5 times annual income puts you safely within widely-held parameters of affordability. Make sure you're getting a place that's reasonably priced for the area and that you're going to stay there for a good while and you should be fine.

I don't know that I would use the whole 160K for your down payment unless you have other liquid savings that you you are not mentioning. Aside from having extra cash for closing, etc., you may find that the upkeep on a house is more expensive than you're expecting, and if it's a house of any age it's almost inevitable that something large will break as soon as you move in.
posted by The Elusive Architeuthis at 7:20 PM on December 4, 2016 [2 favorites]

It's as simple as deciding what you can afford as a monthly payment. Your mortgage broker can help you figure out what your max budget for a house will be. Don't start with the whole number, start with what you want your mortgage payment to be.
posted by LKWorking at 8:14 AM on December 5, 2016

Yes, you can afford it.

The fact hat you have considerable savings is great, you can generally get better mortgage rates with a down payment of 20% or more of the full purchase price.

My advice is to talk to a few banks and get some mortgage quotes. Let them know you'll be first time home buyers. They can talk you through some of the things they would otherwise assume you know. (It isn't like telling a cab driver you're from out of town, reputable banks will not try to rip you off if its your first time.)

From that you can get a specific idea of what your initial costs and monthly payments would be, and put together a budget. That will be the real test that will allow you to evaluate whether you can afford it. (And I'm pretty confident you can.)

Being a NY'er moving to the U.S. gives you a tremendous advantage. Quote-unquote "small homes" will seem giant compared to your former apartment. It's easy to avoid the overpriced McMansions when 1200 square feet seems big.
posted by Cranialtorque at 11:45 AM on December 5, 2016 [1 favorite]

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