How much is prudent to pay for a house?

[NotUrsula]

DH & I are tossing around the idea of moving. We really don't want to, as the house is paid for, but there are some reasons why it might be a good idea in the near future. It has been decades since we purchased our home, and prices are hugely different now, in terms of price against income. I know that the banks have cracked down on the really insanely high approvals that had been the norm during the boom, but I'm wondering what other rather frugal people would think was a reasonable price range for our income.

We're 48 years old, and we have a gross dual income of a smidge over $110K, debt-free. The two kids will be starting college in 2014 and 2024, respectively. How much do you think we should be able to comfortably spend without putting ourselves in danger of being house-poor?

 

[beaglette]

DH & I are tossing around the idea of moving. We really don't want to, as the house is paid for, but there are some reasons why it might be a good idea in the near future. It has been decades since we purchased our home, and prices are hugely different now, in terms of price against income. I know that the banks have cracked down on the really insanely high approvals that had been the norm during the boom, but I'm wondering what other rather frugal people would think was a reasonable price range for our income.

We're 48 years old, and we have a gross dual income of a smidge over $110K, debt-free. The two kids will be starting college in 2014 and 2024, respectively. How much do you think we should be able to comfortably spend without putting ourselves in danger of being house-poor?

I would think that would depend on where you live, what size house you need, amenities, etc.

What are you planning on doing with your current house? Renting? Selling? If you're planning on putting it on the market for sale, wait that out. Maybe buy a house and rent your current one. Use the income from rent to double up on your new house payment and soon enough you'll have two houses paid for! (Lucky you!)

 

[kfeuer]

The conservative rule of thumb is that your mortgage and all fixed expenses should be no more then 50% of your take home income (which is not easy to do in many parts of the country, but since your current home is already paid for and you have no debt I suspect you could do it).

 

[NotUrsula]

We'll sell it, but we're not in a hurry, as we have the cash for the down payment, and the taxes on the current house are low. Our current house is 1100 sq.ft., but we would like to go a bit bigger, around 1800 or so.

My feeling is that the absolute outside that we should spend is 2 years' gross, and I'd feel more comfortable with about 20 months' gross. We live in a large midwestern city (but not Chicago.)

 

[dfchelbay]

Back when mortgages were hard to get. When you needed good credit, job history, etc. the bank allowed up to 2.2 of your income. I imagine we're back to those days now of having to show the credit score, job history, etc. So, $110,000 x 2.2 = $242,000 at most for a house.

For me, I would work backward to figure how much I want to spend per month on a mortgage. Decide how much needs to be budgeted for college, cars, insurance, utilities, savings, etc. Those will be the fixed items in your budget. See how much money is left over, and how much of it your want to use for a monthly mortgage payment.

If your home is paid off, I'd probably stay where you are. At least you have the peace of mind that if one of you lost your job, or have a health crisis, you don't have to worry about making the mortgage payment. I'd use all your extra cash to pay for college, so no one has to go into debt for a college degree. You can always get a home equity loan to pay for college, so that you can write off a chunk of those college payments you're going to be making in the future. Congrats on being young and debt free. It's good to see those old school ways are still important to some people.

 

[dawson5]

I think it really depends on the neighborhood too. If you are in a great neighborhood/school district and one of the smaller homes, I would add on.

 

[greggypetty]

Whatever you do, I don't think it would hurt to pull out a small personal loan to help you out.

 

[NotUrsula]

It's a great neighborhood that we love, but a VERY bad school district. A big part of the reason that we are considering moving is that we estimate that 4 years of high school for our oldest will cost us a minimum of $30K, and possibly as much as nearly $40K, which we will have to pay starting in 2 years. We have already sunk $34K into his education thus far. Add college on top of that, and it begins to make a certain amount of sense to move for decent public schools, since his sister will now be needing tuition paid, too.

If the market was still up we wouldn't consider it, but in the current situation there are some bargains to be had, especially if like us, you don't have to sell your current home before buying a new one.

 

[DMickey28]

I agree with the working backwards method. That is how we figured out how much house we wanted to buy and everyone we spoke to told us how smart that was!!

Figure out your fixed mothly expenses, your budget for groceries, you anticipated college expenses plus the min you want to put into savings. Then see what you have leftover and what you want to put towards a mortgage/ins/taxes.

I think that looking forward at HS for the kids, plus the extra space they take up as they get older with friends coming and going, it sounds like it might be a great time for you to consider a move. The fact that you don't need to sell ASAP is awesome, just make sure to calculate your taxes and upkeep expenses into your monthly budget when thinking about this. You might want to put the house on the market though since so many people are buying right now that can finally get into the market ... especially since you have wiggle room on what you will take for the house.

We just bought our first house. We bought an older home, just about 2000 sq.ft. in a GREAT town. The town is why we bought this house ... our DS is only 2.5 but we don't want to move for a LONG TIME after moving 8 times in 6.5 years. We ended up spending about 1.5x DH's current income. His income grows per year so in another year or two it will only have been 1x his annual salary ... We were approved for over $350K more than what we spent ...

 

[wdwfan16]

If it was me I would only want a 15 year mortgage in the $150-$200K range. How do you plan on paying for college? How are your retirement accounts?

 

[ceecee]

Maybe consider it since you are in a bad school district and have many years left for the kids. Are you using a private school now and will do public if you move and save tuition? Also keep in mind, houses don't sell well if the school district isn't good. We just moved a year ago, same school district which is rated "excellence" for the 6th year in a row, so a lot of people are moving here, our house sold in three weeks, we didn't get as much as we would have had the markets been better, but we saved even more on our new house. We wiped out a lot of our savings and have a mortgage again (hopefully only for 1-2 years). Our new house cost double what our old house did and our taxes are 3 xs more, insurance is more, etc.

 

[KKB]

Rule of thumb for house payment is NO MORE than 28% of your take home income, and total debt (including the house) NO MORE than 33%--note these are MAXIMUMS.
The questions regarding college funds & retirement are important...but I agree it doesn't make sense to pay for private school if you don't have to...

 

[Planogirl]

Rule of thumb for house payment is NO MORE than 28% of your take home income, and total debt (including the house) NO MORE than 33%--note these are MAXIMUMS.
The questions regarding college funds & retirement are important...but I agree it doesn't make sense to pay for private school if you don't have to...

So 67% for living expenses and savings? That's higher than what I normally hear but it sounds good even if impossible for some.

 

[NotUrsula]

It's a given that our current home will not sell quickly. It needs some work and it doesn't have a bathroom (or room for one) on the same floor as the bedrooms. However, it's a popular neighborhood for young couples, and if we price it right someone will buy it eventually.

Our retirement funds are a bit lower than we would like because we took a big hit in the market, and the same goes for the college funds; we are currently throwing a lot at them to rebuild. I got a late start on retirement because I was supporting my mother until she died.

We have never intended to fully finance the kids' college educations, especially not DD's, because by the time she reaches college we will be right at retirement age. We won't retire before 70 if we can avoid it, but sometimes health issues throw a wrench in these sorts of plans, so I don't want to count on it.

You can borrow for college, but not for retirement, and I think my kids would rather I let them finance part of college for themselves rather than have us pay it all but then need them to support us when they are 35. We give retirement the higher priority.

The mortgage on the house we have was a 30-yr fixed that we doubled up on and paid off in 11 years. We would probably go with the same plan again if we move, easing up a bit during the oldest's college years.