Is your housing cost 25% or less of your take home pay on a 15 year loan?

[MrsPete]

We don't have a mortgage anymore, but, yes, when we bought our first house the mortgage was just about 25% of our take-home pay -- and at that point, our take-home pay wasn't all that much. So we were working one week a month to pay for the house.

We took out a 30-year mortgage on that house, but we paid it on a 15-year schedule (I specifically remember my high school algebra teacher making us repeat outloud, "I want a simple interest loan with no pre-payment penalty".) We sold that house 13 years into our marriage, and at that time we bought our second house without a mortgage.

The thing is, to stay below 25% you have to buy less house. You may not have a living room and a separate family room or a kitchen with granite countertops. Our house is not fancy, and we don't have a garage. But it's in good condition, and it's in a great area with great schools. Yeah, it'd be nice to have something fancier -- and most of our friends do have "more house" than we do -- but the choice to live in a house we can easily afford has allowed us to max out our 401Ks since our very first professional paychecks, to invest for retirement and our children's college educations, and to afford the extras that we want.

 

[Friendly Frog]

I don't know if they still offer these...but another option might be a low cost re-fi to a 30 year loan (one with no prepay penalty!) then just pay extra to the principal. You can still pay off your mortgage in 15 years, but if you get in a financial pinch, you can just make the lower regular payment.

With the economy the way it is now. I am more concerned with liquid funds to cover a layoff, than I am paying off my home sooner.

Edit: Looks like the poster above me had a similar idea, so I guess those mortgages do still exist.

 

[Pembo]

Our mortgage is about 25% but with taxes and insurance, it goes over.

 

[sameyeyam]

Our house payment is 8% of our take home pay. I know a lot of people like Dave Ramsey (and I'm one of them). But sometimes I wish he would tell people to really think about what size home would fit them, rather than no more then 25% of your income. When we purchased our home about 10 years ago it was about 12% of our take home pay. I'm so glad we didn't go with the 25%, because DH has had a couple of lay offs and we didn't have to stress or worry about bills.

My rule of thumb is we should always be able to pay all of our bills (mortgage included) with the lowest paycheck. The other paycheck is for saving, large purchases and having fun.

Our gasoline budget for our cars actually exceeds our mortgage payment each month by about $200.

 

[ruadisneyfan2]

We are at 25.4% including taxes and homeowners ins. We didn't plan it that way. We originally started with a 30 yr, then refinanced around 8 yrs ago, took some equity out to redo the kitchen, and now have 7 yrs from Dec. til it's paid off. Can't wait to be done.
Also this is with both of us working FT. Couldn't do it on 1 salary. Taxes alone are over $600. 1800sf on 1/4 acre. I refuse to go any larger even if we felt like moving. Taxes are ridiculous so on a McMansion they are 15-20K per year.
I'll keep our cozy place, thanks.

 

[FINFAN]

our motgage is within that percentage, but our constantly rising TAXES are taking us down( and we are not in a McMansion, just a town that seems to think its residents have an endless supply of $)...they are now almost as high monthly as our mortgage. We have had a similar debate based on college funding etc., but whenever we start to add up the cost of improvements we would have to make (all at once vs. as we can comfortably afford them ) plus the realtor commision, cost to move etc. we are usually in the 40-50K range which is hard to take. We do not really *net* much and would still have a mtg wherever we moved to be within 40 miles of DH work...so we are staying put for now vs downsizing/saving. Honestley, we would have to find a location where the taxes are the main reduction, our mortgage would probably only lower MAYBE $300 max a month and it owuld take a long time to have that 300 a month cover the 40-50 grand costs of moving. When we bought we too gambled on the increased income plan, too bad the income got hit but the taxes did not.

 

[LovableGluttons]

We don't have a mortgage, but still pay property taxes and homeowners insurance. The ywp together run about $3,500 per year, which is less than 2% of our gross annual household income.

 

[DawnM]

We will have to be desperate to move back to a 30 year mortgage. We just refinanced last year FROM a 30 year to a 15 year. The interest rate is lower on a 15 year and for the first time we are paying more towards principle than to interest.

The bottom line on paying a 30 year was over $150K more! And paying more to principle was an option, but when amortized, we were paying over $300 more per month to interest, so we would have had to increase the payments we make currently by another $300 to pay the bank each month. We don't want to do that.

Dawn

 

[DawnM]

Well, your income is much more than ours then. $3,500 is not 2% of our income.

Dawn

We don't have a mortgage, but still pay property taxes and homeowners insurance. The ywp together run about $3,500 per year, which is less than 2% of our gross annual household income.

 

[dvcgirl]

I think that the 25% on a 15 year is a really good thing to shoot for, but sometimes in certain parts of the country, it's really tough to meet that.

You know, I think a lot of DR listeners live in the house where 100-150K can buy you a pretty nice house and so it's easier to meet that 25% figure on a 15 year fixed.

I *do* think that you really need to stay within that 25% of net income on a 30 year fixed mortgage though.

I love the ratio that Elizabeth Warren puts forward in her last book.

50% of your net income goes towards "Must Haves" in your budget. That's mortgage/rent, food, utilities, insurance, reasonable transportation and clothing.

30% should go towards "wants"....basically, discretionary spending....everything from piano lessons to vacations to eating out.

That leaves 20% for savings, 15% of which should go towards retirement....the other 5% can be for anything from college savings for the kids, to saving up for that vacation home down the road.

I think what happens to many Americans is that they go over that 25% for housing and then when they add in the rest of their "must haves"....they end up over 50%. So that leaves a shortage in either the "wants" category or in the savings category.

And if you do just a minimal amount of research into what Americans retirement account totals look like, it's clear that "savings" is the category that is suffering in a major way.

 

[DawnM]

You know, I haven't even included our retirement as income because I never see it!

So, I guess our mortgage is less than the 40% I thought it was.

Ok, going to recalculate.

Dawn

ETA: Oh, never mind. I did guestimate that amount and didn't realize it.....but it is a little higher than I guessed, so we are down to 38.5%

And she didn't leave charitable giving in there!

I love the ratio that Elizabeth Warren puts forward in her last book.

50% of your net income goes towards "Must Haves" in your budget. That's mortgage/rent, food, utilities, insurance, reasonable transportation and clothing.

30% should go towards "wants"....basically, discretionary spending....everything from piano lessons to vacations to eating out.

That leaves 20% for savings, 15% of which should go towards retirement....the other 5% can be for anything from college savings for the kids, to saving up for that vacation home down the road.

I think what happens to many Americans is that they go over that 25% for housing and then when they add in the rest of their "must haves"....they end up over 50%. So that leaves a shortage in either the "wants" category or in the savings category.

And if you do just a minimal amount of research into what Americans retirement account totals look like, it's clear that "savings" is the category that is suffering in a major way.

 

[Imagineer5]

What's the NET INCOME? Income MINUS health ins., taxes, etc? Or total gross income? I guess it'd have to be "take home pay" if it goes towards all that stuff. Hmm...

 

[DawnM]

Your gross minus taxes is your NET income. Whatever you have to spend on things like housing, health insurance, everything that does NOT go to the government.

Dawn

What's the NET INCOME? Income MINUS health ins., taxes, etc? Or total gross income? I guess it'd have to be "take home pay" if it goes towards all that stuff. Hmm...

 

[tlbwriter]

You know, I think a lot of DR listeners live in the house where 100-150K can buy you a pretty nice house and so it's easier to meet that 25% figure on a 15 year fixed.

I agree. As I said earlier, we live in a part of the country where housing is comparatively affordable. In 1999, we built a 3BR 2BA brick home, nice but not fully loaded (less than 2000 sq ft and no wood floors, granite countertops or 3-car garage) for less than $150K. Of course, if housing costs are lower, income tends to be lower too, but our payment on a 15 yr loan is comfortably below 25%. There are parts of the country where this simply isn't possible for the average family.

 

[DawnM]

I agree that income is lower. DH took a 40% pay cut when we moved to NC from California.

Dawn

I agree. As I said earlier, we live in a part of the country where housing is comparatively affordable. In 1999, we built a 3BR 2BA brick home, nice but not fully loaded (less than 2000 sq ft and no wood floors, granite countertops or 3-car garage) for less than $150K. Of course, if housing costs are lower, income tends to be lower too, but our payment on a 15 yr loan is comfortably below 25%. There are parts of the country where this simply isn't possible for the average family.

 

[momtosam]

Before I begin, I think sometimes Dave Ramsey doesn't live in the real world.

If we followed his advice back when we bought our home we never would have gotten into a home. In 2003 we got a 30 yr note on our house. I was pregnant and, at the time, the only one employed (Hubby suffered from the post 9/11 IT recession). Our payment was 30% of our take home before paying 20% in childcare once our DS was born.

I agree with you on this. I like to listen to DR, but on some things he is out of touch. I heard a caller ask the other day how much having a baby is going to affect their budget. He told them it's not as much as people make it out to be, meaning you don't have to have every toy and gadget that comes along. True, but Dave said the cost difference is really just diapers and formula and then he threw in at the end "and paying for daycare" like that was small beans. I'd love to show Dave how much we've spent on daycare the last 5 years! It is defintely a budget buster!

 

[5stljayhawks]

I was looking into refi and the total real cost. I have been in my house for 7 years at 5.625%, I can get a 30 year for 4.25%. My overall payment will drop about $350-$400 a month, great I thought. Then I was wondering what is the total cost. When I did the numbers and looked at the total amortized loan, for 23 years on my current loan and a new 30 year, total cost over the life the of the loans current 23 vs new 30 were within a $1K or $2K. When you refi did you run these #s or did you just look at the cash flow part of the situation. BTW I am a SAHD and our house payment is around 24% of net.

 

[DawnM]

No, I ran numbers and amortized.

http://www.bankrate.com/

Near the top there is a small icon that says, "calculators". I LOVE playing around with adding in extra payments, etc....

Dawn

I was looking into refi and the total real cost. I have been in my house for 7 years at 5.625%, I can get a 30 year for 4.25%. My overall payment will drop about $350-$400 a month, great I thought. Then I was wondering what is the total cost. When I did the numbers and looked at the total amortized loan, for 23 years on my current loan and a new 30 year, total cost over the life the of the loans current 23 vs new 30 were within a $1K or $2K. When you refi did you run these #s or did you just look at the cash flow part of the situation. BTW I am a SAHD and our house payment is around 24% of net.

 

[scbelleatheart]

We bought our house PRE-Dave Ramsey (well, we do a similar program, but I know there are many DR followers here).

We DID refi to a 15 year loan in December.

Our mortgage is more than 25% of DH's take home (I am not currently working and we have chosen that lifestyle for now due to several factors so me going back to work right now is not an option.)

We had planned to sell the house but honestly, in the market right now, I don't think we can anyway, so this discussion is probably not even worth an argument, but.....

I feel our mortgage is too high and eats up too much of DH's take home. I feel we could live much better if we had a smaller house and smaller mortgage. We are also looking at 3 kids in college and it will come before we know it!

DH wants to just stay where we are. He has several reasons for this. 1. He feels his salary will increase and we will eventually be paying 25% or less of his take home towards the house. 2. We haven't found much we like when we look at downsizing. He won't give up owning a few acres, so we would be looking at moving even further from his job. 3. We live in a very nice area with the best schools around. We currently homeschool, but should the need arise, we would not worry about the local schools if we put them in public school. 4. It is a huge hassle to move. 5. He really likes this house, area, and our large piece of property.

I am not asking about taking sides at all. We aren't in a huge fight over this. I am just curious what you would do/advise or what you already have done.

The acreage is a non-negotiable for DH. He hates sub-divisions and won't consider living anywhere where we can see in our neighbor's windows from our house.

Dawn

Sorry, you made me laugh! Piss off the porch kind of guy? That's how mine got potty trained.

 

[buzz5985]

Before I begin, I think sometimes Dave Ramsey doesn't live in the real world.

If we followed his advice back when we bought our home we never would have gotten into a home. In 2003 we got a 30 yr note on our house. I was pregnant and, at the time, the only one employed (Hubby suffered from the post 9/11 IT recession). Our payment was 30% of our take home before paying 20% in childcare once our DS was born.

I agree with you on this. I like to listen to DR, but on some things he is out of touch. I heard a caller ask the other day how much having a baby is going to affect their budget. He told them it's not as much as people make it out to be, meaning you don't have to have every toy and gadget that comes along. True, but Dave said the cost difference is really just diapers and formula and then he threw in at the end "and paying for daycare" like that was small beans. I'd love to show Dave how much we've spent on daycare the last 5 years! It is defint a budget buster!

When I bought my home back in 1987 - if the mortgage was more than 25% of our income - we would not have received a mortgage. Not only that interest rates were around 12%.

Best advice we ever received was this. When we were first buying the house - we would have qualified for a 15 year mortgage. But we were advised to take out the 30 year - make sure no prepayment penalty - and pay the 15 year rate. That way if anything should happen - illness, job loss - you were not locked into that higher rate. Thank goodness we listened. Becuase both happened. But - we have a little over a year left on our mortgage- DS is 13, I can retire in 4 years, if I choose to. It's a nice feeling.

Janis