I’m almost positive I’ve seen a thread on this before, but I’m having no luck searching.
My apartment lease ends in January, and I’ve been looking around for a new place. Where I am now is tolerable, not a bad place…but I’ve been here almost two years and the aggravations are building up. I found a very lovely place closer to work, but it will raise my rent by 8% to comprise 33% of my income. I’ve been hearing that you should never go about 30%, that 28% is the ‘rule’ and it’s best to follow this when you’re young.
In your opinion, how appropriate is this rule? I don’t have a car payment, but I have credit card debt. I don’t spend a lot on extras (no cable, expensive hobbies, etc.), but I still want to keep doing what I do. I have a stable job that I plan on staying in for the next few years, with raises coming.
Part of me knows I should stay where I’m at and pay down my debt. Someday I’ll need a new car, someday I’ll want to buy my own place, plus I have goals I’m saving for (Hawaii!).
But part of me wants to come home to a peaceful, pretty, quiet place that has a gate, perks like car washing and sand volleyball, no one hanging around leering, that’s closer to work, that just *feels * right.
So, for someone in my position, is 33% still too much to pay? Should I stick with the 25%? What do you think?
I think that this is a number that originated with mortgage lenders. I’m not sure whether that percentage is still applicable (seemingly not during this subprime mortgage fiasco), but when I applied for a mortgage all lenders required that payments for principal, interest, taxes and PMI (if required) not exceed 28% of my income. And that total indebtedness (credit cards, car payments, other debts) could not exceed 33% of my income.
If you feel comfortable paying more than that for a rental, that is between you and your disposable income.
I think these percentages are good as a rough guide for people who are considering relocating – as in, “Hmm, that job in New Jersey would pay a lot, but what kind of apartment can I get for $1500/month??”. Definitely not a substitute for a personal budget, since other expenses vary widely from person to person. So I wouldn’t pay the percentage much mind for this particular decision, instead, take a look at what you’re spending your money on and figure out where that extra 8% is going to come from. Playing with numbers, your rent will go up by 1/3, not knowing much else I’d say that’s not a small jump. You will save some gas money by being closer to work (and put fewer miles on your car) so factor that is as well.
Out of curiosity, I just checked on mine and it came out to 33.6%. When I moved out of my last place with the salary I had at the time, I was paying 25%. Incidentally, I got a raise in October - before that, my new rent was making up over 36% of my income.
For something like this, I think it’s important to look at the source income. For me, the actual percentage didn’t matter because I was more interested in how much money I’d have left over once rent was paid for the month. Would I still have enough for all of my expenses?
So I say look at your finances as they are, what you want to pay down on your debt, see what money you’d have left once all of these bills are paid, and see if it makes sense for you.
FYI the 28% rule is based on gross income - that is, before taxes and all that. Just a friendly reminder, as I’ve been in the situation where that’s made a BIG difference.
The 28% rule is for the homeowner so he or she has adequate resources to deal with emergencies (like a new roof) and aren’t too stretched to keep up with maintenance. You don’t want to be “house poor” as a renter but you also don’t have to worry about maintenance or house emergencies. Plus, that guideline was first crafted for families with a breadwinner, a stay at home parent, and kids. It’s still a good rule of thumb but for a single renter, you wouldn’t be risking financial insolvency by going slightly over.
Well, i would add up the extra amount you’d pay in rent, and subtract what you would save in gas. Now pretend that you take this money and pay down your credit card debt. How much sooner until you’re debt-free? If it’s just a few months, then it’d probably be a wash. But if it’s a few years, then I guess it’s up to you to see if the new apt is worth the extra years of debt.
I’ve taken a look at my budget past and present, I’ve given myself a day to consider it, and came to the conclusion that, with some minor adjustments, I can afford it.
I will send the application on Monday and, barring any problems, expect a thread on my new apartment very shortly!
Here in Dubai many people spend 60% on rent (keep in mind that taxes here are zero and rents are among the highest in the world). I personally would be uncomfortable with over 30% going to housing.
When mortgage brokers and companies decided the 33%, it not only takes into account unexpected expenditures, but the mortgage itself.
For instance – what if your taxes or insurance increase? It’s highly likely over time that both will increase. If your taxes go up by $600 a year, that’s another $50 a month increase in your payment. Plus, your escrow account is now going to be short so you will have to increase your monthly contribution to offset the new tax amount not by the $50, but as high as $80 depending on when your taxes are due – or you can send in a lump sum to fund your escrow so it’s just going to be the $50 a month. Not to mention, life gets in the way. Your next car payment could be higher than you’re paying now. You could have children, and have to pay daycare costs, etc.
So while it’s not necessary to use this calc for renting, it’s always a good rule of thumb. You just never know what will happen.
I was right at 30% when my job went kaput, but I’ll most likely stay within the same salary bracket when I get a new one, so it should even out. I’m in NYC, and some people spend up to 50% of their income on housing, because otherwise you get stuck in a shithole. Also, sometimes you’re willing to pay a premium to live by yourself, as opposed to with roommates, which should be taken into account. If you figure it’ll cost you another $400 a month to live alone, or to obtain a bigger bedroom (or a bedroom at all) and you consider that it’s worth it, you shouldn’t fret over income percentage, esp. if you have savings. If you’re pouring all your money into renting, though, that’s all money you’re not going to be able to save, and I think perhaps that’s the idea behind the 28% figure.
One might suspect that I am well paid when I calculate my half of the mortgage is 8.75%, but it’s just a really cheap house. I’ve never paid any appreciable money for rent, the best being $80 for a basement room with two windows. Although i’m envious of those with really nice places, worrying about meeting the bills rules them out.
As my neighbor is fond of asking, “I wonder what the rich folks are doing tonight ?”