The wife and I want to buy a house. The banker lady says we can afford a $300,000 house (payments of $2750/month). Aside from the fact that I don’t trust that the banker lady has OUR best interests in mind, I just don’t want to spend that kind of money. Unfortunately, we haven’t been able to find what I call a “decent” house for th $150K that I’m willing to spend. We finally, found a very, very nice house for $290K which brings us to our problem. Even though I don’t want to spend that kind of money, the bank says we can afford it (the payments are about 1/3 our gross income), and it IS a nice house…Are there any financial advantages (investment or otherwise) to spending the maximum amount that we can afford? I have heard (from a banking source, of course:rolleyes: ) that it makes financial sense to spend the most you can afford on a house, though for the life of me I can’t figure out why.
I recognize some disadvantages already: can’t spend any money on anything else, like vacation, new cars or food:D ; Either of us could lose our income, which means the house has to go; we would be stapped if some emergency situation came up.
So are there any financial reasons why I SHOULD spend this much money?
The rule of thumb is that standalone houses are a better investment than town houses are a better investment than condos (are a better investment than partnerships, which hardly exist anymore for residential purchases).
So if $290K is what it takes to get into the standalone market, that’s one reason.
Suppose you put down 20%. When the house value goes up, You get the appreciation on THE WHOLE HOUSE - so if the $290K goes up by 5%, your 20% ownership just got a 25% return. Of course, you’re paying the mortgage every month, which is more than rent, typically, but you’re also getting some of that back. Since it’s typically a great investment, the more of it you buy, the better off you are.
Do you have 20% to put down? If not, you’ll be robbed once a month, which makes the investment less attractive.
Again, though - it’s all if you can afford it. I’m not a big Suze Orman fan, but she’s right - every foreclosure happens to somebody who got approved for their loan. 1/3 of your pretax income is a strecth, unless you know your income will go up soon.
Well, the first question is what hat did they pull the $2750/month out of? Maybe for a 15 year mortgage, but a 30 year mortgage with the current rate of about 6% and a 10% downpayment would be closer to $1600/month. Add taxes, insurance, and maybe PMI, and you might get close to $2100-$2200/month. You’ll also get a hefty tax deduction.
Financial reasons to buy the house can't really be evaluated without lots of information about the house and its potential to appreciate. But you should consider that a mortgage payment that seems outrageous to you now, may seem very reasonable by the standards of ten years from now because of inflation and just general salary increases.
The biggest reason to buy the house is that you like it, you want to live there, it’s realistically priced for the area that you are in, and the only houses that are going for what you actually want to pay are the ones that have been rejected by the more genteel crack addicts.
I am not an accountant, but our accountant did encourage us to purchase as much as is reasonable. He figured that the increased tax deductions taken via the mortgage interest would help keep us in a lower tax bracket. And yes, assuming that your housing market is positive, you are making a durn good investment.
Other advantages, though not dependent on spending the maximum amount–as a freeholder you will have a slightly greater standing in the community. You will directly contribute to local schools and libraries etc. I always liked that.
Just watch those property tax increases and hope your income rises accordingly.
the way it was explained to me, assuming that nothing catastrophic happens (ant thats a pretty big assumption), no matter what money you spend on the house, the total value of the house will remain pretty much steady, ie. the amount you pay in mortgage will be blanced by the growing value more or less. Taking this into account, you don’t actually save any money buying a cheaper house so you might as well buy the most comfortable one you can afford. Theres a whole other raft of "if"s in there as well but thats the jist of it.
Another thing to consider:
What if the interrest goes up?
(Note, I have no idea how things work in the US, but in most places in Europe it’s relatively uncommon to fix the interrest rate for the entire duration of the loan. That means that the rate can go up as well as down! - Right now it’s possible to get mortgages at ~4%, fixed for 5 years, and ~3% completely floating. If you take a floating rate, you’re not paying much now, but one day it might soar to 8-10% overnight, and that could hurt!)
In the US, you often have your choice – a 15, 20, or 30 year fixed is wise if you plan on being in the house for a while, or a lower-interest variable rate loan with the balloon (typically at 5 years) if you don’t plan on sticking around too long.
I’d always taking fixed rates for granted on anything here in the 'States. I was suprised when my wife told me all the stories of the “crisis” in Mexico back in 94 (was it?). Apparently none of the interest is fixed. The payment on her Blazer doubled because the bank increased the interest. Of the people who didn’t lose their jobs or take paycuts, many lost their houses because of the interest increases, even though they remained capable of meeting thier “normal” payments (happened to my sister-in-law, according to my wife). I’m glad that here in the USA a contract is a contract is a contract. Credit cards could be a problem for us, though, since many are variable interest.
I wouldn’t do it. In my experience, what the bank says I can afford and what I really can afford are two very different things. As you already pointed out, if either of you lose a job you’re screwed. No more vacations or extra money. It’s never a good thing to have your expense/income ratio so close.
Also, keep in mind that banks have very low risk when it comes to financing homes. They don’t want you to be unable to pay your mortgage, but at the same time, they can always sell your house and get back their investment. Thus, they’re willing to lend you every last penny they think you can afford to buy a house.
There are so many factors, that no single answer is correct for everybody.
One rule of thumb I have found sensible, is that a new house should be a financial stretch - at least at first. Some say for the first 2 years. I’d say at least for 8-12 months. If it isn’t, chances are you underbought.
This assumes several things. Including, do you anticipate your salary being - at least constant adjusted for inflation, or hopefully increasing somewhat? Do you plan on living there for some number of years? What is the housing market like? What is your job/family situation?
You certainly do not want to end up in a situation where you put minimal down, RE prices decline, and you are stuck with negative equity - your house is worth less than you owe on it.
And while you can deduct mortgage interest, you ARE spending quite a bit of money to save those taxes.
Also, consider your lifestyle. If you like to travel, dine out, and buy nice things, you may resent being house rich and cash poor. Having to make a huge monthly payment can put a serious crimp on your budget.
I fear I may have muddied the waters somewhat. In short, I would not finance the max I am approved. However, if you play it too conservatively, you may well be quickly disappointed that you did not spend more, and you may want to move/upgrade quicker than you would have had to otherwise.
Just to confuse the heck out of things, we were very conservative with our first house. My wife and I were both working. We got a mortgage that we could pay out of one of our salaries, putting 20% down to avoid PMI. As interest rates changed, we refinanced a couple of times, also paying down principal and switching from 30 yr to 15.
About 5 years later, when my wife wanted to stay home with our kids, we could afford to.
After being in the house for 10 years, when my kids got bigger, we needed/wanted a bigger house. We figured this would be the time to do it, cause if we waited much longer they would start leaving and we would not need a large house. So we bought a house that was approx 2X the price of our old one. A very nice house IMO, but still far less than the bank would lend us on my salary alone. We were able to afford it because we had so much equity in our first house. We have been here for 5 years, and our current plan is to stay here maybe 7 more, until the kids are all in or out of college.
Looking back at it, we probably could have bought our present house 15 years ago and been in approximately the same position. This house would have been considerably cheaper than, and tho the payments would have been higher, in retrospect we realize that we could have afforded them. But we were unable to forsee that at that time.
Further, we learned A LOT from our first home. Both things that were good and bad about it. That experience enabled us to buy our present home which is such a good fit. There are so many issues to home-ownership, from wiring and plumbing, to neighbors, traffic, and grading and drainage - to name only a few. Buying a “starter” home can be a useful way to gain experience in such matters, that you can apply down the road in buying your dream home.
Something I had read repeatedly in various places was that purchasing a primary residence was more about lifestyle than an investment. I’m not entiredly sure where bup gets the idea that renting is cheaper since I right now pay less for my house a month than I did for an apartment 3 years ago. For me it was same money, more space, and eventually it would be all mine.
You may also give the crack houses a shot if you are looking at it as an investment in the sense of its very easy to pay it down quickly (making an extra $500 a mo pmt) In 10 years you will have a house and $60K-$70K in equity to put towards a newer nicer house. You might not be looking that far out, lots of ifs…
$290K for a decent house…sheesh…Thats a freakin mansion in Fresno, Ca
I don’t know where the OP lives. However, the Boston Globe ran an article yesterday showing where starter homes could be had for $250,000. Only 8 communities out of 100+ Boston area communities had anything available for around $250k. Most of these were not nice places and the houses were generally run-down fixer-uppers. I you went to a real estate agent and said that you wanted to buy ANYTHING for $150,000 in the Boston area, they would just laugh. They simply do not exist at all let alone “acceptable” houses.
I live in Boston too and there’s no such thing as a house for $150K for at least 30 miles in any direction. There aren’t too many condos for that price either; if there are, they are usually quite small, need work, or have something else wrong with them.
When we purchased our home two years ago, we were approved for significantly more than we knew we could reasonably afford. We ended up buying a house further away from work than we would have liked, because the housing market here in MetroWest Boston is ridiculously expensive (as Shagnasty pointed out.) We paid what we knew we would be able to afford, which was about 100K less than the bank said we could buy.
Our little two bedroom bungalow in Worcester has appreciated considerably since then, and we’ve been able to take out a home equity loan to pay off all of our credit cards, putting us in a better financial situation for the future.
Basically, I’m saying that you should stretch a little, but don’t put yourself into the “poor” house (figuratively, of course). You don’t want to be in a situation where you could lose your house. On the other hand, it’s a long term investment and by stretching a little bit you’ll be happier in the long run.
There’s a big difference between 150K and 290K, so think long and hard whether you can really afford that much house. And remember, the “banker lady” is a sales person, and probably doesn’t really care about your ability to pay past the first few months, after which they will probably sell your loan to another bank anyway. Buy just a little more than you think you can afford, not what they tell you you can afford.
What Shagnasty said. I’m in Boston area, more or less, and when I started looking, I decided to stretch and set an upper limit of 200K. The agent drove me around to all the houses in that range. In pretty much each case, it was a matter of pulling up to the curb and me saying “Just keep on driving.”.
The $300K mentioned in the OP will buy a pretty nice house around here, but nothing that’s going to have people’s jaws dropping. Even at that price, it will probably need some remodeling – people around here can get away with selling non-remodeled houses at the remodeled price.
My suggestion is to buy the least expensive home that meets your wants and needs. Spend or invest the difference.
The purpose of a home is to have a place to live and enjoy that living, not a financial investment. If you purchased a home that went up greatly in value how could you cash the gain? Either move out of the area, as other homes would presumably also rise in price, or you would have to downsize.
The banker’s statement about paying one third of income for a house is how the bank judges whether to make the loan or not. It’s a credit underwriting rule. You are not a rule of thumb, what you can pay or are comfortable in paying is based upon your circumstances and personality, not upon how the mortgage company conducts their business.