Don't Bite off too Much House

As I've written before, one of the financial "secrets" of millionaires is buying a house you can easily afford. As I've stated, this rule has worked for my family. Every house I've purchased and every house my wife and I have purchased have been worth less than twice our household's total annual realized income. (And since that first house purchase, our net worth has grown dramatically.) Yes, this meant that we have never lived in the "ritziest" neighborhoods in town and we didn't have a five-bedroom place on a lake, but we lived in nice middle class areas with friendly neighbors. This is certainly fine with us and it has been a key part of growing our net worth.

So I had to share this piece from Money Central with you. It cautions that you shouldn't bite off too much house or your net worth will suffer. Their key thoughts:

Thirty years ago, first-time home buyers were often encouraged to stretch as far as they possibly could to buy a house. Back then, that advice made some sense. Today, it can be a recipe for disaster.

A too-big house payment can, at the very least, leave you with too little money for other goals: retirement, vacations, college funds for the kids. At worst, it can leave you vulnerable to foreclosure and bankruptcy.

What’s more, you can’t count on your real estate agent, a mortgage loan officer, your friends and family or an Internet calculator to know what you can really afford. That’s a decision you have to make yourself after reviewing your finances, your future obligations, your goals and your gut.

So how much should you spend on a house? Here’s the short version: You’ll probably be most comfortable using the 25% lid.

I'm in agreement with this recommendation -- not only because it make s sense, but because it has worked in my life. Too many people stretch as far as financially possible to buy as big of a house as they can, and then when an unexpected financial emergency arises (which they always do), the dream home turns into a nightmare. Don't let this happen to you.

By the way, one way to save on housing (and other) costs is to move to another (cheaper) area of the country. And after retirement, you may want to save by retiring in a foreign country.

Comments

[Dus10]

Further, too many people do not calculate the additional costs to run a home that costs more (assuming "cost's more" means more square footage). With energy prices going up, it is a tougher pill to swallow.

[RS]

Yeah, I will second that. There are a lot of other costs that you have to take into consideration. Taxes is a huge one for us...they told us the estimate for taxes here was $8500 (which is too much anyway) and now the rumor is that it will be closer to $11000. Big suprise there, I am not looking forward to that bill.

Also, insurance, heat, water, electric, painting, furnishing, etc. all cost a ton. It is tough up here in the NE to own a house right now.

[Tom]

RS -- which state do you live in? I live in upstate NY and between the sky high property taxes and similarly high energy costs, I just don't see that buying a home makes sense. Of course, it will work in your favor if your house appreciates at 15% per year, but if it doesn't then it will just become a money pit. Having just moved here last year, I seem to have missed the run-up in prices and now all that remains are overpriced houses with high associated costs. The mortgage interest tax deduction may be nice, but I think it would subject me to the AMT (I would need to look more carefully), so it probably wouldn't be much of a benefit.

[cory]

I live in Upstate NY, everyone around here bemoans the "sky high taxes" but I've gotten the bills and they're really not that high. That prompted me to do some more homework, and I found that NY state property taxes vary WIDELY by county, so it's best to get some actual numbers before deciding that buying won't be worth it.

[Tom]

Yes, they do vary widely. You can download a PDF file with all of the property tax rates for NY state municipalities at http://www.osc.state.ny.us/localgov/orptbook/taxrates.htm . They are normalized as dollars per $1000 of assessed value, so comparison is easy. In general, you can count on paying between 2.5 and 3 percent of your house's assessed value per year in property taxes. Some are lower and some are higher (Schenectady is over 5.5%), but in my opinion they are uniformly too high. I would probably have to pay about $6000 per year in property taxes if I were to buy a modest home where I live -- my rent is just over $9300 per year, so property taxes alone would account for over 60% of my current housing costs (excluding energy). Given that I'm not in a position that I need to buy, I think I'm better off saving.

[cory]

Those numbers are very misleading. I live in Albany County where, according to those charts, I should be paying about 3%. My house has a market value of about 150k. So my tax bill should be about $4500, right?

No. The tax assessment on houses in New York state is significantly lower than the market value. The tax assessed value (as of 3/1/2006) is around 96k. For Albany county, you're only taxed on 71% of your assessed value anyway, so that number drops to somewhere around 70k. Then I pay 3% on that, which comes to a bit over $2000 (about 1100 for property, 1100 for school), or 1.5% of my house's market value. A number more in-line with the rates you'll see for the rest of the country.

I got the run-around asking these tax questions while I was buying, that's why it's important to get actual numbers before making your decision.