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July 02, 2008


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My mortgage is slightly less than double my income, but when I bought it 4 years ago, it was about 2.5 times my income. But my next house I plan to buy will likely have a mortgage around 3x my income and right at the payment rate of 28% of my monthly income. Sure, I could live in my current house for the next 26 years and then possibly be richer (maybe not) when I retire, or I could live in the house I actually want to live in all that time, build up more equity due to appreciation, and then retire probably as rich or richer depending what happens with housing appreciation in my area and stock market returns.

I limited myself to a house worth 1.5x my annual income when I bought in 2003. Now, the remainder on the mortgage is about 90% of my annual household income. My lender did try to get me to borrow at my limit (as did my first realtor - watch out there too). Be careful when you buy and I would strongly advise to only buy the house you need, not the best house you can afford.

The suggestion from Millionaire Next Door is simple but ultimately isn't very useful because it doesn't take into a account what current interest rates are. If this recommendation was written back when interest rates were in the 8%-9% range how is this prove useful to somebody getting a 5% rate now. They can certainly afford a lot more house than the author intended.

Monthly out-of-pocket (mortgage P&I, property tax, insurance) is a much better indicator.

I guess we're ok in our little house then as our mortgage is about 120% of our total income - much less than the 200% MND and FMF suggest. And our mortgage payment is about 17% of our monthly income.

Too bad we're outgrowing it and will move next year.

All the commenters have been assuming that a household's total "annual realized income" is the same as total income, and that may be true, but I guess I am wondering if that is the case. Is there a difference between total income and "annual realized income" that would make the analysis under this formula different than what has been discussed previously by these commenters?

The 28% cap for housing costs - is that based on gross monthly income, or net of taxes (actual take home)? There's a big difference between the two.

Absolutely NO sympathy for folks who bought ARM's and sub-prime mortgages! Who cares if the realtor or lender convinced you to buy a home you couldn't afford? It all boils down to personal responsibility, a concept that has become foreign to most Americans.

For many years, federal law has REQUIRED lenders to print the interest rate on the FRONT page, along with how much the rates can change, and both the bottom and TOP rate the loan could go AFTER the first couple of years. You could just read the first page and not go any further along the documentation, and still be crystal clear in your mind just how high the rates could have gone. There's no excuse to NOT fear a 12.5% interest rate!

The market will self-correct in the coming years, and many people will finally wake up and learn to be more careful what they get themselves into. Far too many more will need to be treated like children who feel they are not responsible for their finances, and the government (we the taxpayers) will be asked to bail these people out, and the builders and lenders who fed the fire.

Lenders have already gotten the message. For those that are still in business, approving a mortgage or HELOC has gotten much tighter, even for creditworthy customers. This is a good thing! Maybe we'll go back to the days when lenders actually REQUIRED your monthly payment to be less than 28% of your income.

Don't lump all ARM owners into the same basket. While there was a big problem with products such as Option ARMS, there were also a lot of legitimate ARMS issued over the past years.

I'm currently in the 4th year of a 5-year ARM. We *never* expected to stay in this house for 5 years so we opted for the 3/4 % lower interest rate. Well, things change and we're still here. Thing is, my rate is tied to the LIBOR and the LBOR rate is now lower than my current rate. I've checked with my mortgage lender and if the reset was to happen today my payment would actually *go down* by about 1/8 % point. There's no certainty that this will continue but I've already got things in motion to refinance if the LIBOR starts to drastically rise.

While rules of thumb are nifty, I don't think they're helpful if your goal is to accumulate wealth (vs buy the most expensive house you can).

We determined how much we were willing to spend on a house based on how much we could spend each month after meeting our other goals (i.e. 401k, IRA) that would still leave us with plenty of discretionary income.

Salary ratios or expense ratios had nothing to do with it. Those ratios are designed to separate you from your money. Who wants to spend a full third of their income on housing???

I think you should finance as little as possible for your personal residence. It is NOT an investment. A house always costs you money every month with taxes, utilities and maintenance regardless of whether it's appreciating. Once you have paid off your mortgage the only way your personal residence could be considered an investment is if you earn more in appreciation than taxes, utilities and maintenance. Even then the return is probably not great.

When I went house shopping about 18 months ago, I had lenders telling me I could afford a $200k+ house. I don't know how they come up with those numbers, but I laughed at them. I crunched my numbers, decided I wanted a house payment less than I'd been paying in rent (I had a pretty high rent) and ended up buying for about $135k (fixed, of course). Haven't regretted getting a smaller house for more than a few seconds here and there when I think a 2nd living area would be really nice for entertaining. (And it would be, but that's for later.) My budget isn't stretched, I don't sweat it when they screw up my escrow and my payment fluctuates a hundred or two a month, like some of my friends.

It is especially good advice to know what YOU can afford to buy. Do not let the mortgage broker or real estate agent tell you how much to borrow. They will not be making the payment!

Tracee F - I'd sure like to know where one can buy a house for that amount. :) Good for you! I can't get a one-bedroom shack in a crappy area for less than $200K where I live. (Although, yes, I live in almost paradise) But it's still very discouraging since moving somewhere cheaper would not be realistic right now. Here's hoping prices drop considerably more in the next year or so!

My mortgage was 3x income at a 36% dti ratio. It was cheaper than rent including taxes and I paid it off in 12 years. Many people do make the mistake of only considering initial payments and ignoring the interest rate. These people shouldn't buy.

You are forgetting something very important - income can change. I am reading conservative suggestions here, but no mention of what you can really afford?

My husband and I have always based our mortgage on what we could afford if we BOTH were on unemployment. This allows us to sleep well and allows us to pay off/down the house very quickly. This in turn allows us to take advantage of the appreciation on a more expensive home when ever we desire without wasting that benefit on huge interest payments. By borrowing less, we get better interest rates and can stash huge piles of money. The cost of buying/selling is minimal compared to the extra cost of interest on a larger mortgage and WE make the decision as to when it is time to spend this money.

As for taking responsibility for ones choices, they will never learn. When the 'victims' state that they were told they could afford a $600/mo car payment, I ask...Were you saving $600 a month toward the car before you bought it? If not, why? Where did you think the money to cover the payment would come from? Isn't that your responsibility? This is usually where they create some fantasy excuse or realise that their brain had glazed over when they were told they might be able to have the fancy, shiny new car.

Oh, and my favorite. There are now so-called financial gurus out there telling people that it is not their fault that they have to file for bancruptcy...what ?!?! It is not their fault that they agreed to a payment or other financial terms that they could not possibly afford. These people are not talking about expenses from a car wreck or medical event. They are talking about plain ol' over spending. Unfortunately, this only feeds the victim mantality and those who believe it will continue to suffer until they actually seek out financial resources to help them, not ones that just pat them on the back and say 'there there now, I feel for you'

Wow - I've never seen such harsh 'rules' for not buying homes that aren't more than twice your annualized income. If that was the case, I couldn't live in my state. Our mortgage came out to be 3.8x (or 38.8%) of our annualized income - but we live a lifestyle such that we are able to live debt free (outside the mortgage) and we are able to make 2 extra payments a year on a 30 yr conventional fixed rate loan.

What it comes down to is this: If you can't afford it, you can't. If you're able, you can. It is up to the responsible party to decide.

I share the sentiment of an earlier poster that said they have no sympathy for those who claim they didn't know about the ARM. At the same time, some folks who had no intent to stay for more than 3 to 5 years are now stuck. But that was something I took into consideration when I purchased my why couldn't others see it? Perhaps they did, and they decided it was worth the risk. Now many folks do not want to accept the risk. And it blows my mind that we start to bail them out. I do feel bad and pray for them, but it is time to pay the piper.

It boggles my mind that I, the responsible person who can still pay the mortgage, am the one who is literally at the shortest end of the stick. Do I get the option to refinance for little to no fees for lower rates? That is what boils my blood.

It doesn't take a rocket scientist to see the folks with the boat, the H2, the F350 Extended cab long bed, the RV, and the 3500 sq ft home who got the ARM or Ballon that are realized and see that it is just inappropriate. Make them pay their dues, or if necessary, face the consequences.

we make a little over $100K a year and our home is $166K. We're doing great.

However it was not always the case. When we moved in it we were at $55K a year.

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