Or, what is more likely, they opted for an interest-only or some other unconventional loan. These types of loans have been rampant the last several years. When they adjust and owners' monthly payments skyrocket, look out below. I hope these people have the landing gear on the nose of the plane.
Doodie347 wrote:
Some of these replies are pathetic. People suggesting spending 40-50% of your income on your house payment? Buying a $200k house on a $48k/year salary? Rest assured, these people either don't have a home, or have nothing in in theirs, because they can't make a sound financial decision to save their lives.
Sounds like you're the pathetic one. I have a $200,000.00 home and make about 50k a year. I also have 2 kids in college, an 05 car, a 401k flush with cash, no cc debt and I can buy all the beer I want.
If you can't match that then maybe you are the one who can't make sound financial decisions to save your own life.
Surprise! wrote:
Or, what is more likely, they opted for an interest-only or some other unconventional loan. These types of loans have been rampant the last several years. When they adjust and owners' monthly payments skyrocket, look out below. I hope these people have the landing gear on the nose of the plane.
That is exactly why so many have had to file for bankruptcy, lose their hose, etc. The thing is that if you're going to buy a house that takes half your take home income, you need to be SUPER frugal in all other areas of your life, or hope that your income increases while the payment for the house remains the same.
When I bought my house, my house payment was about 45% of my take-home pay each month. We planned to be rid of the PMI within a couple years, and so that along with a better rate when refinancing and some pay raises, that house payment is now only about 28% of my take-home pay (take-home pay lessened by the fact that a large percentage is put into my 401k and I never see it). But, if not for some serious sacrifice on my wife's and my part, we could not have been able to refinance when we did to get the better rate and get rid of the PMI. You can do it with a large perentage of your pay going toward the house initially, but you've got to be FRUGAL FRUGAL FRUGAL in order for it not to bring you down in the long run. Unfortunately, most people don't have that kind of discipline -- and that's not bragging on my part -- the statistics bear that out. If you know you don't have that kind of discipline, then buy a house with a lower mortgate payment.
Flagpole: Take a look at your 401k and see how it's been doing the last 18 months or so. Make sure that any of the funds you contribute to aren't heavily reliant on builders stocks. Of course if the dollar collapses and we have massive deflation, there's not a whole lot any of us can do. Good things there's a lot of nice places to visit in the US - I think my quick weekend trips to Europe via a $300 plane ticket may be coming to an end pretty soon.
There's a difference between OWNING a $200,000 house on $50k a year and BUYING a $200,000 house on $50k year. First off, you could have bought your house for much less, and experienced normal (or abnormally high) appreciation to get where you are.
Second, as someone with two kids in college, you're easily in your mid-late 40s or older, you've built up plenty of equity over the years, no doubt by owning cheaper homes, paying them down a bit, and then moving. So it's unlikely you took out a $200k loan on a $50k year salary, in ADDITION to your other obligations.
The original poster looks to be a few years out of college, not much savings, no assets, and a bit of debt. Suggesting that he buy a $200k house off $48k a year with those limitations is bad advice, no matter how you cut it.
Note that "lower mortgage payment" and "debt obligation" are not necessarily related. Too many of the wrong people have been sucked into ARM's, interest-only's, and other exotics.
Consider your lifestyle and your stomach for debt in relation to other financial goals - paying off current debt, saving for retirement,etc. If you're not sure where you're going to be in 5 years, i'd strongly recommend getting rid of your current debt and finding a rental that gives you more personal flexibility. Housing as an investment was great the last five years in certain areas of the country but not so impressive over a 30 year horizon when considered nationally.
Doodie,
When I first suggested he buy at 200k I didn't know anything about his finances. I did however ask what down payment he had. If he had a 100k to put down and only had to mortgage 100k then he would be fine at 50k salary wouldn't he? If he had 50k down payment and had to mortgage 150k he still might make it.
Yes I bought my house in 93 for about 70k while paying child support for 2 kids and only a 5% down payment on a 30 year loan. I got in so much trouble with cc's, about 17k that I had to do something. So when interest rates dropped, equity had increased I refied. I went with a 15 year fixed at 5.25%, took out 35k in cash to pay all the debt off and still have some play money. Right now I'm sitting on a 90k 15 year mortgage and make 50k. Now that this guy has provided some additional info I would say with no down payment, student loans, etc and interest rates rising he probably will be lucky to be living in a tent by this time next year.
Seriously though he should start saving now for a down payment and pay down some debt and maybe in 2 years or so he may be able to pull off a 200k home. And by then maybe house prices will start to rise and interest rates may come down a bit. It depends a lot on where he's looking too. Where I live 200k will buy a small 2 br. In another state 200k might buy a brand new 3-4 br with an acre of land.
Surprise! wrote:
Flagpole: Take a look at your 401k and see how it's been doing the last 18 months or so. Make sure that any of the funds you contribute to aren't heavily reliant on builders stocks. Of course if the dollar collapses and we have massive deflation, there's not a whole lot any of us can do. Good things there's a lot of nice places to visit in the US - I think my quick weekend trips to Europe via a $300 plane ticket may be coming to an end pretty soon.
Surprise!,
I got out of the builder's stocks 2 years ago. Good thing too. The last couple months generally haven't been too good for anything, but I'm in this for the long haul.
Sergeant Hulka wrote:
Note that "lower mortgage payment" and "debt obligation" are not necessarily related. Too many of the wrong people have been sucked into ARM's, interest-only's, and other exotics.
TRUE! Don't do the ARM or interest only loans. A fixed mortgage 15, 20, 30 years (whatever you can afford) is the only way to go.
Flagpole Willy wrote:
TRUE! Don't do the ARM or interest only loans. A fixed mortgage 15, 20, 30 years (whatever you can afford) is the only way to go.
I agree completely. I sleep great at night knowing that my payment isn't going to change. The peace of mind is worth the slightly higher payments in the early years.
Yes, too much risk in ARMs.
However, I do not agree with Flagpole in the near term. He stated that interest rates are going up. They have gone slighly up but I think they will level off now or go down a little bit in the near term. But with a mortgage, you have to look long term and predicting long term interest rates is nearly impossible.
Ibolt wrote:
Yes, too much risk in ARMs.
However, I do not agree with Flagpole in the near term. He stated that interest rates are going up. They have gone slighly up but I think they will level off now or go down a little bit in the near term. But with a mortgage, you have to look long term and predicting long term interest rates is nearly impossible.
Bernake is talking very tough about inflation. Certainly another interest rate hike is in order at the next meeting, but the real question is if it'll be 1/4 or 1/2 point. Even if the Fed pauses with their rate hikes, the housing market is toast. The Fed's job isn't to protect assets it's to fight inflation. The Fed has now raised rates 17 times in a row. That isn't going up slightly.
If you get a fixed rate, you certainly don't have to predict long term interest rates.
Question:
My wife and I have about 10 years left on a 15 year loan (we pay extra principle each month to pay it off early). Currently, after 4 years of owning the house we could expect 33% appreciation on our house. We have also taken out a 20 year loan on a 3.5 acre parcel of land, which we are also paying extra on principal each year in hopes that we will pay off the house and land at the same time. Our thoughts are with both paid off, when we sell the house whatever we clear (expect close to $175K after taxes and agent fees) can go directly into building a nice house on a paid off piece of land. We could either build a house that COSTS $175K and have $0 house payments, or build something nicer and still carry a small house payment.
Here's the question? Is this a good idea? I hear people tell me both yes and no. Yes because this keeps us pretty much debt free by the time we are in our mid-30's, and therefore all bring home money can go towards retirement, and living a comfortable life. Others say No, because we would make more by keeping a house payment but upgrading houeses every few years. This also allows us to keep the interest deductions on house payments longer. I'm not trying to get rich, but rather retire at a decent age and live a long comfortable retirement. Is owning a house the right thing to do, or is keeping a house payment and a larger house the right thing to do?
Note - for a little more clarity, I would consider us "debt free". We have combined annual net income close to $95K and with our current situation we are able to invest in my 401k and roth, my wife's 401b and roth, and our daughter's 529.......and we have no "debt" other than our house, land, and 3 years left on a car payment.
The fed controls short term rates. Yes, the fed has raised the fed funds rate every time they have met for 17 meetings. But compared to how much the fed funds rate has gone up the long term rates and fixed rate mortgage rates have only gone up slightly.
The long term rates are determined by the market. The fed has little control over them.
The fixed rate for a mortagage is correlated to the ten year treasury. The rates for 10 year treasuries have gone up slightly since the fed started raising the fed funds rate.
ARMs are usually tied to short term rates since they are usually tied to the prime rate. The prime rate is usually 3% above the fed funds rate.
The fed is a little paranoid about inflation at this point. If oil prices continue to rise (this will slow economy since it acts like a tax and is anti-infaltionary in every sector execept energy and transportation) the fed should mellow out and stop raising the fed funds rate.
There is a lag time from when the fed raises rate and the rate increase to have an effect on the economy. We haven't seen what the rate increase to 4.75 or 5% yet.
If the fed continues to raise rates and does do a 1/2 percent increase as you predicted the fed may do, the economy will suffer.
The core rate of inflation is what need to look at. The core rate is not too bad right now and with the last couple of rate increases it should be lower in the coming months.
It would all depend on the interest rate you get and its a quality of life question that you can only answer.
If you could earn a higer after tax consequence rate of return with your cash, you should invest it elsewhere and carry a low interest mortgage.
BTW in your current situation, you should pay off whatever loan has a higher interest rate first* and not pay off them at the same time.
*You will need to compare the after tax interest rate on your mortgage since it is deductible for you home and compare it to interest rate on the property you are paying off. (assuming the interest on the property is not deductible).
Doodie347 wrote:
Some of these replies are pathetic. People suggesting spending 40-50% of your income on your house payment? Buying a $200k house on a $48k/year salary? Rest assured, these people either don't have a home, or have nothing in in theirs, because they can't make a sound financial decision to save their lives.
this guy is right. If you make $48,000 a year that is $4000 a month. You have to give at least 5% of gross to 401k or you're retarded. So that leaves $3800. Then taxes take 20-21%. That makes $3002. Then this guy said he had $12k in a car and $14k in school loans. So, say $250 and $250 roughly. That leaves $2500. A $200,000 house right now with less than 10% down (that's what he has) will be around $1600-1900 a month (PMI included).
Do the math and you will see.
TV. Internet. Heat. Electricity. Water. Trash. etc. = $300-400
Car insurance = $50-100
gas = $50-300
Even at $1600 + the above he's at $2000 a month. Add food into that and that means no health club, no vacations, no eating out for $40 a pop.
For those of you who were just guessing the rule is 28% of your gross income for housing and 35% for all debt. This is an outdated guideline though as most people have more than just 7% in other forms of debt.
Anyway, if you figure taxes take 21% of gross, your home cannot take 40% of gross and have that be sustainable. That leaves just 39% for retirement, food, utilities, your car, and everything else.
For this example (of $4000 a month) retirement should be 5-10% and car should be over 10% ($450). It just doesn't leave enough.
darkness wrote:
Doodie347 wrote:Some of these replies are pathetic. People suggesting spending 40-50% of your income on your house payment? Buying a $200k house on a $48k/year salary? Rest assured, these people either don't have a home, or have nothing in in theirs, because they can't make a sound financial decision to save their lives.
this guy is right. If you make $48,000 a year that is $4000 a month. You have to give at least 5% of gross to 401k or you're retarded. So that leaves $3800. Then taxes take 20-21%. That makes $3002. Then this guy said he had $12k in a car and $14k in school loans. So, say $250 and $250 roughly. That leaves $2500. A $200,000 house right now with less than 10% down (that's what he has) will be around $1600-1900 a month (PMI included).
Do the math and you will see.
TV. Internet. Heat. Electricity. Water. Trash. etc. = $300-400
Car insurance = $50-100
gas = $50-300
Even at $1600 + the above he's at $2000 a month. Add food into that and that means no health club, no vacations, no eating out for $40 a pop.
For those of you who were just guessing the rule is 28% of your gross income for housing and 35% for all debt. This is an outdated guideline though as most people have more than just 7% in other forms of debt.
Anyway, if you figure taxes take 21% of gross, your home cannot take 40% of gross and have that be sustainable. That leaves just 39% for retirement, food, utilities, your car, and everything else.
For this example (of $4000 a month) retirement should be 5-10% and car should be over 10% ($450). It just doesn't leave enough.
Generally speaking you are right. To continue with a house payment that is 40-50% of your net income is a tough tough thing to do. But, if you're on a track to make more money within the next 2 years or you have a spouse who is going to be working full time in a couple years, sometimes you have to bite the bullet in order to get into a house while you can still afford its price. It takes INCREDIBLE frugality and patience to do this, and if something bad happens (loss of job, costly illness, etc.) you could really be in a hole quickly.
Just some points though:
1) 40-50% is much less doable with a car payment and student loans and credit card debt. That's why I recommended getting the car payment and the credit card debt gone BEFORE buying a house. Plan to drive that car for 10 more years after it's paid for.
2) No one needs to have cable (I don't, and I make MUCH more than $48,000 per year). No one needs to eat out at $40 a pop. I rarely eat out, and when the family does do it, the four of us usually do so for about $35 tip included. Once a year on our anniversary my wife and I head out to a nice place for dinner, but our frugalness during the year allows us to do that.
3) 40-50% of take home income for a house payment for a couple years is not a big deal. It can be done. If you're in a dead end job and see no ability to make more money, then don't do it.
4) You have to really want that house and make the sacrifices to do it. If the opportunity to buy a house in the neighborhood of your choice comes up and you need to pay 40-50% of your monthly income to do it AND you are financially responsible, you can make it work. In my case, it would have been worse to wait because at the time the houses in my neighborhood were going up 7% a year. Two years of being very tight with the money and now it has loosened up.
Just depends on who you are. My free-spending brother could NEVER make that work. I could though, and did. A home buyer has to be honest with himself about what kind of person he is.