tl;dr How the hell do I figure out what a reasonable price range is?
About me: 29, male, living in Chicago. Never owned before. 762 credit score.
About my job: $142k/yr. Software engineer, work remote.
About my assets: Total net worth, $450k. Keep about 20k in the bank, 318k is in VTSAX, and the rest is in various 401ks, IRAs, and HSAs. I've been maxing out my contributions to those every year.
About my income: After taxes, health insurance, and maxing out my 401k and HSA, I take home ~$5500 a month.
About my current living situation: $2700/mo. rent. 1br in a River North high rise.
Mainly looking to buy because I've been paying rent for years and not getting any equity out of it.
My partner can contribute $800/mo towards a mortgage. Between that and what I'm currently paying, that's a $3500 monthly payment.
According to NerdWallet's mortgage calculator, that's about a $500k home, assuming a 20% down payment, a 6.538% interest rate, 2% taxes, and no HOA. Obviously the more HOA eats into the monthly payment, the less is left over for price.
But obviously, just because one can afford a $500k house, does not mean one should. The job market for software engineers was bumpy before the AI boom, and AI is going to cause/is already causing massive disruptions. And I've been told the real estate market is insane right now, which squeezes me in on the other side if it slumps while I'm holding onto a house.
On the other hand, I also know that paying down a mortgage is not the same as paying rent, because the interest payments go to the bank but the principal essentially goes to yourself. To my untrained eye, this sounds a little like a reason that you can afford a little higher a monthly payment for a mortgage than a rent.
Questions I'm not asking:
1. "How much house can I afford?" -> I already have a mortgage calculator; everything after that depends on my risk tolerance.
2. "How much house should I buy?" -> Depends not only on my risk tolerance, but how much I'm willing to trade my comfort for it. It is always possible to live cheaper and more miserably, and it is always possible to spend more for increasingly frivolous luxuries.
Question I am asking: amidst all these factors, both objective and subjective, how do I hone in on a price range that works for me? What tools or strategies have you all found success in?
Any other advice, pointers, words of encouragement are appreciated. I am overwhelmed with inputs and have no clear path forward to the output (price range).
How to buy a home "responsibly"
byu/LastStar007 inpersonalfinance
Posted by LastStar007
13 Comments
Is your partner recognized via law? Specifically marriage or something substantially similar?
You should not look at a home as an investment because you can’t cash out dry wall with a few mouse clicks and 10 min.
https://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/
> How much house can I afford
3x income is a good starting point. Savers may be able to afford more. Spenders less. Really depends on your budget and other goals.
Someone who wants to retire very early or have a bunch of expensive kids will be able to afford less house due to other spending compared to a childfree ascetic.
> How much house should I buy?” -> Depends not only on my risk tolerance, but how much I’m willing to trade my comfort for it. It is always possible to live cheaper and more miserably, and it is always possible to spend more for increasingly frivolous luxuries.
See above. Really, the easiest way to figure it out is to look at homes you like, make a list of must haves, nice to haves, and dealbreakers, and see what fits in your budget
So the first idiot check is go to some open houses for homes in the 300-350,000, 350-400,000 and 450-500,000 range. Take notes and discuss what you get in each range.
Second, if you want to buy a house with a non-spouse person go talk to a lawyer about a contract for what to do if either of you dies or one wants out. It is not recommended to do this but you can cover your rear.
Third start putting this money away every month and see how it pinches. Now, also add 1% a year for maintenance coasts. Live with this for a few months to see how it feels.
After these steps go talk to a bank.
>To my untrained eye, this sounds a little like a reason that you can afford a little higher a monthly payment for a mortgage than a rent.
Terrible way to think about it. Rent is the MOST you will pay a month, mortgage is the minimum. A busted AC costs thousands when you own and $0 when you rent.
The best answer is to make a budget.
I’ll add that at your income level, we were not comfortable with PITI higher than $2500.
> “Mainly looking to buy because I’ve been paying rent for years and not getting any equity out of it.”
It may not be true that you are not “getting any equity” out of renting. There is the opportunity cost of the money that would’ve gone into homeownership including interest payments, higher utilities, higher insurance, and the repairs and maintenance costs.
Plus, homeownership tends to trigger spending creep, for other things, such as furniture, nicer cars, keeping up with the Joneses, depending on what neighborhood you buy in.
If you’ve continued to live beneath your means and max out your investing, redirecting what would have been spent on total cost of home ownership (minus your monthly rent) the return on the redirected funds, is your equity.
Whether a home you could’ve purchased would have appreciated, and givin you equal equity, or more or less, it’s kind of hard to compute. But if you’ve been sensible about it, and it sounds like you’re someone who may have been, you’re not missing out on equity growth, you’re just replacing the appreciation of home value with a different form of investing and wealth accumulation.
I think the question is not “What can I afford?” and the question is moreso “What should I afford?”, that is really a very personal question and you are going to get a variety of answers here. When we bought our house, we specifically looked at a range between 250k and 310k (MCOL in 2022). It was very much a seller’s market at that time. We knew what we *could* afford, we knew what we would get *approved* for, and we knew what we *wanted* to afford. I really think that’s what it boils down to- finding the type of house you want and balance it with how much you want to spend per month. Factor in 1-2% of the home value for annual maintenance costs as well. The advice I always give people is don’t let your lender approve you for the maximum amount. Decide how much you want to spend, and get approval for that much. It’s too easy to let the idea of “only 10k more, only 20k more” creep in.
You look internally and ask yourself what you value and what stresses you.
You can reasonably afford $500K for the reasons you’ve said and continue to enjoy a savings. I also know that some calculators will also tell you you can afford $750K based on your numbers. That’s also where you’re going to have to balance your instincts with reality – because your neighbor who has your same numbers is going to view $700K as reasonable, which drives up housing prices so what’s left in the $500K range may not be desirable to you.
I personally settled on 2x-3x of household income as a comfortable range with a good down payment. I am still able to invest and save without putting it all into my home. I wouldn’t have felt comfortable putting more into housing, but again, it’s a personal choice. My instinct was to anticipate job loss (which I’m currently in), building of savings (which i have 2 years of expenses saved),
While I understand that renting is “throwing away money” there’s an exchange for the freedom to move, downgrade, upgrade to luxury, etc. I’m holding a home that is 15% below my purchase price so it’s unlikely I’ve ever recover my overall cost, but i didn’t overextend myself so I was able to build separate savings aside from my home equity.
Do not use your partner’s contribution in your budget.
Chicago taxes will be much closer to 3.0% of purchase price just fyi.
You should buy the cheapest house that meets all your basic needs. It always costs more to buy, maintain, and live in then expected.
Your partner – are you married? Or…Assume they lost their job? Can you afford to pay the whole mortgage payment the next month? If the answer is no – then you gotta choose a cheaper home.
Thinking about how much house you can afford is one way of thinking about it, but a better one is modeling the impact on net worth for renting vs buying. The feeling of throwing away money on rent is driving this, after all.
There are a couple good rent vs buy calculators, like this one at NerdWallet: https://www.nerdwallet.com/mortgages/calculators/rent-vs-buy-calculator
If you play around with the numbers, you’ll see the “optimal” answer changes a lot. If I plug in your numbers with a 6% rate of return on your non-house investments, you’d break even on the 540k house in 13 years. But if your return rate is 8%, renting will always be cheaper.
On the other hand, if you can find a 440k house and live there for 4 or more years, buying is better as long as your investment rate of return is 8% or less.
Long way of saying, use a model like this to compare your options
I think I can give advice. Early 30s male in Chicago.
You should think of your primary home as a cost mitigant. I remember back in 2020-2022 people were saying not to buy real estate because rates were going to come off our housing was too expensive, etc etc.
I come from a family of real estate investors and landlords and have my own set of doors.
What I can say is that your primary living is meant to mitigate rising inflation/rent costs. I bought a cheap $300k condo to live in while my rentals were worth more than 350k each. My small condo put my monthly expenses to be very low ~1k mortgage all in. At the time, I was prepared to increase my budget up to $2.5k mortgage. Why? Because I inherently know rents will always increase.
In the meantime, I’ve taken +50% appreciation on all my doors and personally locked in a low monthly fixed expense.
What redditors won’t tell you is that your rent will continue rising ~3% every year and decrease stability (some people saw 15-30% rent increases!!!) At the end of the day, your profit function should be to secure housing where all-in cost is less than your current monthly rent. So if your rent is $2,500, find a property where your monthly cash outflow is less than that, including expected maintenance costs. This will probably put you in ~$300k buy range. This way, you’re net cash flow benefit due to the buy.
Yes this will mean leaving River North high rise life. You can’t have it all.