How Much House Can I Afford?

‘How much house can I afford?’ is a question which begs us to ask the next question: “How much can I afford, overall?”

Here’s a full breakdown of how we tackled this process on our recent excursion into pursuing homeownership.

Before answering our 2nd, more important question of what we could afford, I was already pre-approved for the $365,000 property I was looking at. In other words, the bank had filled in the gap so, for now, we’ll run with the bank number and then come back to our title question at the end. I’ll include a review on where a mortgage of that amount places us relatively to others in the US.

If we pursued a higher mortgage, I am not sure if we would be pre-approved but for now, we’ll go with this $365,000 as the maximum we could afford… based on the bank’s opinion.

How Much Can I Afford?

Answering our first question required a dive into our overall lifestyle spend. We broke our spend out into three large categories:

  1. Housing,
  2. Student loans, and
  3. Full cost of living minus housing and our student loans.

We bundled a lot into cost of living so the full breakdown is below on each category:

First, our overall housing expense:

With the property we viewed first and were pre-approved for, the overall expense would have been $3,000 per month. A crazy amount that only 10% of households spend in the US each year.

How Much House Can I Afford? 2

For more background on the graph above, click here.

This was the property I was approved to buy, so at first glance I can see why many people don’t dive too deep into their numbers. For us, $3,000/month included principal, interest, taxes, insurance, HOA, PMI and an extra $250/month for a “housing general maintenance” fund.

As a rule of thumb, we are aiming for around $5,000 in a housing fund in case we need an immediate fix. Depending on the specific property we purchase, our next step would be to create a clearer picture of what our housing fund should be based on the replacement value of our household goods, the time an upgrade was last purchased, and our best probability of need that replacement within the next 3-5 years.

Second, we stared at our damn student loans:

Not much we could do here of course, except slow down our extra payments or go back to the minimums each month. In the meantime, we’ll keep riding this debt pay-down train as fast as we can while maintaining our overall money plan. After all, debt is only one piece of the puzzle. 🙂

Third, the all encompassing cost of living:

We’ve included a lot of items in our COL estimate, but the chief ones are food, insurance, the cost of our cats and our commuter costs.

The big one worth highlighting now is our cost of livings includes payments made to cover retirement and early retirement years.

We made sure to include larger recurring costs that popped up throughout the year. For us that means a few items. One, is pet insurance, which unfortunately had to be put to use recently this year, helped one of our cats pounce back to 100%.

The plus side is we don’t have to worry financially — since we’ve recouped $1,500 of our extra vet bills. Not bad considering his insurance was $500. That’s a 300% ROI, but most importantly our cat is healthy again.

How Much House Can I Afford? 3

So now that we tackled our 3 big components that make up our lifestyle spend, we can dive into the fun topic of seeing what we should afford.

How Much House Should I Afford?

At $3,000 per month, this was drastically different than our current rent of $1,700. To be fair, our rent is likely to spike up as it didn’t go up last year. We estimate the current value closer to $1,900 now.

So, of course we looked at all the fun pros and cons to homeownership, but we also looked at an eleven hundred dollar ($1,100) lifestyle increase.

That means we would need to cut our investments and/or curb the extra payments to student loans. Our cost of livings could be reduced further, but we’ve overall copied a frugal approach including our recent 90 Day Frugality Challenge.

Then, we had a conversation and both agreed we loved our tiny home approach since it has afforded us so many benefits in the DD household. Since looking at the first property ($365K asking price), we’ve adjusted our aim to places that wouldn’t require such a large adjustment in lifestyle.

We could technically buy a 250K home that’s a terrible value. We could technically buy a 300K home that’s a fantastic value. Price doesn’t equal value.

Another mistake we wanted to avoid is what many folks fall for — buying emotionally. An example is falling overly in love with the first place. We believe many houses can make a home, so be sure to see the market while its there.

One tip I’ve learned: If you’re convinced a place is worth X and you’re at a disagreement with the seller who believes the value is Y, then don’t budge. Stick to what you value the place to be.

When it comes to the value of a property we’ve extended the value to include the value to us personally, such as:

Living in a 1 bed/1 bath for another 5 years allows us to keep saving extra money to invest or eliminate debt. If we upgraded to a more expensive and relatively unneeded 2 bed/2 bath in the next few years, then our housing cost would spike up while our investments tumbled a bit or our student loan payments slowed down to their default payments.

On the plus side, if we maintain our tiny home lifestyle, we don’t face any disruptions such as having to furnish, decorate, and of course clean more space.

Buy opting into a much smaller mortgage than what a bank says I can afford, I also have the opportunity to afford early retirement by saving money on interest from the mortgage. Many people will fork over six figures of interest via a mortgage in thirty years.

Of course, most people also focus on the monthly payment amount and the range is remarkable here in the US as shown in the first graph above.

We moved from being in the top 10% of money spent by homeowners down into the 50th to 70th percentile.

By choosing to live below our means, we afford ourselves more opportunities to pay off debt and stack more to our investments.

Our 10 year goal is to have a 2 bed/2 bath, so we’re not scared any of our future goals will change based on the purchases we make today. Eventually we will get there, but only after we reinforce our foundations first.

A distillery must operate with the prospect of today’s work making money years from now. That’s our approach to housing, too.

How much house can you afford and how much did you opt-in for? If you’re still renting, how much house do you want to take on?

-Matt

P.S. For more on the topic of housing and how much one can and should afford for homeownership, check out this Millennial Money Minutes Podcast episode where we tackle the issue in 5 minutes:

^^Definitely check out the episode as it was one of the best ones we’ve done IMO. Enjoy!

7 comments… add one
  • Financial Coach Brad May 30, 2017, 6:31 am

    A lot of people don’t realize just how many costs exist beyond the mortgage. I spent time to calculate my costs as someone who no longer has a mortgage. Here’s the write-up: https://maximizeyourmoney.com/financial-fitness/with-no-mortgage-i-still-have-these-housing-related-costs/

  • Ryan @ Just Another Dollar May 30, 2017, 7:38 am

    We recently decided to put off home-ownership for another year after discussing our current debt & savings situation. When we do start looking, we’re planning to stay under $400,000 even though we could borrow upwards of $600k. Our plan is to get our ducks in a row, then watch the market for a good value duplex to help springboard us into the next stage of FI.

  • Mrs. Picky Pincher May 30, 2017, 8:23 am

    I looooove that you acknowledge there’s a difference between how much house you “can” and “should” afford. For us, the answer was “as little as humanly possible.” The market basically chose for us, though, since the real estate in our town was hot at the time. We had to swoop up whatever we could get our little Picky hands on, and that was a $145k mortgage in a nice area of town, with a yard, and good schools. It’s not much to look at, but it’s pretty safe, everything (mostly) works, and we’re happy. We don’t need a two-car garage or a swimming pool to be happy and hit our money goals.

  • Lily @ The Frugal Gene May 30, 2017, 12:23 pm

    Thanks for the breakdown DD!! 🙂
    Our situation might be a bit different. We had a 1.2 million mortgage with more half of that unpaid but it is rented out so I guess our mortgage/rent is $1500 for something that should be $5000/month. If we didn’t rent out then we would be stretched otherwise I would have never made such a big purchase.

  • Chris @ Keep Thrifty Jun 5, 2017, 9:00 am

    I really like how well thought-out this is. Most people go into home ownership owning too little of their house (a tiny down-payment) and without a good understanding of what the costs are. As in all things, the goal shouldn’t be to ask how much one can afford, but to ask how much house one needs.

    We ultimately got to the point that we’re now going through the downsizing process. If we had known what we really needed 10 years ago, we’d probably be in a very different situation!

  • Mike Jun 5, 2017, 1:25 pm

    Nice breakdown, not many people take into account all the other costs associated with home ownership…my wife and i will be looking for a mortgage later this year…right now we only pay $1,000 in NYC, which is really low…i expect our mortgage to be significantly higher but we need to figure out how much we can afford…
    Take care,
    Mike

Leave a Comment