How much home can you REALLY afford?

When an online calculator informs you that you — a household making $75k/year — can afford a $236-$288k house, you trust it, right?

No! Stop! Do Not Pass Go!

First, if you state your deposit is less than 20% the calculator should reach from the screen and slap you. Not only are you clearly not ready to buy a house, but you are going to pay an extra $600-$1000/year in “private mortgage insurance”. This is insurance most banks require you to pay to insure the huge mortgage you clearly can not afford. But they are going to stay quiet as they slowing suck 6% year after year for 30 years from you like a tick. Money talks, but it also keeps sage advice quiet.

An Example of Stupidity

So let’s say you do use one of these calculator, and you do make $75k/year, and have no deposit (slap). Sure enough, the calculator says you can afford a $236-$288k house. Awesome! For a “mere” $1750-$2000 in a monthly mortgage (30 year fixed rate at a historically very low 6%), you can afford the house of your dreams!

But let’s dissect this amount further and put it in different terms. Once you subtract your income taxes (30%) from your sweet top 25% of US Households $75k annual salary , you are left with $52,500/year for life’s basics — shelter, food, and clothing. Since you pay $21k – 24k/year in mortgage payments, you are actually paying 40% – 46% of your spendable dollars on that sweet shelter. Never mind utilities or maintenance of said shelter. You are going to pay 40%-46% of your household income for the next 30 years just to afford the luxury of having keys to the shelter of your dreams! Enjoy.

There is a better way

Listen to reason, not an online calculator. There are cultures where it is inconceivable to pay anything but cash on a house. Americans are rare in that more than half the country owns a home — few other societies can boast such spending. The American Dream of homeownership is unique, and expensive.

Be smart: spend no more than 2.5x to 3x of your household income on a house.

Now enjoy.

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