I have nothing against the person who started this thread, but lets suppose he/she purchases a home for $450K with 5% down. There’s a real possibility that by the end of the year this person will have a property that’s only worth $400K, yet will be forking out big monthly payments on a house that has depreciated in value. Is it still a great deal then ? This person will be just another statistic on the verge of a potential foreclosure if his/her income decreases for whatever reason.
Once again, my advice would be to find a home that is affordable at a much lower price range that reduces the financial risk. [/quote]
It’s not particularly risky at the level they’re talking about though. I’m in very nearly the same place they are in (same income level, buying a home that I will have about a 400K mortgage on). At this level, the total mortgage burden (PITI and all ancillaries like HOA’s, etc) winds up being 23% of my gross monthly. This is extremely affordable territory – and leaves me with well over 6 months of reserves. How affordable is it? Remember, we’re currently at pretty ridiculously low fixed rates – I’m locking in tomorrow at 4.375% (using 2 seller paid points). The payments on a 400K loan at 4.375% are roughly equivalent to the payment on a 325K loan with more normal (say 6.5%) interest rates. Essentially, if you buy a house at todays interest rates at 3x income, the actual payment is closer to a 2.5x income ratio payment under more normal interest rates.
I did some calculations the other day based on what the payment will be and what my positive cash flow will be after the purchase. I could afford to take a 20K/yr pay cut and not even feel it (other than my bank account wouldn’t be cash flow positive, but it wouldn’t interfere with planned expenses like nights out, vacations, etc). A 30K/yr pay cut would be doable and still make ends meet by cutting out things like vacations and economizing in other areas (no dinners out, etc). 40K/yr if I sold my car and bought a cheap reliable used car cash if it was absolutely necessary. Mostly just to see exactly how affordable it was, since my industry is pretty recession resistant.
Will the value of the house drop in the short term? Very likely – in fact, I’d say almost certainly. Will it make any difference to how affordable the payment currently is? Not in the least – and since I don’t plan on moving for quite a few years, I’ve got a long time for inflation (which most posters here will say is certainly coming) to bring the value of the house back up.
