Right now a basic 4S McMansion, a Chanteclair or a lightly optioned Silhouette, costs around 650K. You need 130K income to prequalify with 20% down. (I actually ran the numbers with a sales agent at Silhouette in early September, she told me that they’d want to see debt to income less than 40% based on 6.5% interest rate)
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Breaking out my trusty calculator:
$650K purchase price
-$130K 20% down payment
= $520K mortgage at 6.5% (if you’re lucky)
$520K @ 6.5% = P&I of $3286.75/mo
Property tax @ 1.25% of $650K = $677.08/mo
Insurance ~ $150/mo
Total monthly payment of $4113.83 which is 38% of gross income.
This does not include Mello-Roos, HOAs, maintenance or other debt.
The approximate tax benefit in a best-case scenario is $1047.90 (if calculating a 30% rate, which is generous for the tax benefit), for an effective payment of $3065.93.
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We earn about that amount, and I would NEVER commit us to such a monthly burden — especially one we couldn’t get out of if prices tanked further (or we’d lose our down payment…or worse).
Maybe I’m too conservative, but I think housing costs should be no more than 30% of one’s NET income, after taxes; and that assumes the family doesn’t have any other major obligations (student or other loans, unusual medical concerns, hobbies, etc.).
The formulas used by the lending institutions to determine affordability are based on the “olden days” when people had defined-benefit pension plans, employer-covered healthcare, more stable jobs, lower inflation and a better economy. Anyone who trusts these numbers is looking to be the next foreclosure “victim”, IMHO.
