How much of income is it reasonable to spend on mortgage/loans? - Mothering Forums

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#1 of 16 Old 07-07-2010, 12:43 AM - Thread Starter
 
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We've been trying to sell our home, and I've been trying to get a grip on exactly what we should be looking for in a new one, price-wise. We own our current home outright (no mortgage) but have seriously heavy-duty student loans. We have no other debt. We are committed to the idea of moving, because this house isn't working for us for a variety of reasons, but just haven't figured out exactly what price range to look in for our next home. I'd love some feedback so help me sort this through.

I recently took over our family budgeting, and I think DH was sort of loosey-goosey about this. I've instituted a policy of holding back some money from every paycheck so we accumulate savings to pay for big, once-a-year bills like taxes, insurance, etc. I've got a grip on what our expected monthly expense are. But what else? I've been keeping the books now for three months, and each time I think we should come out of the month with more money than we do, and each time the difference is something I see as a "one-time" expense, only it seems we actually have them all the time. Badly-needed new tires, travel expenses to an out-of-town wedding, etc. How do you all account for those things? And how much of our take-home income is it reasonable to spend on student loan + mortgage debt? How much do I need left over for random stuff like new tires that aren't part of the utility/grocery/household expense calculation?

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#2 of 16 Old 07-07-2010, 02:41 AM
 
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The general rule of thumb is that housing shoud be 1/3 or less of your gross income. So if you take home $3000 a month after taxes then you can spend $1000 or less (preferably less) on your rent or mortgage payments.

Another general rule of thumb is to figure 10% of monthly expenses as "contingency." So if all your bills and expenses add up to $2300 a month, you set aside $230 for things that aren't regular expenses. Whatever doesn't get used one month goes into savings for emergencies.
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#3 of 16 Old 07-07-2010, 02:50 AM
 
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I was told the upper limit was anywhere from 36-45% of monthly income.

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#4 of 16 Old 07-07-2010, 08:34 AM
 
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I think housing should be about 30% or less of gross income, but housing plus other debt shouldn't exceed 45%. So, if you have a lot of debt you may need to reduce that 30% for housing.

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#5 of 16 Old 07-07-2010, 08:49 AM
 
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There are different rules of thumb. Dave Ramsey/Larry Burkett believe in 25% of your take home pay. And recently, I've heard the 30% of gross, too.

I will say, though, that we pay about 35% of our take home, and it is tight. Probably because another 19% of our take home goes to student loans. So, if I were you, I'd consider the student loans and mortgage together as my top percentage. So, if your loans are, say, 10% of your pay, I'd look for housing int he 15-20% range. Yes, you won't get as much house, but you'll be happier.
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#6 of 16 Old 07-07-2010, 09:01 AM
 
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My grandparents always told me 25% of gross pay. They have always been my go-to advice givers on money.

Of course, I did not follow their advice when we bought our current house and we lived house-poor while paying 40% of our gross pay to the mortgage. After a promotion and raise, we now pay 20% of our gross and are much more comfortable.

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#7 of 16 Old 07-07-2010, 11:37 AM
 
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We used to be at 19% of gross income, but as of Febraury, at 27% of gross income.
Personally, this 27% is not something I would ever sign up for again. It's just to large of my percentage I would be comfortable long term. I would like to see that number closer to 20%. All that being said, we also have no debt, so we very conservative with our numbers to start with.

As others have mentioned, most "experts" tend to recommend a 30% ratio.
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#8 of 16 Old 07-07-2010, 03:53 PM
 
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You had a lot of questions in there!

Occasional/unbudgeted expenses: many of these you really can budget for. Tires do wear out, and need to be replaced. If that happens every 4 years, you can divide the cost by 4, and put that much away each year, for new tires. School clothes/supplies, new shoes, dental appointments - these all come up on a regular basis. You've already planned for some of these - taxes and insurance. Just increase the amount you put away for non-monthly expenses to cover periodic things.

As for mortgage amount - you know what you pay now, and as you get more comfortable with handling the finances, you'll decide if this is a reasonable amount or not. If you think you can spend $200/month more, put that amount away for several months, and see if you miss it. If you have to keep dipping into that stash, you don't want to put it into a mortgage!

Since you're new at the family money thing, I strongly suggest you start tracking your expenses. You don't need fancy software, or even a spreadsheet - just a notebook, where you write EVERY penny you spend in a month. You might be shocked to see how quickly little things can add up in a month, and you might see simple, relatively painless ways to trim the fat - freeing up more money for a bigger mortgage payment.

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#9 of 16 Old 07-07-2010, 04:25 PM
 
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Quote:
Originally Posted by marsupial-mom View Post
The general rule of thumb is that housing shoud be 1/3 or less of your gross income. So if you take home $3000 a month after taxes then you can spend $1000 or less (preferably less) on your rent or mortgage payments.
You said gross but used net in your example.

I've heard tons of numbers. I think the general rule of thumb is 25% of net. Our mortgage payment is about 10% of our gross income. It was 16.67% when we bought the house. I calculate based on gross because I like to budget using our entire income because we can reduce what's taken out for taxes. Plus it includes medical flex, retirement savings, etc.

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#10 of 16 Old 07-07-2010, 10:15 PM - Thread Starter
 
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Quote:
Originally Posted by nd_deadhead View Post
As for mortgage amount - you know what you pay now, and as you get more comfortable with handling the finances, you'll decide if this is a reasonable amount or not. If you think you can spend $200/month more, put that amount away for several months, and see if you miss it. If you have to keep dipping into that stash, you don't want to put it into a mortgage!
Yeah, this is what I've been trying to do. The amount I've been able to put away each month has just varied widely, I think because of the sort of random things (tires, travel) we weren't budgeting for, since DH basically wasn't budgeting at all.

We pay 20% of gross income already in student loans. I think we're most likely to take on about another 6% in mortgage (we have none currently), so I guess that would be about 26% of gross in monthly debt, which is about in line with what you guys are saying. Since we're not getting much interest in our house yet I still have time to get a better grip on our situation before we need to commit to a new one ourselves. When DH did the money we were really disorganized and occasionally carried cc debt. This spring we got a small inheritance from my grandparents and used it to pay off the cc, pre-pay DD's tuition for the year and start a reasonable savings account, so our situation sort of changed, which is great. That's when I decided to take over, and I think it makes much more sense for me to do it since I'm our primary spender. Now I'm just trying to make sure we don't get in over our head by taking on a mortgage, since we're already pretty highly leveraged with student loans.

I appreciate all the feedback!

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#11 of 16 Old 07-10-2010, 09:19 PM
 
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My first question would be what is the difference in money between your student loan debt and your equity in your house? Ie If you sell your house and get $100,000 for it, and you have $50,000 in student loans, then you could pay off those loans, and have $50,000 left over for downpayment of a new house-- and you would no longer have the 20% going towards loans. So you would be back to having ~25% of your income able to be dedicated to house.

As for 'others' this is our hardest area. We always look at our budget which says we'll have x amount leftover at the end of the month, and then once we get there, it's half of that. If you're on budget with our other expenses, and it truly is just 'random', like repairs, new appliances, needed trips, then these are things I would normally use our savings for, but I suppose if it's every month, then the easiest thing to do would be track it for a few months and find an average to 'budget' for the random things. Anything above/below gets deposited to/taken from savings for the next time.

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#12 of 16 Old 07-11-2010, 02:13 AM
 
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Here is how you help account for all those "one time" expenses that crop up...make a YEARLY budget. Sounds crazy, but it works. Month to month, you aren't thinking about tires, oil changes, school clothes, new coats/swimsuits, birthday parties/presents, xmas, weddings, vacations, school fees/homeschooling matierals, church activities, etc. It';ll help you think of all thoe little things, and you can sort of bidget that into a mopnthly amount.

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#13 of 16 Old 07-11-2010, 11:57 AM
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Quote:
Originally Posted by marsupial-mom View Post
The general rule of thumb is that housing shoud be 1/3 or less of your gross income. So if you take home $3000 a month after taxes then you can spend $1000 or less (preferably less) on your rent or mortgage payments.
.
that is net, not gross.



our mortgage is 17% of our net income.

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#14 of 16 Old 07-11-2010, 04:14 PM
 
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Originally Posted by bobandjess99 View Post
Here is how you help account for all those "one time" expenses that crop up...make a YEARLY budget. Sounds crazy, but it works. Month to month, you aren't thinking about tires, oil changes, school clothes, new coats/swimsuits, birthday parties/presents, xmas, weddings, vacations, school fees/homeschooling matierals, church activities, etc. It';ll help you think of all thoe little things, and you can sort of bidget that into a mopnthly amount.
This is exactly what I do. I got the idea from Mary Hunt's book Debt Proof Living. I have a savings account at my bank dedicated to expenses that occur once a year or even less frequently. I have an amount auto drafted into savings each month. I personally have it divided into subaccounts such as car repair, life insurance, car tags, etc. in a notebook, but to the bank it's just one account.

I also keep a generic emergency fund of $500-$1000. I use the generic fund to boost a sub account as needed. For example, we just decimated the car repair account and it will take a while to build it back up. In the meantime, if we need more repairs I can use the generic account to pay for them. Until I added the generic account, I was transferring money from other subaccounts as needed which meant they were never building up to what they needed to be.

Until I started keeping this account my budgets always looked great on paper but never worked out. It's also nice to have a savings that's OK to spend. It helps me keep my other savings account which is for true emergencies off limits.
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#15 of 16 Old 07-11-2010, 05:35 PM
 
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Here's my .02 from someone who has BTDT with the "30% of gross income" rule of thumb: that's too much money going toward housing.

Now that I know better, the cynic in me thinks that the real estate industry came up with that figure to get people to spend more $$$. Cha-ching. You may be able to afford to spend 30% toward housing, but you won't be able to afford much else, including retirement and other investments. That's what I've learned, take it for what it's worth.

I've recently heard that you shouldn't spend more then 25% of your net income on housing, including taxes, insurance and maintenance. After crunching the numbers, my family would have been better off following that one. Hopefully, we'll be there soon :

So first, it might be helpful to figure out what kind of lifestyle you would like to be able to afford (after setting aside savings and retirement). What are the extras that want? Travel? Or date nights? Or coffee drinks? Hitting the big sale at ____ store? Activities for the kids? Then try to find balance between that and housing costs.
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#16 of 16 Old 07-11-2010, 11:51 PM
 
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Oh, and i absolutely DO agree 30% is too much..unless you have like..NO other debts at all....most people i know in real life can barely manage 20-25%.

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