When can I afford to upgrade my house?

[TBH]

Hi, folks.

I'm 31, spouse is 45, we have one child, age 4. We have been in our house for four years. It's great, except that we don't have much of a yard and I'd really like to be able to garden more and let my little son spend more time outside. I know it would be better for our financial well-being to stay put, but I'd like to move to a different house in a few years. My dream house costs about $400,000 right now. Not sure what it will be worth when I'm ready to buy it.

I wondered if people could help me figure out how much my income would need to be to afford that $400,000 house, assuming a $80,000 down payment.

Alternately, I like the idea of saving up a much larger down payment because our income fluctuates a lot and I'd rather keep our fixed expenses relatively low.

Here are our numbers:

Assets:
House worth about $120,000 (very conservative estimate, may be worth more like $150K but I'm assuming house values may drop again before we sell)
Retirement: $95,000
Emergency/short term savings: $40,000
College: $34,000
Other investments: $5000

Liabilities:
Mortgage, 5.25 fixed, 20 years: $46,000 balance

Income:
$5000/month gross in salary ($60,000 annually)
Also have freelance income, which varies a lot but will probably be at least $20K for 2008.

At the moment, my spouse and I have agreed to continue to work on shoring up our retirement savings, and also try to save for a down payment. We're expecting to save most of our freelance income, and also continue to put aside about 15% of our salaries toward retirement. Our goal is to save $100,000 outside of retirement and home equity, and then we'll re-evaluate where we are and see whether it's a good time to buy a different house.

Thoughts? Am I crazy to contemplate this? I may be able to find a house in an edgier neighborhood with a big yard that would be more like $250K, which might be more realistic for us, but I don't want to make the same mistake I made with this house and buy something that I'm going to be unsatisfied with in the long term.

[maat55]

I would wait until you can afford the payment on no more than a 20 year fixed and not more than 28% of your take home pay.

Call me a nut, but that's what I would do.

[disneysteve]

I wondered if people could help me figure out how much my income would need to be to afford that $400,000 house, assuming a $80,000 down payment.

One rule of thumb is to not spend more than 3 times your annual income on your home. So by that measure, you'd need to earn $133,000 to buy a house for $400,000.

The other rule is that your monthly housing costs (PITI) shouldn't exceed 28% of income, as maat mentioned. So run the numbers based on that. You can use the calculators at bankrate.com to play with the numbers.

[jIM_Ohio]

I am reading you have 90k equity in the home? You have the 20% down payment if you can sell your home.

I think it makes sense to buy the larger house in a down market. If you can sell your house now, you eliminate the risk of it dropping in value. Rent for a few months while you ramp up the savings, then look to move once you have the savings and the right price on the new purchase. I am guessing what you think is a 400k house might sell for around 250 or 300 if you bid low. Rates are also as low now as I would expect them to be for years.

Step 1a ramp up savings
Step 1b put your current house on the market and see if you get an offer
Step 2a rent an apartment
Step 2b ramp up savings more
Step 2c start looking for a new house
Step 3a find the new house
Step 3b make sure budget is right
Step 3c make a low offer
Step 3d keep looking
Step 4 move into new house

I assume step 1 will take you around 12 months (to sell). I think the time from step 1 to 4 is around 24 months. If you rented, how much more could you save?

[MonkeyMama]

I wouldn't consider a mortgage that large unless you could afford it on one income (something else I didn't see mentioned). Even then, it sounds like quite a stretch.

On $60k, I think a $250k mortgage is reasonable, personally. That would be about my limit. That was our limit when we made six figures, because we could still afford it on that income. (The one income was around $50k and to us it was a pretty easy house payment. We took on a $240k mortgage when we moved here and went down to one income. It was always an easy payment, but I wouldn't borrow a dime more. It would open us to significant economic risk to buy more).

Is there nothing in between there? It seems odd to me that you could maybe settle for $250k, but you really want the $400k house. What about a $300k house. $350?

I don't like that 3 times income rule of thumb. It has little to do with interest rates or your down payment. With low interest rates and a large down payment you can swing more quite easily.

[disneysteve]

I don't like that 3 times income rule of thumb. It has little to do with interest rates or your down payment. With low interest rates and a large down payment you can swing more quite easily.

I agree. I just like to throw it out there. I think the 28% of income to housing is a much better rule of thumb.

The 3 times income does consider that more expensive houses are more expensive to own and maintain, though. Just because you can afford the mortgage payment doesn't necessarily mean you could afford everything that comes along with that more costly home - taxes, utilties, lawn care, pool care, association dues, landscaping, etc. I think a lot of people make the mistake of looking at the mortgage payment only to decide what they can afford.

[TBH]

DisneySteve,
That figure of $133K income to afford a $400K home is about what my sister came up with. She's a big help for things like this. I don't know if we'll ever make that much money, tho. We're a lot better at saving than we are at increasing our income.

jIM_OHIO,
This is good advice, except that we couldn't save more money if we were renting. Our mortgage payments are $585 per month. I overpay a bit, $625 a month. Rent around here would be at least $900 or $1000, and a place that size would not be big enough for our stuff so we'd have to rent a storage space too. We might save a little money on utilities, but not much, because this is a row house and we replaced the windows and the furnace during our first year here so it's pretty efficient to heat. Maintenance is costing a lot at the moment, but the stuff than needs fixing would need to be fixed before we could sell the house anyway (water damage, termites, etc).

I am feeling very tempted to rush and buy something now while it's a buyer's market, but I keep telling myself that it's better to wait til we can really afford it and not let the decision be driven by what the market may do in the future. Also, there is no way I'd convince my spouse to move twice in a two-year period. He would never move again if I left it up to him.

MonkeyMama,
There is an odd split in housing prices here. There is great housing stock but the neighborhoods vary widely. Much of the city still has a lot of blight and high violent crime. A house in a safer neighborhood with good schools is going to be well over $300K. I'm willing to be in a more transitional neighborhood, but it's still hard to find a house in good shape with a nice yard.

Still, my spouse agrees with you. He says he thinks we'd find something nice for much less than $400, but I want to be prepared to go pretty high so I don't talk myself into a more frugal house and find myself dissatisfied AGAIN. I have always hated this house but agreed to buy it because it was such a good deal. I'm not going to uproot the whole family for something only slightly better. If we move again, this time I want to get a house I really love, and that's going to cost more money.

Also, I'm with you on buying a house based on one income only. One income for us is around $45,000. We can afford our current house on that income, but really we shouldn't buy more house if we are sticking to that rule.

I think our plan is probably good. Save like crazy, and wait til we can buy that dream house with only a $200K or $250K mortgage. Another factor is that in 1.5 years our child will be in public schools so we won't be paying for preschool any more, but I'm not sure how much summer camp costs so I don't want to assume our childcare expenses will be nil.

Thanks for the help, everyone.

[LuxLiving]

TBH, I'm assuming that moving to a lower COL area is out of the question? --where you'd be able to buy more house in a better 'hood, with less money? Also, once kiddikens is in regular school would one of you be able to go back for additional schooling that could increase the income?

[TBH]

TBH, I'm assuming that moving to a lower COL area is out of the question? --where you'd be able to buy more house in a better 'hood, with less money? Also, once kiddikens is in regular school would one of you be able to go back for additional schooling that could increase the income?

Yeah, we're not moving. We've been here a long time and really love it. Also, my parents just moved here, so now we have even more reason to stay. Housing is already pretty cheap here in Philadelphia compared to other cities in the NE.

Increasing income:
We both have advanced degrees already. The problem is we both work in nonprofits. I'm freelancing a lot more, so our income has gone up, but I'm nervous about relying on irregular income. I tend to want to live on our salaries and save the freelance income.

Spouse's salary is about $47,500 for a FT dayjob in mid-level nonprofit management. He can't really move up any higher where he is and he doesn't want to change employers, so his only income growth will be in normal cost-of-living increases, which are never higher than 3%.

I work part time and my hours vary a lot, but I make anywhere from $10-20K from my dayjob.

Freelance income also varies a lot, but is anywhere from $20K per year and up.

So $60,000 is a pretty conservative estimate of our income, but it's all I'd feel comfortable basing a house purchase on.

The best chance of income growth is in my freelance business, and I'm expecting that I'll be able to do more of that once the kid is in school more. So I do expect that our income will go up a little when that happens.

[LivingAlmostLarge]

So basically you want to save $80k and put down $200k on a $400k house? That sounds reasonable with a $60k income.