COMMENT OF THE DAY: HOW MUCH HOUSE YOU CAN AFFORD “. . . Affordable is in the eye of the beholder. My brother wants to buy his first house, and I explained it to him thusly: To see how much house you can afford, NEVER start with one of those mortgage calculators. Instead, do the following: Evaluate your month to month finances. Figure out how much you can comfortably spend on housing every month, using your own situation of debts, expenses, etc. Multiply by 2/3 to see how much you can pay on a mortgage (the remaining 1/3 is escrow fees to cover required insurance, taxes, etc, which the mortgage calculators leave out.). THEN go to the mortgage calculator and work it backwards to see what price range you should be in. This will be your threshold for affordability. You will then probably want to knock off 10 or 12% and give that number to a realtor (this way if they show you something over your price range that you like, you can still go for it). That said, on a macro scale, the affordability indices do have merit. Large corporations use the data to help determine where to locate offices. Federal and State governments use them to help determine who gets housing dollars. But it is important that we not treat those numbers as gospel for what we, individually, can afford in terms of housing.” [ZAW, commenting on Where Houston Ranks for Affordability; The Rise of Bicycle Commuting] Illustration: Lulu
However much Texas economic development interests would like it to be the case, large corporations DO NOT make any site selection decisions on the basis of a simplistic housing affordability index. They project their expenses based on site-, industry-, and supply-chain-specific metrics; and they don’t generally care about whether housing is affordable for employees insofar as qualified labor is available and inexpensive.
These indices are generally useless for any practical purpose.
The good mortgage calculators do bring PMI, HOA fees, insurance, and taxes into the discussion. Otherwise, any ol’ loan calculator would do….
I usually tell folks to double the sale price and divide by 360 and you have a rough idea of the monthly cost (without PMI, just tax and ins.). Just work it in reverse for how much you can afford.
$2000 for housing available = $2000 * 360 / 2 = $360,000 house. This still considers you put 20% down on that $360k. @4.5% that is $1450/mo for the mortgage($288K).