According to Dave Ramsey, financial self-help guru, when purchasing a home for the first time you should have at least 10% to put down, get a maximum 15 year mortgage, and have your monthly payments total no more than 25% of your net income.
Heading over to the mortgage calculators at MLS we find that buying a $450,000 home with $45,000 downpayment and a 15 year amortization period at 6% interest would result in a monthly mortage payment of over $3400. That means you’d have to be netting over $13,000 per month. My SIL’s husband makes $250k per year and nets $10,000 per month. So Dave thinks that you shouldn’t buy a $450,000 home unless you are making well over $250k a year. What planet of cheap real estate is he living on?
Think that saving up more money for a downpayment would get you a better deal? Even doubling your downpayment from 10% to 20% on that $275,000 home would only decrease your monthly mortgage payment by $230, allowing you to net about $900/month less, which means instead of having to gross $150,000 you need only make $140,000. I’m sure that is a great comfort to us all.
At the other end of the spectrum, the “affordability” calculator at MLS says that if you gross $150,000 per year, have no debt, and get a 6% interest rate on your mortgage, you can “afford” a monthly payment of up to $4000 and a total mortgage of $625,000 (they don’t show the amortization period used for this calculation but you can bet that it’s way more than 15 years). Given 10% down that’s a $700,000 home. But given that a $150k salary nets you about $8000 per month, that’s a whopping 50% of your monthly income spent on the mortgage payment alone. Talk about debt enslavement!
So Dave says if you gross $150,000 you should only buy a $275,000 home whereas MLS says if you gross $150,000 you can buy a $700,000 home. I’m hoping that the truth lies somewhere in the middle!