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How do decide a reasonable home price for income level


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2011 Dec 27, 7:23pm   36,669 views  90 comments

by justwantaniceplacetostay   ➕follow (0)   💰tip   ignore  

Say I am willing to pay $2,500 to rent a place. Is there a good calculator that can take into account tax savings from MI+PT deduction given income level and factor in the approx mortgage costs so I can see what amount of house I could get for $2,500 pm.

The only thing I have been able to find is to do some combination of TurboTax Forecaster Online tool and http://www.zillow.com/mortgage-calculator/

I am getting tired of renting in these crappy badly maintained communities in the south bay and am increasingly thinking that its worth taking the plunge just for a better quality of life. Avalon was decent but their prices have gone up in the last year...Does anyone see the same trend in the Bay Area.

#housing

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1   zzyzzx   2011 Dec 27, 11:58pm  

The lower you pay, the better. When buying a house, the objective shouldn't be to be making monthly payments forever, the objective should be to pay it off ASAP and not have a mortgage (like ~1/3 of all houses).

2   edvard2   2011 Dec 28, 12:09am  

Well... you have several options. First of all, consider renting somewhere else besides the South Bay. I'm paying $1,700 for a four bedroom house in the east bay, with a big back yard, a garage, and in a safe neighborhood. That's one option.

Secondly, there's more to buying a home than the mortgage. You have not only the mortgage, but property taxes, maintenance, insurance, and so on.

Everyone's finances and situation are going to be different. Everyone's own idea of what is cheap and expensive is different. $2,500 sounds rather expensive to me for rent but its obviously fine with you. Thus my point. Anyway, you might want to talk to a financial professional who can look at your finances and give you a realistic outlook on what you can and can't afford.

3   Dan8267   2011 Dec 28, 12:13am  

NY Times Rent vs Buy Calculator

As a side note, $2500/month is an awfully lot to spend on rent unless its in the Playboy mansion.

4   Jimbo in SF   2011 Dec 28, 12:31am  

IMO, the Mortgage Interest deduction is a wash with the extra Property taxes you'll have to pay. Insurance is only about $1k a year and a lot of maintenance you can do yourself, so neither are generally costly.

So, if you're willing to pay $2500 in rent, then that's a good place to aim for a mortgage payment. Or you could pay more in mortgage payment, if you feel you have the ability to pay down extra on your principal and will 'get' to that $2,500 payment in a few years.

A 4.25% 30 yr mortgage, would be about $500k of a mortgage balance for approx $2500 a month payment.

5   FortWayne   2011 Dec 28, 12:36am  

zzyzzx says

The lower you pay, the better. When buying a house, the objective shouldn't be to be making monthly payments forever, the objective should be to pay it off ASAP and not have a mortgage (like ~1/3 of all houses).

If the homeowner isn't insulted by your offer...you didn't bid low enough!!!

6   TPB   2011 Dec 28, 12:58am  

$2500 a month, and you sound like your average ham and egger, looking in the Mansion windows in sheer awe, just like the rest of us mooks, in this God forsaken country.

What in the hell is so goddamn important about having to live in "the Bay" or Calicornholia for that matter?

In the rest of the country, $2500 in rent, will get you a lot of attributes, but "crappy" wouldn't be one of them.

7   StoutFiles   2011 Dec 28, 2:07am  

justwantaniceplacetostay says

Say I am willing to pay $2,500 to rent a place. Is there a good calculator that can take into account tax savings from MI+PT deduction given income level and factor in the approx mortgage costs so I can see what amount of house I could get for $2,500 pm.

No. No no no. You do not buy a house saying "I can afford X in rent, so I can get a house with X mortgage. The mortgage should be considerably less, because you are taking on 30 years of debt while hoping that there are no financial hiccups. If you are paying the same to rent as you would to own, then continue renting.

8   Â¥   2011 Dec 28, 2:16am  

Is there a good calculator that can take into account tax savings from MI+PT deduction given income level and factor in the approx mortgage costs so I can see what amount of house I could get for $2,500 pm.

There's no good calculator I'm aware of, but I have a spreadsheet that tells me if you're willing to pay $2500/month for the next 30 years you can afford to max out the FHA limit (~$900,000 with 20% down).

Here's the numbers:

Price 900000.00
Down Payment 180000.00 20.00%
Loan Principal 720000.00

IO 2250.00 3.75%
PMI 0.00 1.15%
Prop Tax 937.50 1.25%
Tax Credit -1122.00 35.20%

Subtotal 2065.50

HO Ins 143.75
HOA/Utils 100.00
Maintenance 212.50 0.15%
Opportunity 461.66 3.00%

Total Other 917.91

Nominal Cost 2521.75 (2983.41 with Opportunity Cost)

Actual Expense 3606.18 (4067.85 with Opportunity Cost)

Average monthly cost of ownership over life of loan: 1928.46. This doesn't include the lost yield on the $900,000 you could have invested somewhere.

Your housing cost after the loan is paid would be around $1063.75.mo.

FWIW, going with a 5/1 ARM @ 2.5% with 30% down, the numbers look like:

$850,000 purchase price, $600,000 loan principal, $2000/mo nominal cost, $3000/mo actual cash outgo ($2500/3600 with opportunity cost). Expense after the loan is repaid is ~$1000/mo, average monthly cost is $1500 (assuming rates stay at 2.5%).

Jimbo in SF says

the Mortgage Interest deduction is a wash with the extra Property taxes you'll have to pay

that's funny, back when I was looking 10 years ago I left it off my calculations for buying a condo since it is true that the MID was a wash with taxes & HOA fees. Now that interest rates are 3% and not 8%, this is probably more true : )

9   clambo   2011 Dec 28, 2:17am  

1/4 your income for the mortgage. That leaves 3/4 of your dough for:
1. chicks, cars, booze, travel, guns
2. savings/investments
3. goodwill/target for clothes, ross/payless for shoes, netflix/roku for entertainment, cheap vietnamese food and in-n-out burger fixes.
Did I leave anything out?
Oh, I did leave out "lose 1/2 of total net worth" and "pay 1/4 of income for 18 years for child support."
Buying a house is your #2 most risky financial decision. You can always reverse mortgage the dump someday.
No man yet has figured out how to "reverse mortgage" a divorce. When he does, he's gonna get the nobel price for economics.

10   edvard2   2011 Dec 28, 2:34am  

Bellingham Bill says

Here's the numbers:

Price 900000.00
Down Payment 180000.00 20.00%
Loan Principal 720000.00

IO 2250.00 3.75%
PMI 0.00 1.15%
Prop Tax 937.50 1.25%
Tax Credit -1122.00 35.20%

Yeah.... only problem is that 20% of 900k is $200,000, or approximately 7 years worth of renting a $2,500 house- just for the down payment. Down payments just don't magically disappear. You would have still spent a wad of cash up front, which is important to consider in any long-term mathematical equation. Also- you had better have absolutely perfect, squeaky-clean, totally flawless credit in order to get a 3.75% interest rate.

So in other words, the scenario above is using the absolute Best scenario, and in the end... we're still talking about a million-dollar house, of which a similar one can easily be bought almost anywhere else in the USA for 200k or less.

11   B.A.C.A.H.   2011 Dec 28, 3:25am  

The GOP says

What in the hell is so goddamn important about having to live in "the Bay" or Calicornholia for that matter?

Some of us grew up and were raised here with deep roots and extended family.
Others are hipsters who come here from all over the USA because The Bay Area is so Cool And Hip.
And others have their sites on The Fortresses along the Left Coast, including like The Fortress in the Bay Area:

like from Patrick's news links:
http://japanpropertycentral.com/2011/12/the-china-money-myth/?source=patrick.net#post-7306

".... The defining factor is that the top ranking countries can all provide permanent residency for foreigners who purchase real estate. A recent report by the Hurun Research Institute and the Bank of China found that 60% of China’s rich were either in the process of emigrating or considering doing so...."

"...A recent survey by Soufan, one of China’s largest real estate portals, showed that 50% of Chinese respondents want to invest in America. In second place was Canada with 11.4%..."

12   Katy Perry   2011 Dec 28, 3:48am  

The GOP says

What in the hell is so goddamn important about having to live in "the Bay" or Calicornholia for that matter?

It's 70 degrees today in my town( Temecula Murrieta CA) and 63 degrees in SF Bay Area Today oh and in SF This week the lowest Night temp is 48 degrees.

13   Katy Perry   2011 Dec 28, 3:50am  

clambo says

No man yet has figured out how to "reverse mortgage" a divorce. When he does, he's gonna get the nobel price for economics.

How about Fake boobs and yoga classes for the ex so she can get married off. hehe

14   Katy Perry   2011 Dec 28, 3:54am  

StoutFiles says

No. No no no. You do not buy a house saying "I can afford X in rent, so I can get a house with X mortgage. The mortgage should be considerably less, because you are taking on 30 years of debt while hoping that there are no financial hiccups. If you are paying the same to rent as you would to own, then continue renting.

Bingo Totally agree!! ha and you said BUY a house hahah! if you can Buy a house well then BUY the House ( I don't mean rent the money BTW.)
Renter= me
home borrower =you
Owner= my grandmother

15   REpro   2011 Dec 28, 3:55am  

If rent you can afford is $2500/mo. and PITI for the house is the same, is not enough with situation of declining/flat RE prices. You should also have some return on your money spent on down payment, closing costs, update, and differed maintenance.

16   edvard2   2011 Dec 28, 4:13am  

Katy Perry says

It's 70 degrees today in my town( Temecula Murrieta CA) and 63 degrees in SF Bay Area Today oh and in SF This week the lowest Night temp is 48 degrees.

Yup. And for the last few weeks I've woken up in the Bay Area to frost on the cars and on the back lawn. Meanwhile in Hawaii its around 75 degrees all day, every day.

17   Jimbo in SF   2011 Dec 28, 4:33am  

StoutFiles says

justwantaniceplacetostay says


No. No no no. You do not buy a house saying "I can afford X in rent, so I can get a house with X mortgage. The mortgage should be considerably less, because you are taking on 30 years of debt while hoping that there are no financial hiccups. If you are paying the same to rent as you would to own, then continue renting.

The other side of that argument is that you are "fixing your house payment at $2500 by buying, while rents will rise over that 30 years".
I personally am able to pay down principal, so the actual monthly payment reduces every time I re-fi. After 4 yrs into a 30 yr mortgage, my monthly payment is below equivalent rent and the original mortgage is 50% paid off.

18   Katy Perry   2011 Dec 28, 5:04am  

edvard2 says

Katy Perry says

It's 70 degrees today in my town( Temecula Murrieta CA) and 63 degrees in SF Bay Area Today oh and in SF This week the lowest Night temp is 48 degrees.

Yup. And for the last few weeks I've woken up in the Bay Area to frost on the cars and on the back lawn. Meanwhile in Hawaii its around 75 degrees all day, every day.

bet there is more work in the Bay area though.

19   REpro   2011 Dec 28, 5:07am  

Katy Perry says

It's 70 degrees today in my town( Temecula Murrieta CA) and 63 degrees in SF Bay Area Today oh and in SF This week the lowest Night temp is 48 degrees.

Its 65 degrees Day and 43 degrees in Night now in Dallas, big deal…

20   BayArea   2011 Dec 28, 5:45am  

I'm not sure if it has been said yet, but "should pay" and "would be loaned" are two different things.

From a bank's perspective, they will generally loan you some amount where the monthly mortgage payment does not exceed 45% of your gross monthly income.

It's debatable what you "should" pay. "Should" has very different meanings in different parts of any city, county, state, or country.

21   edvard2   2011 Dec 28, 5:58am  

Katy Perry says

bet there is more work in the Bay area though.

I thought we were comparing weather? Besides- given the choice between tropical paradise and the Bay Area... how many people do you think are gonna raise their hands for the Bay Area?

22   StoutFiles   2011 Dec 28, 6:09am  

Jimbo in SF says

The other side of that argument is that you are "fixing your house payment at $2500 by buying, while rents will rise over that 30 years".
I personally am able to pay down principal, so the actual monthly payment reduces every time I re-fi. After 4 yrs into a 30 yr mortgage, my monthly payment is below equivalent rent and the original mortgage is 50% paid off.

As if renting and a mortgage are a straight up comparison for monthly costs. On the flip side, renters can usually fix their rent costs per year, and if the rent rises too much, then go somewhere else, or then take a look at the housing market, which isn't going anywhere anytime soon.

23   SFace   2011 Dec 28, 6:18am  

justwantaniceplacetostay says

Say I am willing to pay $2,500 to rent a place. Is there a good calculator that can take into account tax savings from MI+PT deduction given income level and factor in the approx mortgage costs so I can see what amount of house I could get for $2,500 pm.

A good starting point is what 417K in borrowing can get you as that will yield the cheapest rates. About 1,950 in mortgage and 600 with 500 principle and 1400 interest strating off.

MID depends on your tax situatiion. The sweetspot for MID is around 150K level-220K gross level which would easily pay your property tax and maintance reserve and P&C insurance.

So without anymore facts, anything between 450K - 600K appears doable based on your 2,500 parameter.

When you buys things, you must consider incremental value

24   bmwman91   2011 Dec 28, 6:23am  

First, ditch the Avalon BS. I used to live in a nice, large professionally managed complex that was aimed at high-tech workers & families. Rent WAS reasonable (1100SF 3BR, 2nd floor, end unit, next to pool...$2300/mo). A 700SF 1BR was also about $1500 in the same complex (I was in the 3BR with roommates). NOW, the same 3BR goes for $3400, and the same 1BR units for $2300 or more. Google's 2011 hiring binge, along with hordes of people that want to wait & save before participating in the (obviously) ailing housing market, have driven rents up by incredible amounts in the Bay Area, particularly around Mountain View.

So, faced with a big rent increase (Prometheus was going to be "nice" and only crank it up to $2600 from $2300), my fiancee & I moved 2 blocks away (same zip code). We are renting a 1000SF 2BR, 2 story townhouse apartment in a 12-unit building for $1775/mo (plus all utilities). The building itself is nicer, and generally quieter than hoity-toity Central Park @ Whisman Station was.

I looked into south bay Avalon complexes wen my lease at CP was expiring, and all of the reviews of them that I read were horrendous. Basically, Avalon markets themselves as being high-end communities, charges correspondingly high prices, and then you get to live in a mediocre cage with paper-thin walls. With the exception of one of the newer complexes, the Avalon places in the South Bay all look like run-down dumps that were build 30+ years ago (because they are). They pull a bait-&-trap on tenants with relatively low intro lease rates, and then crank it up when renewal comes around.A lot of reviews mentioned cockroaches, too (although to be fair, that is usually the tenant's fault as much as the landlord's).

Find a smaller complex to rent in. They cost less, and the management is generally a lot better since one unhappy customer can actually hit their bottom-line hard. Avalon and places like that don't give a flying fuck about one, or even a half-dozen tenants packing up & leaving.

25   Patrick   2011 Dec 28, 9:49am  

REpro says

If rent you can afford is $2500/mo. and PITI for the house is the same, is not enough with situation of declining/flat RE prices. You should also have some return on your money spent on down payment, closing costs, update, and differed maintenance.

I take all that into account in my calculator, which I should probably make free again.

Anyway, the answer is $386,994 if you can afford to pay $2,500 a month, assuming no housing depreciation or appreciation, a 25% marginal income tax rate, 20% down, 7 year ownership term, and some other common assumptions.

So you can afford about a $400K house.

26   JodyChunder   2011 Dec 28, 10:04am  

clambo says

/4 your income for the mortgage. That leaves 3/4 of your dough for:
1. chicks, cars, booze, travel, guns

this boys got the right stuff here

27   JodyChunder   2011 Dec 28, 10:08am  

Nomograph says

NEWSFLASH: If you buy your clothes at Goodwill and eat cheap fast food burgers, you won't have to worry about getting any chicks.

Jeez, you'll get WAY more play with a Nissan Leaf.

Nomograph: you have a point here. living cheap is all right but be carefull as you will get the sugar diabetes eating junk food and sweets all the time

In my experience: LAdies do not care about your clothes. they want a strong dominating man with $$$ and good with kids.

28   JodyChunder   2011 Dec 28, 10:11am  

justwantaniceplacetostay says

ay I am willing to pay $2,500 to rent a place. Is th

I done the math. you could afford to rent almost four of my 2200 square feet homes all at once for that kind of money. i would have never dreamed of paying so much to rent a place to live in all my year

29   TPB   2011 Dec 28, 11:11am  

B.A.C.A.H. says

Some of us grew up and were raised here with deep roots and extended family.
Others are hipsters who come here from all over the USA because The Bay Area is so Cool And Hip.

That I can understand the later, not so much.
I mean when South Beach got all hipster dufus on us, back in the early 90's, all of the COOL people bailed.

30   TPB   2011 Dec 28, 11:14am  

Katy Perry says

It's 70 degrees today in my town( Temecula Murrieta CA) and 63 degrees in SF Bay Area Today oh and in SF This week the lowest Night temp is 48 degrees.

Well there's other places with great weather.
I haven't needed long sleeves all year long.
It was supposed to get 50 degrees last night.
But it never did.
But if it all went to pot tomorrow... er I mean if things got more screwed up, than they all ready are, well I mean worse than the hell hole south Florida is now, I'd be out in a minute.

Now if you'll excuse me, I've got home invaders at the door.

31   Jimbo in SF   2011 Dec 29, 12:48am  

StoutFiles says

As if renting and a mortgage are a straight up comparison for monthly costs. On the flip side, renters can usually fix their rent costs per year, and if the rent rises too much, then go somewhere else, or then take a look at the housing market, which isn't going anywhere anytime soon.

In my experience, property tax is a wash with the mortgage interest write off, so there is not a 'huge' difference in renting versus owning a house (diff maybe for an apt, where utilities are included).

But ask yourself in all honesty, will you be able to "go somewhere else" if the "rent rises too much" in 20, 25 or 30 yrs .. while the homeowner still has a mortgage payment of $2500? (or less with principal paydown and re-fi)

My guess is that typical rents in that timeframe (20, 25 or 30 yrs) could be $5k, $7k or even more. Using math, you can see a $2500 rent that raises by 3.5% a year will be at $7k in 30yrs.

32   StoutFiles   2011 Dec 29, 4:33am  

Jimbo in SF says

But ask yourself in all honesty, will you be able to "go somewhere else" if the "rent rises too much" in 20, 25 or 30 yrs .. while the homeowner still has a mortgage payment of $2500? (or less with principal paydown and re-fi)

If you can guarantee you'll stay there 30 years and there aren't any financial hiccups along the way, then yes, it's a better deal to get a house. However, all these people foreclosing never thought it would happen to them but it did. Because of this, I never advocate that people buy a house based on what they can afford month-to-month, as many people do, and what it sounds like the OP is doing.

33   robynfrog   2011 Dec 29, 6:25am  

Rents go up. And up. And up.
When we first started renting in the 1980's, our rent was $700. (small 3 bedroom, 1 bath, SF Bay Area)
By 2011, our rent (small 3 bedroom, 2 bath, SF Bay Area) had gone up to $2,200. From what I hear, rents are skyrocketing throughout the Bay Area.
We looked at the situation and said, "We need to lock in a payment now. How high will rent be in another 30 years?" If it triples again, that will be $6,600 a month. Not so good, since we would like to retire, and the pension will be a fixed income.
We found a nice little place (nicer than what we were renting) in the Santa Cruz mountains near Boulder Creek for $315k. We only had to put 5% down. Our mortgage, taxes, and insurance put together are less than $1,800, a monthly savings of $400 compared to what we were paying for rent. That doesn't even count the mortgage interest deduction, which my husband calculates should be about $400-500 a month.
We can count on our payment not going up ever. And after 30 years, no more payment at all (except taxes, insurance, and maintenance, of course.)
So, if you can afford $2,500 a month now, take some time to think about what you will be able to afford in the future. Are you planning to retire? Is your job fairly secure? Don't forget to figure in taxes, insurance, and maintenance. Best to lock it in now while interest rates are so low. I'm guessing you can probably afford something under $400k, which you're not going to find in the Bay Area unless you go a little further out. (Unless you want to live in a bad neighborhood.)
Or you can stay where you are and watch the rent go up...

34   edvard2   2011 Dec 29, 6:30am  

Rents go up and rents go down but unlike real estate rent HAS to be priced where real wages can afford them. So yeah. they'll go up. But only to an extent. Wages have barely budged. We've been renting the same house for 8+ years. In those 8 years our rent has gone up once- by $100.

35   edvard2   2011 Dec 29, 7:43am  

Los Angeles Owner says

A majority here think home prices are going to crash and be flat for the next 20 years. If that's the case... All those getting foreclosed on in the next 5 years can just get back into the market when people like BubbleSitter and KatyPerry decide to buy a house...(what 10-20 years from now?).

Count me out of that group. If anything I would counter by suggesting that a lot of people here are simply wanting the housing market to go back to just being normal. Real estate has for the last 20-30 years been increasingly characterized as an investment- that of which it typically is not. As long as that attitude exists there will probably continue to be dramatic swings, booms, and busts. Let's face it- the only reason people aren't going out and spending 110% of their incomes on a mortgage is because lenders won't let them. If they could they gladly would. No lessons have been learned.

Indeed my rent situation is a bit unique. But I also know tons of others in our boat. There is a major difference between apartment complexes- especially those owned by large real estate firms- and single family houses and property owned by either older owners or individual owners. In the case of the apartment complexes, many simply automatically raise rent systematically. On the other hand a individual owner is probably more inclined to keep rent the same if they find good renters- of whom we are. As a result the landlord doesn't have to worry about his property and we in turn save 45% of our incomes.

36   zzyzzx   2011 Dec 29, 8:41am  

Bellingham Bill says

Your housing cost after the loan is paid would be around $1063.75.mo.

Still way too fucking expensive for a paid off house. I figure with property taxes, insurance, and utilities, I'm paying close to $250/month. Maintenance is extra.

37   JodyChunder   2011 Dec 29, 12:05pm  

robynfrog says

Rents go up. And up. And up.

NOT ALWAYS. nothing goes up forever and ever. not even house prices.

38   JodyChunder   2011 Dec 29, 12:08pm  

Los Angeles Owner says

it will be like a old battle scar... a sign of living life to the fullest taking a chance with fate and losing).

sounds like some one trying to make poetry out of a cruddy decision.

39   JodyChunder   2011 Dec 29, 12:09pm  

zzyzzx says

Still way to fucking expensive for a paid off house.

definitely, people are warped tho when it comes to the price of things, perception has been warped by all the $$$ games

40   figalito   2011 Dec 29, 3:18pm  

I live in Fairfax, Marin CA and rents are going up pretty quickly around here. It is next to impossible to pick up a 2 bedroom house that is not a run down shack for less than $2,500 per month. And I am not talking about some modern state of the art house, I mean your basic 2 Bd 1 Ba. But what are the alternatives? Leave Fairfax, go where? Back to SF and pay $3,000+ for a 2 bed apartment? Move to a part of the Bay Area where I can rent at a more reasonable rate but live outside of my community, both professionally and culturally, and commute like a rat on a treadmill? I chose to live in Fairfax because of the community. I go to the grocery store to buy milk and it may take me 2 hours to get out of there because I will meet so many friends. To some of you Fairfax/Marin may sound like a nightmare....so many psychotherapists, yoga teachers, massage therapists, spiritual teachers and students, dancers, etc... but to me, it is paradise to be surrounded by a like minded community.

Yes I have avoided Debt Slavery (thank you Patrick :)) but I am not about to give up living in a community of like minded, well educated, psychologically minded people. So guess that means I am stuck paying exorbitant rent and avoiding a mortgage like the plague. All your numbers and calculations cannot account for the value of living with one's chosen tribe.

SF offers the highest concentration of experts/visionaries/teachers in all of my areas of personal and professional interest. It is like paradise. I am pissed the rents are too damn high! But my quality of life just wouldn't be the same elsewhere.

For some of us leaving for cheaper rent or for the possibility of buying a house at a reasonable price elsewhere in the US, or beyond, just doesn't outweigh what one would lose by not being here in the bay area.
Oh and btw, I am from Ireland and have lived and traveled all over the world. When I first moved to SF as a young Irish lad all of us Irish immigrants agreed that the biggest problem with moving to San Francisco right off the boat is that you'll never want to try living anywhere else. For the past 17 years I lived btn Big Sur, Santa Cruz, SF City, and Marin. Where else compares in the US?

Guess I will continue to live in shacks to enjoy the Bay Areas riches!

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