Yesterday I was looking at real estate porn — one of those catalogs that comes in the New York Times and has lots of pictures of homes I can’t afford. I decided to go online and find out exactly how much I could afford to pay for a home. So I found one of those mortgage-affordability calculators. I put in our combined income and combined monthly debt payments ($600 in student loans), and voila–found out that we could afford a mortgage payment of more than half our take-home pay!
That is, frankly, absurd. We couldn’t afford that much unless we totally abandoned saving and cut back on spending significantly. We certainly couldn’t afford that if we had a kid to raise. Keep in mind that in New York, if we got a condo or co-op apartment, we’d also have to pay monthly maintenance fees, which could easily be another $800 a month.
Who designed these calculators and what are they smoking? The main problem, I believe, is that they all calculate your affordable mortgage payment based on pre-tax income, not take home pay. Though all the calculators have slightly different assumptions, they assume that total debt should be no more than 36 percent of your pre-tax income, and the mortgage itself should not exceed 28 percent of pre-tax income. That strikes me as a mistake; since tax rates and health care costs vary across the country, these calculators should start with take-home pay, not gross income.
The bottom line: we have approximately zero hope of buying anything in New York. –Hannah
4 Comments
March 31, 2008 at 2:54 pm
As I’ve been thinking about the whole idea of home purchase lately as well, I’ve asked some current NYC home owners how they manage to make mortgage payments. One thing someone mentioned was that at the beginning of a loan you are paying primarily interest, so the majority of your payment is tax deductible, making it possible to afford more than you currently pay in rent. Perhaps this is part of the discrepency?
March 31, 2008 at 11:45 pm
That’s a good point — even so, I think it would be unaffordable for us, particularly taking condo fees into account. The most you’d save by deducting the interest would be 30%, so we’d still be paying significantly more than we’re paying now, just on the mortgage.
August 29, 2008 at 1:14 pm
All of this is true. I think the key is, wait until millions of other have lost their homes, and buy from the bank.
Wish me luck!
September 24, 2008 at 11:15 am
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