Tips for Homebuying To Avoid Financial Stress

Wealth Advisor

In this video, Ben Ruttenberg guides viewers through essential stress tests for homebuying, aiming to prevent them from becoming “house poor.” He introduces two critical rules of thumb for determining a financially comfortable home purchase. The first rule suggests that the home value should not exceed twice the gross income of the potential buyers. For example, a couple earning a combined $400,000 annually should consider homes valued at no more than $800,000. The second rule emphasizes that the total housing payment, including mortgage, property taxes, and homeowners insurance, should not surpass 30% of the household’s net take-home pay. Through a practical example, Ruttenberg illustrates how a couple with a net monthly income of $15,000 should aim for a housing payment of no more than $4,500, considering a $650,000 home purchase with a 20% down payment. These guidelines aim to ensure that individuals can manage unexpected expenses without compromising their financial stability or broader financial goals.

Video Transcript

Hi, my name is Ben Ruttenberg, and today we’re going to walk through a couple stress tests. If you are looking to buy a home, what should I be thinking about? How do I know if my home is too expensive? How do I know if I’m going to be house poor? There are a couple rules of thumb that we want to make sure that we’re aware of to make sure that we’re buying the right size house and we’re not going to be too test when we do move in to whether an unexpected repair or maintenance that we’ll be able to handle it. So the first test, pretty simple, is we want to make sure that your home value is less than two x your gross income. Pretty simple. Let’s assume two spouses combined income of 400,000.

 

That would mean, hey, $800,000 house would be at the top of the line. Kind of a good ceiling to think about if and when we’re house searching. Very simple. But generally speaking, if you fall under this rule, you’ll be able to help manage any unexpected repairs or maintenance. And generally you’ll be able to keep the rest of your financial plan on track to make sure that your home is not eating up a huge portion of your monthly budget. The second test that we want to make sure we’re aware of is we want our total housing payment to be less than or equal to 30% of our net take home pay. So what do I mean by housing payment? Well, that includes your actual mortgage payment, that includes property taxes, and that includes homeowners insurance.

 

So all of this should add up to less than 30% of your net take home pay. We’re going to walk through an example of what this would look like in practice, but important to keep these three costs under 30% of the net take home pay. So let’s assume married couple has after taxes, after retirement plan contributions. They net in their bank account 15,000 a month. That’s their net amount after taxes, after retirement contributions. So when thinking about a housing payment, 30% of this would be 4500. So we’re thinking about how big of a house should we have? What house should we be looking at? Well, we want to make sure our housing payment is less than or equal to 4500 a month. So let’s walk this out. Let’s assume they’re looking at a $650,000 home.

 

We’re going to assume this is in Pennsylvania and we’re going to assume they put 20% as a down payment. So this would be 130,000 that they would put down on the house to start. This would equate to. Again, we’re going to assume 30 year mortgage, current rates about 7.5% for their interest rate. So they’re looking at $650,000 house. They’ve put 20% down, 30 year mortgage, 7.5% rate. Their actual loan payment will be about $3,600 a month, and then their taxes and insurance. Again, this can depend on where you’re living. That’s going to dictate how expensive your property taxes are. But for this example, we’re going to assume this is 867 a month, which would put your total housing payment right about at 4500 a month. So if were sitting down, I would say to this couple, again, that’s making 15,000 a month net.

 

Hey, a good rule of thumb for thinking about a house would be 650,000. That would put your monthly housing payment at about 4500 a month, which is right around 30% of your net take home pay. So again, this is going to depend on family size, what your actual financial plan looks like, what your goals are. This could adjust a little bit. But in terms of a general rule of thumb, I would say a $650,000 house for this couple would be right in line with that 30% net take home test. So if you have any questions about the house that you’re in, or if you’re looking about buying a house, feel free to reach out to a financial advisor that’s happy to walk you through this decision.

 

 

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