How Much House Can You Afford?

as individuals and for our families. So we're just here to give you what we know, what the internet has to say, and kind of weigh it out. What's going to be your best next step.

out Cashified. It's c ashifyd. I usually see between one thousand and two thousand dollars cash back. Don't quote me on that. I don't know the percentage they use. Again, it's a small percentage because that's cash back, But when you're making a huge purchase like a home, that can go a long way for affording more at closing time,

so cutting closing costs. So check them out Frugal friendspodcast dot com, slash Cashified, or just click the link in the show notes and thank you for supporting our sponsors in the friend Letter that helps us bring it to you three times a week for free with lots of tips to save money. Ways to get significant cash back. And if you're not getting the friend letter yet, definitely head to Frugal Friends podcast dot com to start getting that it's free. Sponsors allow us to keep it free for you.

We've got episode three fifty six Frugal Side Hustle, Airbnb Rooms and co hosting. This was what Airbnb rooms, essentially renting out a room in your home on Airbnb. This is what Travis and I did when we first bought our home before we had kids, to help make our home more affordable. And then also co hosting is a way you can use Airbnb to make money without hosting anyone. It definitely does help if you have hosting experience, but you can be a digital co host and manage properties

for Airbnb owners. So three fifty six, that's a really good one. And then episode two nineteen home buying tips in a crazy hot market. It's a little outdated, but we have a lot of tips that are still This is it'll help you even more because this we recorded when it was a seller's market and it's currently a kind of a buyer's market, but it's still it's it's come more to a buyer's market. But so these chips

should help you even more so Episode two nineteen. But let's get into our first headline when you take to the internet and you google how much house can I afford? These are the types of things the Internet's going to give you, and we're going to talk about some things so you don't have to google. And also some of our opinions and the first article that comes up both

are actually from bank Rate. They just have a lot of good home buying content, and this first one is should I buy a house now or wait?

it going to get worse? Am I going to look back in three years from now and wish I had bought now? Or is it going to get better? Am I? Am I going to yeah, wish that I had waited longer? And I think this is the question we're all asking now or wait? This article I think has a really tempered, helpful approach, but they are citing that most would be buyers currently are picking the weight side of the equation.

That the volume of existing home sales was down more than fourteen percent from October twenty twenty two to October of this past year of twenty twenty three, according to the Nationalciation of Real Litters, and according to the Fannie May Home Purchase Sentiment Index released in early November, and overwhelming eighty five percent of consumers believe it's a bad time to buy a house. And yet they're also citing some different reasons of why it might be looking a

little bit better. So, you know, we were, as buyers in a constant disadvantage over the past few years, but things have started to look a little bit better for buyers in parts of the country. Certainly depending on where you're at in the United States, different pockets are looking different. So you've got days on the market, those figures are are up, so that is currently giving buyers more time

to make an informed decision. So we are not in the thick of some of those pandemic days where you were waving inspections and pulling the trick, or you only had hours to make decisions and you were competing with ten other people and paying over asking price. We are starting to see it cool off a bit, which is great. But yeah, popular West Coast cities that had been suck skyrocketing, like Seattle and San Francisco, they saw double digit year over year declines. So this is giving a little bit

more leverage to buyers. Of course, you've also got the issue now of increased interest rates. So at the time of recording, we are the average is just under eight percent. You're looking at about seven point nine percent, but we know day to day, month to month that has shifted and changed. We saw about six percent back in October twenty twenty three. Now we're kind of back up to just under eight percent. So these things we can't totally predict. I do think we are in a bit better times

than maybe a year or two ago. Again, with that kind of time on the market, prices are cooling off slightly, you've got a little bit more negotiation power as a buyer. But again the downside is those interests, right, So these are the things that we're all weighing out, and so then when it comes to yeah, is it a good time to buy, they kind of have some helpful things to think through.

rates started skyrocketing. And so I locked in rate and went to talk to the lender and he's like, you need to go with this rate because you will not find this rate from any lender from here on out. And so we got really lucky in that. But we were buying at a time where inspections were being waived. We were, you know, at some homes we were offering sixty thousand over asking and still getting out bid. So

we were it was such a stressful time. I almost I would prefer a season like this where you can take your time, you can negotiate the price. Ultimately, the price of your house won't change over thirty years. What you buy it at now is what it will stay at. Rates can change, and rates are now trending downward. It's still very high, making it unaffordable at some rates because houses our back upwards in price. So we had a few months where they were trending down, they are back

trending up an increased price. So it's so these three, uh, these three qualities that bank rate lads out. If you do meet them and you want to buy a house, then it would be a good time to buy a house. If you don't meet these three qualifications essentially, then it probably is better to wait until you do. But each again, home buying season will have its unique qualities, and you

have to the best time. It's sometimes the best time to buy a house was you know, always quote unquote five years ago, right, except for a few times in history. But we don't have that, and we cannot predict the future. So we can we can predict with some certainty what twenty twenty four is going to be like. It looks like house prices are going back up and interest rates are going down, So that may be good if you

buy now. It may mean you can refinance sooner. But and you have more right now, you have more negotiating power for the home price than when interest rates go down, you will have less negotiating power because more buyers will will flood the market, so you have to kind of weigh those options. But if you can afford it, I would take more negotiating leverage on the home price. We definitely did not get that. We didn't overpay, but we definitely paid at the top. Like our home has not

accrued any equity in the past two years. But we have this rate locked in that we can actually afford, and if we had to pay a seven percent interest rate, we would not be in this house. We can afford it because we're airbnbing the back part and it is a rental property ultimately for us. So that's my insight. So I'll go into this first. You need to answer yes to these three questions essentially, and if you can, now is the time to buy. The first is do

you have excellent credit? Anytime you're borrowing money, Start by checking your credit score. The best deals on mortgages will be available to those with high scores of seven forty and above, and says in fact, the median credit score for mortgage borrows in the third quarter of twenty twenty three with seven seventy and if you are in the excellent range, you're not going to get any better rate than at eight hundred, than you are at seven seventy,

and probably even seven forty. So once you're in that excellent range, you've pretty much tapped out for the low rates on your mortgage.

less interest you'll have to pay. So having plenty for a down payment is certainly going to make lenders feel more comfortable about loaning you money. It helps to have that cushion in case if something unexpected happens, So not just a down payment, but then even more left over after that. Again, not just for closing costs. But now as you're stepping into if this is the first time, if this is the first time for you being a home owner, you're going to run into all sorts of

unexpected things when it comes to upkeeping a home. If you are used to renting and having your landlord pay for fixes as they happen, that's not going to be the case anymore. So I my personal recommendation is having at least five thousand dollars set aside for whatever you might run into with the house over the upcoming year or two. I know, for us, our heating and cooling system went out within the first couple of months of us moving into our home, so things like that can happen.

Not to mention if there's any other fixes or asthetic things that you want to do to the home, having additional money set aside for that. So what you're down I know that they're kind of using just general terms. Have a sizable chunk of change enough money. Of course, some of the typical recommendation is twenty percent of the overall home purchase price would be a good down payment goal.

Many people don't do that. The reason for doing twenty percent is not just to cut the amount that you are borrowing, but also that usually cuts out you don't have to pay private mortgage and insurance that PMI can add a monthly cost to your mortgage. Honestly, for us, we chose not to do twenty percent, and our PMI is only about thirty dollars a month, so it was more advantageous for us to keep cash in our pockets pay the thirty dollars a month than to shell out

thousands more. That's going to have to be a personal decision. Of course, it depends on the type of loan that you're getting, how much of a down payment, but still the bigger the better, certainly because again you're borrowing less, which means you're going to pay less interest, and in a time when interest rates are fairly high compared to what we've seen over the last few years, that's going to be pretty advantageous for you.

down payment and still have negotiating power. In more competitive markets, the person putting down more money will beat you out every almost every time, So think about that as you decide when to purchase, because right now you might be able to get away with three three and a half percent down. In the future you might have to go closer to five or ten percent, and houses will increase in price. So we were able when the market was really good, we did put three and a half percent

down because yeah, same for us. It was we saw equity rising and saw that it was much better for us to pay PMI than it would to be to wait to save thousands more dollars. So PMI is great, and you can use the equity bill in your house to put towards a refinance to get PMI off, So

I wouldn't worry about that. But if you're worried between saving three to ten percent, the earlier you buy, the lower your down payment, I think, and this is personal opinion, you'll have more leverage with your down payment.

to lean more on the side of waiting. I think that's kind of the most helpful summary.

We bought another house and are renting out our old house because we wanted to buy a rental and they were too expensive, so we had to buy a bigger house. We had to upgrade when we didn't want to turn the back part of this house into a rental and use our original primary home as our you know, kind of the rental we wanted to buy. So it was a move that we made. I don't if I had it to do again, I wouldn't do it again. I'm

just gonna be honest, I wouldn't do it again. It will turn out to be profitable for us in the end, but for me, I'm not a real estate investor. I've learned that about myself and I don't want to even have long term renters or airbnb. I'm just I'm done with it. So I would say, be very sure that you're going to stay in this house for a long time. You can rent it out possibly should you want to move, but you should not want to move if you are

buying a house somewhere. So those are the three questions that you need to answer yes to. Do I have excellent credit? Have I saved enough for a down payment? Part B? Do I have also my emergency fund? And three? Are not planning to stay in this home for a while? And if you can answer yes to all those questions, then this could be the time to buy, and so we will look at costs, specific costs in our next article. Our next article is also from bank Rate and it

is literally titled how much house can I Afford? And it starts out with a calculator that we will play around with, but then also has some guidance, some wisdom that you should think about when you are asking how much house it can afford.

in here. So if we were to say, use some pretty straightforward easy numbers that an annual gross household income is one hundred twenty thousand, So if both you and a partner are working and bringing in gross income of one hundred twenty thousand, we know that that's not everybody, but it's a number we're plugging in, and that your monthly debt currently, let's say you are in a debt payoff right now of student loan debt or credit card

debt of let's say five hundred dollars a month. This could also probably include car payment too, right.

You could buy a home for four hundred twenty thousand dollars at that point, your monthly payment would be about twenty seven hundred dollars two thousand, seven hundred and forty one dollars, and that your estimated closing costs would be right around twelve thousand dollars. So that means, in addition to that twenty thousand dollars down payment we just mentioned, you'd have to also have twelve thousand dollars set aside

for closing costs. These are, of course all estimates. This doesn't include different negotiations that you may make, and of course all the different numbers that you could be plugging into the calculator. It's also assuming certain tax rates and insurance rates. But depending on where you're looking at buying

your property taxes, your monthly insurances. If you live in an area like US in Florida, and you're also required to get flood insurance, all of those things could also increase your monthly payments.

all encompassing. But this is what you can expect. And if you have these different qualifications your maximum budget, they will give you a five hundred and twenty two thousand, they'll prove you for around five twenty two, depending on your credit score, and that'll give you a monthly payment around thirty four hundred dollars and B fifteen thousand in closing. But the way bank Rate is doing this is they run off. They recommend something called the twenty eight thirty

six percent rule. So most financial advisors agree that people should spend no more than twenty eight percent of their gross monthly income on housing expenses and no more than thirty six percent on total debt. So the twenty eight thirty six rule is the home affordability rule that most financial advisors use. It means your mortgage payment should be

that should be affordable. It says, let's oh, for example, let's say you earn four thousand dollars a month, and that means your mortgage payment should be a maximum of eleven twenty twenty eight percent of four thousand, and your other debts should add up to no more than one than four hundred and forty each month thirty six percent. So that is so you have I have more room

for more debt than in the scenario we gave. But when I was playing around with the numbers, the more debt that I put into the calculator, the higher the price or the lower the price of the home that would be recommended, and I wanted to keep that as close to four to twelve as possible. So if you have more debt then you can certainly and the homes are less expensive than forour twelve, then that's fine. But think about the twenty eight percent rule. Take your gross

monthly income, so not net. Take your gross monthly twenty eight percent of that is about what your mortgage payment should be. And they're taking They're saying mortgage payment, not PMI, taxes, all the s gross stuff, because you really can't predict that until the very end. So that's why they say all the calculators are going to give you just your

mortgage payment. So instead of using thirty which is what most people have maybe heard of, use twenty eight of gross monthly income on mortgage, and then make sure your debts don't add up to more than thirty six percent, because your debt to income ratio is a huge factor in what you get approved for in the mortgage business. So really those are the two most important things to consider when figuring out how much you can afford.

my then day to day, month to month. So I do think it's important not just to look at that one number, but also the monthly cost, because if you could technically afford four thousand dollars a month, but let's say you're currently running and you're used to twenty two hundred dollars a month or less, and plus maybe you're not needing to pay for certain utilities depending on where you're at, I think it's really important to look at

how much how pinched am I going to feel? How financially strained might this cause for me if I do move forward with this at this time. So I think

that's an important consideration. And I think once you are looking at specific houses, you can get a general sense for what are the property taxes in that area, what are people paying for homeowners insurance in that area, and you can get this calculator to give you an even more accurate estimate, still going to be an estimate and approximate, but being sure that you feel comfortable with where you're at right now if you were to take on that

monthly amount. Does this feel comfortable for you? Do you still feel like you have some financial cushion month to month?

to stay on top of everything. I was trying to really make sure we had everything right up front, and they just kept put me off and put me off until the very last minute, and it was so frustrating. So going in strong and knowing your debt to income ratio your DTI, and you can do this. They give on this article the calculations for it. But you can just search for a DTI calculator and playing around with those numbers and just being very sure that you stay

under that. It's going to be really important because so everybody goes into home buying with a budget. Right, So we can do these numbers and say everything, but everyone's going to go in with their budget and their agent is going to show them houses that are more. It's just going to be a better house, like houses that cost more are better. But we have to be really practical when you are making this kind of housing decision. This is one of your big three housing, transportation, food.

Housing will make the biggest impact in your financial freedom, how much you spend on it, how much equity is growing. All of that. Your primary residence isn't typically an investment, though some people will say it is, uh, but it does protect you against inflation like we've seen for the past five years. It does. It is a protection. So you really have to look at this like a business decision.

And yes, we want to be in a safe neighborhood, and we want to have walls that are stable and all of these these are yes, these are the practical parts of the business decision. Uh. But we have to understand that windows can be replaced, tubs can be replaced, things can be replaced over time, things can be painted, wallpaper can be removed. I just removed a ton of it this weekend, you know. And these aren't all things

you want to do. But if it keeps you in that debt to income ratio that puts you in a good monthly spot so that you can pay off your debt and invest, it's necessary. It's necessary to think that way.

because we're also seeing rental prices skyrocketing as well. So yeah, it's not I know we're saying that there's a lot to consider here, and man, this is so so expensive, But for some people this is going to be the best financial decision for them, both in the short term and the long term. And just to feel like, yeah, you're getting locked in at a certain rate rather than waiting and seeing and interest rates going up or being beholden to rent prices skyrocketing in your area.

rates often dampen the home buyer enthusiasm. We've seen that, however, if you're still in the market to buy a home, highest interest rates mean your monthly mortgage payments will be steeper. Even though mortgage rates aren't permanent, you still have to think in five year terms. You have to be able to afford this house for five years. So, as a example, with a five percent interest rate, the principle and interest on a thirty year, six hundred thousand dollars mortgage would

be three thousand, two hundred and twenty per month. At eight percent, that figure would be four thousand, four hundred and two after dropping as low as three percent in late twenty twenty, and rates hit seven point eight in October. I think they're back, probably back at around that in January. But so that is over one thousand dollars a month. So no, it's one of those things like you will for the next two years. If you buy a house, you'll be paying probably one thousand more than you would

have a couple of years ago. That's a lot, so you have to be at a financial place to do that. But once you are able to refinance in a couple years, that will go down drastically. So if you're if you're still on the rise of your career, then maybe it is a time to wait. But if you feel like you are kind of maxed out and maybe are only pursuing the inflation raises, which we always think you should be pursuing as much money from your employer, as much

money from your industry as possible. We don't believe you're ever capped out. But if you believe that you're not going to be making twenty thirty percent jumps anymore, you're kind of at that level, then definitely it's it's a good time to buy a house, and you can play around with these calculators. Kind of like that to see to even play around with interest rates. I know in this example we seven point three, which is actually lower than what the average interest rate is, so that is

accounting for excellent credit. But yeah, you'll have to play around with the budget calculator. We definitely like the one at bank rate because you can put in a lot of different things. But yeah, that's that's our recommendation to.

looking at all of the entertainment subscriptions. So we have, you know, all the things Hulu and Netflix and HBO and Disney and all of them, and what we ended up doing was deciding to pick one and cutting down on all the others. They're easy to cancel, they're easy to start up again, and so what we're going to

do is keep one going at a time. When we get tired of the one that we picked that's our favorite at the for now, and our kids get bored of watching things and we get bored of watching things, then we will cancel that one and tick a new one and start that subscription backup. So that's my tip for saving some money in that category and limiting some of those subscriptions, and also, honestly, we're spending less time

watching TV that way. Hope you guys have a great day, and thank you again so much for your podcast.

take to heart. Jen, I know you do this, Eric and I have recently started doing this because you're right, it's so easy to resign up if there's a new show on some other platform that you want to see, then cancel what you're currently watching, pick up the other one. It's like, we can't be watching this multiple things at one time, and I think it can help us to just find what is enough be content even if there

are multi people in the house. How can we negotiate, find one platform at a time that's gonna entertain us and switch around. There's there's no problems with switching around. I love this so much.

with it. The variety. If you're an Amazon Prime member, I'm not so. I think Netflix was the second most, so thinking like, oh, I'll just get one at a time and go in order of these. You know the amount of content in each, and I wish I could find it, but I'm having trouble, but maybe you can. You can google it at a later date.

And to live on the water is going to increase your property tax and insurances just astronomically that by the time your house is paid off, you're still paying far more than a mortgage would ever be just to live there, just because of the taxes and insurances that you still are going to maintain. Huh. So I'm I'm not a

glasses glass half full on this one. But but you know, what it's doing is leading me to contentment and finding my enough And so my dreaming big now is just saying, you know what, my house, my house with a few more improvements, is going to be where I probably live for the rest of my life because of the state of things. Wow, house, But I'm if I could add a pool, just a small little plunge pool, with a finished garage. So that was more than we even thought

we could have when we bought this house. Having a detached garage was not even on my list of things, because I didn't think I'd ever be able to afford it. It just so happened to have a detached garage, which is awesome. Someday I'd love to finish that off into some usable space. That would be great if I could have a pool and a finished garage, and if I could be so bold as to request that there's no more increase on our property taxes or insurances, that would

be my dream. That's me dreaming big. It's not going to happen, but if you're asking me to dream, that's my dream. That's my new dream. I'm not on the water, I'm not paying for new sea walls, but that's what i'd love.

our way. Somewhere in early twenty twenty two, we lost our way and we realized that. I got so angry the first half of twenty twenty two. I was so angry because no normal person could buy a house under four hundred thousand dollars. It was infuriating. We put an offer after offer after offer, and that's not even the

average home price in Florida. We were trying to buy the average home price, and we couldn't get approved because all houses at that price were being bought in cash by investors, either individual investors or hedge funds, mostly like high volume individual investors in our area. And it made me so mad.

But we're like a little angry.

and we are fixing it up. We will financially come out on top, but not in the way we want to. So that's just frustrating.

Thanks to Barn, I don't have a lot of friends I can discuss my debt free journey with. So it's so fun to listen to y'all. Y'all have made my commute and runs more enjoyable and efficient. If you're ever in Houston, you've got a friend in me. Hey, this is the next? Is this the I feel like a lot of people have been suggesting we should go on tour, or maybe I just suggested it because we've got a

lot of awesome fans. There's a lot of people in Australia who listen to So we're going to go to Texas in Australia and maybe buy a house there, you know, old tour maybe will find more affordable housing.