Buy an expensive house or a modest one?

Question

I make $4K a month after paying taxes, have no debt and have an excellent credit score (820 FICO). I'm considering buying a house for $330K with 3% downpayment. I was approved for the loan and can handle the closing costs, but am concerned about the housing expenses to income ratio. PITI will be $2.5K and I don’t know if this is a smart thing to do. I did a very conservative budget and it means spending all I am making. And that’s before anything bad happens (if I get sick, car breaks down, roof leaks etc). Another option is buying a house for $270K which is not as high quality, had been asessesed and appraised at a lesser amount than house A and probably won't appreciate as nicely. But it means a smaller monthly payment (about $400 less) and an ability to put a little money into savings every month. In the long run, what's a smarter move - to buy for $330K and really strecth myself fiancially or to buy at $270K and be able to save in addition to making monthly payments. THANK YOU!

Answer 1

You had me with the 270k house till you got to the probably wont appreciate as nicely.

"buy the worse house in the best neighborhood."

Personally you didn't give any "heart" reasons, that you love either house, it was all finance.

Keep looking for that house thats LESS money, in a good neighborhood for that 270K that you absolutely can't live without, that just stirs your soul.

Don't stretch but reach.

Answer 2

It's quite a difficult question to answer. Except the budget and payment that you concerned. You might need to find out the possible maintenance cost for the house in years to come and your financial status.

1.  Will you get a steady raise of your salary each year?

2. Are you going to get married and your spouse will produce income?

3.  Do you get bonus or some extra income at end of year?

4.  How old is the house?

5.  Did previous owner do any updates such as a newer roof, termite treatment, replace with copper plumbing, etc.? (these are the most costly major fixing to the house)

6. Does it has more bedrooms or studio that you can rent out to get some extra money? (that's what most investors called "potential" property)

7.  Will you try to negotiate with the seller to knock down to an amount that's more affordable to you?

After all, the location of the house.  Usually better location means is house in a great school district. Houses in good school area tends to increase and hold the value really well. Anyway, try to foresee your condition in the next 10 years before you make the decision.

Answer 3

The smarter move is to not buy either house.

You can't afford the $270,000 house.

Bad stuff WILL happen, it's just a question of when.

And you don't want to get foreclosed on the first time the car breaks, because your budget is stretched so thin even when there isn't an emergency.  So be prepared.  

Put aside $20,000 cash in the bank, and just let it sit there.  

It will NOT be part of your down payment.

I know it'll take a while to build it up, but you're going to need it if you lose your job and want to still be able to pay the mortgage and feed your family while you're looking for a job.

Or would you rather live your life paycheck-to-paycheck?

If your mortgage is $2500 and your take-home pay is $4000, then you are going to be "house-poor", meaning you have a nice house, but won't be able to afford furniture for it.

Can you really live on $1,500/month, and save for retirement out of that?

If you redid your budget, how much could you comfortably afford?  $1,000/month for the mortgage, and another $400-500 for taxes and repairs?

For a 15-year fixed rate mortgage, $1,000/month is a $120,000 mortgage.

If you want to stretch it out to 30 years, you can stretch it out to $165,000.

If you want more than a $165,000 house, then you need to make up the difference with a HUGE down payment.

Answer 4

Buy the least expensive house and bank the money you're saving. After I closed on my house, I had expenses come up with unexpected repairs I would not have been able to afford if I hadn't had it in savings. Just because a bank will lend it to you, doesn't mean you should take it. I agree, you shouldn't spend more than 25% of your income on housing.

Answer 5

It's guaranteed that , if you buy the cheap house, you will realize that you could have handled the higher payments on the big house.  THen you get to kick yourself for the next 5 years.  

In the boom years of 2004-2005,  the expensive houses went up at double the rate of the cheaper houses.  You could get rich just by owning a house.  Everyone who got the big house was glad.  Now it's going the other way  Everyone wishes they had been a little more conservative.

Are you a gambler.

Answer 6

Personally I do not want my house payment (including PITI) to be more than 1/3 of my monthly income.

That would mean your house payment would need to be more like half of what you are looking at.  That is just me, because i have more in my life than a house payment.

Answer 7

A lender will look at your gross monthly income to see if you can afford a house.  Your mortgage payment shouldn't be more than 28-31% of your income, and your mortgage payment plus other debts shouldn't be more than 36-43% of your income.  However, it doesn't take into account all of the curveballs that life throws at you.  I prefer to keep my mortgage at 20% and be able to have some money to live comfortably and build up savings.  Houses always seem to need some type of work every couple of years, at least.  Cars break down.  Furniture wears out.  Clothes need to be replaced.  Computers break.  Family members need help.  Vacations cost money.  .....  

I would look for a house that may not be the most beautiful house in the neighborhood, but is priced low and has a good layout and is in decent shape.   A little paint and some new flooring can make an old house look a lot better.  

Don't spend every penny you make on a house.  You still have to live.

Answer 8

I personally am only comfortable with 20% of income going to housing, that way I have some cash to enjoy life with.

You really should not buy anything until you are ready to pay 20% down.

But, whatever you decide, the 330k stretch will not work out.    SOMETHING always happens in life.    Cars break down, people get sick, storms damage homes, etc etc.    You should not be in a position where any small set back would lead to ruining your credit and foreclosing on your home.

Answer 9

You do not make enough to buy anythig over 200K and live comfortably.  Don't forget you have to pay the bills too and all those 'surprise' broken items.

If you stretch you'll end up just like every other foreclosed homeowner in America.  If you can't afford at least a 10% downpayment DO NOT EVEN LOOK at buying a house.

I make a bit less than you and went for a 100K condo.  When the air conditioning broke, the dryer stopped working, and my circuit breaker overloaded all in the SAME WEEK I was pretty thankful that I didn't opt for the 150K townhouse I also had my eye on.  I still go on vacations, have enough to spend on home improvements, and plenty goes into retirement and savings every month.

Buy only what you need, not what you can afford.  I wanted a 4 bedroom 3 bath house, but only needed 2 bed 2 bath, so that's what I bought.

Answer 10

DON'T overextend yourself:  most common problem of first-time buyers.  Rule of Thumb:  25% income on housing.

Go with cheaper house, or wait, saving for down payment.  3% is minimum down payment required for FHA.  20% down lets you avoid PMI.  Larger down payment than 3% and good credit qualifies you for better interest rates.  Your first 10-15 years you will be paying almost entirely interest, very little principal with 3% down.  Extra principal payments can have a big impact over the life of the loan.  There are more than 2 homes available now, widen your horizons.

Don't forget to fully fund your 401k.  If you don't pay in, you don't get the matching funds from your employer.  Contributing to it now gives funds a long time to grow for your retirement, tax- free.  It also reduces your taxable income.

Answer 11

You never need to have a monthly house payment more than 25% of your monthly income.