When should one buy a house?

[Acehawk74]

a downpayment of 20% compared to a downpayment of 0% signifigantly changes the outlook of buying a house. With a larger downpayment, you are more likely to be financed at either a better rate or with less points charged to the mortgage. Just some numbers for comparison:

100k house price, 0% downpayment 6% APR 30 years

Monthly Payment = $599.55

100k house price, 20% downpayment (making principle 80,000) 6% apr, 30 years

Monthly Payment = $479.64

So not only are you paying $120.31 less on your mortgage per month, but consider this.

With the 0% down mortgage, you are paying:

115,838.19 in interest
100,000.00 in principle

215,838.19 over 30 years, assuming no additional monthly payments, making all payments on time, and 12 minimum payments each year.

With the 20% down mortgage, you are paying:

92,670.55 in interest
80,000.00 in principle


172,670.55 total, assuming the same from above.

So in conclusion, by paying a 20% down payment, you are saving $43,167.64. Of course you have to consider the $20,000 up front, but that doesn't factor into mortgage and interest costs. Also, monthly payments typically include Homeowners insurance that is NOT included in these mortgage calculations.. so keep that in mind as well. If anyone sees any errors here, please let me know.

Additionally, with a 35k salary, you probably shouldn't buy a house that costs $200,000. Even with a 5% rate and 20% down, you are looking at a monthly payment of $858.91. $35,000 annual (pretax im assuming here, but lets just say this is your net income for sake of argument).. would be $673.08 per week, or $2692.30 per month. Looking at the ratio of mortgage payment to monthly income, it comes out to 31%. Above we showed that 33% would be a solid point for living expenses(gross), or 25%(net) so this would be very hard to justify, because you would ceartinly go over this 33% ratio when all expenses are figured. Feel free to ask more questions if you have them.

[college_boy]

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Using 33% as your living expenses on 25k.. that gives you the following:

Assuming a net income of $25,000 a year
Montly income = $2083.30
33% of Monthly income = $687.50

By maintaining that ratio, you should be spending $687.50 of your income monthly on living expenses. Without getting too detailed, lets just assume that half of your expenses is your mortgage+insurance

Mortgage Payment = $343.75

Now.. with this payment, at a 5% APR, you could afford a house costing - $64034.

That's a generous rate, especially since the buyer is most likely young. Additionally that house price is WAY to low to be something worth buying, unless you are looking into investment opportunities, or other ventures, not a great scenario here to buy at this point.


Although the savings look nice, and the 10% down (which wasn't added into the calculations) I would agree with everyone else in saying that perhaps the potential buyer should improve thier situation financially, by either getting a signifigant down payment, or improve the income/education etc..

Hope this helps, and please anyone feel free to dispute/correct my math, its very late, and errors are possible, but the general idea is there.

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I liked your post but 25K was the absolute minimum income i was suggesting. I am going to be a teacher and i think the starting salary in my area is 33k or so with a mandatory 1000 dollar raise every year, so that's not too far off of that 25k I guess. I was really just asking for a theory for everyone to go by as to when they should buy a house. I enjoyed your posts though.

How would a downpayment of 20% or 0 down change the strategy of someone buying a house. Assume 35k or so for their salary and a 200,000$ house. I'm leaving poker out of this because it's hard to say where the games will be in 3 years, but it may be a factor nonetheless.

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35k salary and 200k house......not likely.

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Read better.

[college_boy]

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a downpayment of 20% compared to a downpayment of 0% signifigantly changes the outlook of buying a house. With a larger downpayment, you are more likely to be financed at either a better rate or with less points charged to the mortgage. Just some numbers for comparison:

100k house price, 0% downpayment 6% APR 30 years

Monthly Payment = $599.55

100k house price, 20% downpayment (making principle 80,000) 6% apr, 30 years

Monthly Payment = $479.64

So not only are you paying $120.31 less on your mortgage per month, but consider this.

With the 0% down mortgage, you are paying:

115,838.19 in interest
100,000.00 in principle

215,838.19 over 30 years, assuming no additional monthly payments, making all payments on time, and 12 minimum payments each year.

With the 20% down mortgage, you are paying:

92,670.55 in interest
80,000.00 in principle


172,670.55 total, assuming the same from above.

So in conclusion, by paying a 20% down payment, you are saving $43,167.64. Of course you have to consider the $20,000 up front, but that doesn't factor into mortgage and interest costs. Also, monthly payments typically include Homeowners insurance that is NOT included in these mortgage calculations.. so keep that in mind as well. If anyone sees any errors here, please let me know.

Additionally, with a 35k salary, you probably shouldn't buy a house that costs $200,000. Even with a 5% rate and 20% down, you are looking at a monthly payment of $858.91. $35,000 annual (pretax im assuming here, but lets just say this is your net income for sake of argument).. would be $673.08 per week, or $2692.30 per month. Looking at the ratio of mortgage payment to monthly income, it comes out to 31%. Above we showed that 33% would be a solid point for living expenses(gross), or 25%(net) so this would be very hard to justify, because you would ceartinly go over this 33% ratio when all expenses are figured. Feel free to ask more questions if you have them.

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Good stuff. I appreciate it.
This wasn't really meant to be a question about me however, but more of a general inquiry.

[Acehawk74]

Understood =) Glad i could help.

[FishHooks]

When you guys say you should spend only 33% of your income on living expenses, is that taking into accout things like food, etc? Or just things like bills, car, house?

Also out of curisoity, because I'm also getting a degree in finance, what kind of job do you plan to get?

[Acehawk74]

Honestly, the job will be whatever i can get to start. Ideally, id like something either investments, or corporate finance. I know that is a broad stroke, but until i see what is out there, its hard for me to determine that.

The Living expenses from what i understand should be your "required" expenses. This would not include your extras, like cable, cellphone, etc.. Food, I would personally include. If you feel you HAVE to live with something (this is purely a matter of interpretation) then you could include it. Ultimatley, if you are truly concerned, a financial advisor could help get you on the right track on how to approach your finances. Hope this helps!

[FishHooks]

I just thought 33% seemed really really low, unless your really rich.