Today we’re talking about a very important subject specifically about how much house can you actually afford the reason this is such an important topic is because buying a house is typically your biggest
financial decision that anybody will ever make and it needs to be the right one otherwise you can see yourself in big trouble very quickly a lot of people suffer from being house poor so I thought to myself dude that’s not gonna be me
I don’t want I want to live below my means because my wife and I are actually looking for a house right now and knock on wood we’re looking for a forever home because we do want to start a family so I took my financial skill set and I created this spreadsheet that I’m gonna share with you guys today so let’s get right into it so very simply put anything that’s a yellow highlighted field is something that’s gonna be an input so you know you need to put something in here so very simply let’s start with the house price so my wife and I are looking in Northeast Ohio specifically suburbs of Cleveland and the houses in the suburbs that we’re looking at they’re probably gonna be in anywhere from the 250 to 300 thousand dollar range okay keep in mind this is our forever home and houses are
relatively affordable in in the Midwest compared to Los Angeles San Francisco New York and all that good stuff right so let’s just say for easy numbers let’s use $280,000 somewhere in the middle right so the spreadsheet automatically calculates 20% so the reason you want to put 20% down and that’s exactly what my wife and I are planning on doing is because you want to avoid PMI which is private mortgage insurance so for people that haven’t gone through the house buying process or don’t know what PMI is that’s essentially just a little bit of a bill that doesn’t go towards principal or interest it just goes towards private mortgage insurance meaning that it’s just money that you’re throwing away the reason that the banks or the lender wants that si PMI if you’re putting less than 20% down is because it shows the bank that you or the lender that you have skin in the game
meaning that you’re not just going to put down 2%
and if your house is under water or loses a lot of value or you can’t pay for it you just walk away with pretty much no money in the deal so they want to tack on that PMI to make sure that you’re committed to that loan if you will so ultimately we’re putting down 20% so you can see here 20% of 280 is $56,000 meaning that the actual mortgage or the loan amount is two hundred and twenty four thousand dollars so the annual interest rate for a 30-year mortgage at least right now is going to be about four and a half percent so my wife and I are pretty much gonna be looking at a 20-year mortgage and with what I’m estimating is going to be a realistic annual interest rate we’ll probably end up somewhere in the low fours so let’s just use for point one for example now the next field here we don’t touch this is the number of payments per year meaning that you’re paying once a month you’re not paying you know twice a month meaning 24 payments you’re not paying three times a month meaning thirty-six payments you’re making twelve equal payments throughout the year meaning that your payment per period with all factors being considered is one thousand three hundred and sixty nine dollars so the sum of the payments with all these numbers combined is going to be actually three hundred and twenty eight thousand dollars meaning that you’re paying 104 thousand dollars in interest over the course of 20 years at four point one percent now let’s just do a quick little experiment say we push this loan out to a thirty meaning that the terms the rate is a little bit higher and we added ten years to the payment that three hundred twenty eight thousand dollar total now got bumped up to four hundred and eight thousand dollars so can you see how powerful that is I’m getting a shorter loan with a lower interest rate
you’re literally saving eighty thousand dollars right around there so now let’s move forward so these types of houses that we’re looking at the taxes are probably gonna be anywhere from you know five to six thousand dollars a year the insurance let’s just say easy numbers let’s call it a thousand bucks and typically if there’s an HOA we’ll put it in there as well so for those of you that don’t know what an HOA is it’s just simply a homeowner’s association fee so if you see nice big
developments they have you know
manicured lawns and landscaping and all that stuff that’s pretty much what you’re paying for right so ultimately all these numbers combine so we have the mortgage the text insurance the HOA all that stuff broken out to a monthly basis we’re looking at just under two thousand dollars a month now I went a little even more conservative and added three hundred dollars a month for utilities so you may have gas water sewer electric you know anything at the city mandates that you need to pay and also to power your house you know we’re not running on a treadmill to turn the lights on you know what I mean so ultimately there’s two schools of thought now so we know that we’re in right around four twenty two hundred a month but it all depends on what you make right this is all relative so what is the appropriate number on how much house you should be able to afford some people say thirty percent of your gross some people say thirty five percent of your gross some people say twenty-eight percent of your net it all depends on what your level of risk tolerance is so keep in mind I’m relatively conservative I don’t want to be house poor you know just to keep up with the Joneses and live in a big McMansion right I do want a nice house where I can raise my family but I don’t need to show off to anyone right so I’m actually gonna be using Dave Ramsey strategy of twenty eight percent of your net that should be all of your housing expenses so that bottom number that I just showed you
so twenty-eight percent of your net income is a big difference than thirty percent of your gross right gross makes no sense people why would you base your mortgage payment or your housing expense off a number that you don’t actually realize right so my gross could be a bajillion dollars but if I’m paying you know Commission and taxes all this stuff you know and I’m taking home another amount
I can’t live high on the hog I can’t act like something that I’m not right so I just advise you guys to be a little bit more conservative so we’re gonna go with twenty-eight percent of our net so person one these aren’t what my wife and I actually make but these are just rough calculations so let’s just say my wife makes fifty grand a year let’s say I make fifty five grand a year
for easy numbers I added another row here called extra income because some people may bartend on the weekends they may have a side hustle they may you know do whatever outside of their ordinary income to where they can you know throw some money in here you know if you pick up overtime or whatever there’s a ton of opportunities here so ultimately we added all that up okay and we came out to a gross income of a hundred and ten thousand dollars now what did we talk about I said not to use your gross I said to use your net so I took this spreadsheet just a little bit further and I multiplied the gross by 69% so if you can see this here in the top left corner the reason I multiplied it by 69% is because once you figure you know Roth IRA 401k taxes you know federal state local whatever when you take out all those taxes you’re pretty much taking home 70 or 69 percent of your income I just went on 69 because it’s a little bit more conservative and it’ll get us closer to a realistic number right so now what we’re seeing is the mortgage is taking up 31% of our net so that’s just this number right here that a number that’s close to $2,000 the utilities in the mortgage and all that good stuff if you throw in that extra 300 bucks this is coming out to be 35 percent of our purpose of our hypothetical net income and after the housing expense so you have your take-home income after your housing expense you’re taking on four grand in a month right so in my opinion these people right here are house poor they cannot afford this house okay if they kick it out to a 30-year mortgage you know you’re getting a little bit closer even if I adjust this interest rate right here you know there’s still at 32% a third of their income so one out of every three dollars they make is going to their housing which is
ridiculous that leaves you with no money to go on vacations that leaves you with nothing to invest I mean you’re pretty much living off four grand a month imagine having kids imagine having a dog imagine having you know God forbid a health concern or something like that so ultimately let’s see if these people’s income improve
that’s why I created two columns here so let’s say my wife’s income let’s say it stays the same but I get promoted at work and I start making 75 grand a year instead of 55 and let’s say my wife picks up some overtime I’m getting some YouTube money whatever let’s just say our extra income is 10 grand so now instead of 110 we’re making 135 and now this house looks a little bit more affordable we’re closer to that 28% all-in that’s with utilities mortgage tax insurance HOA mortgage payment all that stuff right so now this $280,000 house is looking like we can actually afford it right so it’s a little bit above that 28% of net but you can see here that this helps you put into realistic perspective what you can actually afford and sometimes what I like to imagine is say I’m my wife’s making 50 grand I’m making that 55 and then YouTube blows up and I just start making like 250 grand a year I’m just kidding hey by my course I can afford this house you guys so ultimately I hope this spreadsheet was helpful for you guys if you want the spreadsheet give me a shout
just remember that the rule of thumb is to stay at about 28 percent of your net income and I didn’t even factor in you know if one of us loses our jobs or as one of us get sick that’s with two incomes so you got to be extra careful you guys the beauty about that
calculator is that you can be as conservative or as lenient as you want to be but again shoot for that 28% that way you have some money to invest you have some money for a rainy day fund and you also have some money for traveling otherwise you know what’s the point of living right so thank you so much for watching you guys I really appreciate it there’s gonna be a PayPal link below if you want to donate to the house fun to please do so if you want to actually literally sign up for my course all joking aside it’s a great course we have about 40 students in there and we’re doing a great job I seem to be getting a lot of positive feedback from that thank you so much and I have a prosperous day.
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