What’s up everyone?
A few weeks ago, I did a video on how much money you would need to comfortably buy a home for $400,000, which had a lot of you feeling very overwhelmed. We used the 50-30-20 budget and the 30% rule that states your mortgage should not exceed 30% of your income. After figuring out the loan numbers & living expenses, we figured out the necessary salary to buy a $400,000 and not be house poor would be $187,000 gross salary.
Today we are going to focus on an $800,000 house with 40% of our income on the mortgage.
We’re using an $800,000 house because in a lot of areas, mine included, $800,000 is the median sale price. With interest rates around 8% and homes still expensive, I think it’s important to see how much money you actually need to buy the house and how much you need to net from work to live comfortably.
You may already be throwing things at me for even suggesting you buy a house in today’s market. It’s ok- I understand your frustration. But this is for informational purposes only, so it may come in handy, if not today, then someday.
Lets dive right in
So we’ll start with your mortgage and work our way to living expenses and end with how much you need to net to cover everything and still not be completely house poor.
There are 4 or 5 components of a mortgage payment. Think of the acronym PITI. Principal, Interest, Taxes – in this case, property taxes, and Insurance -and we’re not talking about your health, but rather homeowners or hazard insurance. There could possibly be a 5th component which is mortgage insurance or PMI, and that depends on how much you are putting down. Typically, borrowers making a down payment of less than 20 percent of the purchase price of the home will need to pay for mortgage insurance. Mortgage insurance also is typically required on FHA and USDA loans.
Out of these 5 components, if you get a 30 year fixed loan- which is the most popular loan, your principal and interest will remain the same amount throughout the length of the loan. They will vary between how much of the amount is principal and how much is interest but the total amount is the same number every month. As for your insurance and property taxes, these numbers can change from their original amount.
Your property tax is based on the assessed value of your house, so if your house goes up in value, which is what we all want, your property taxes will go up as well. Now, the assessed value is different than the market value. You may be buying a house that costs $800,000, but the assessed value is $650,000 so your property taxes are based on the $650,000. Every state has a different property tax rate so check your state to get a more accurate number for your budget.
For our example of an $800,000 house, we’re going to say the assessed value is also $800,000 to make it easy. As far as the property tax rate, we will use 1 % of the assessed value which is the average property tax rate according to bankrate.com. So 8000/12= monthly payment ($666)
Your home insurance adjusts depending on inflation and other factors – such as severe weather. You can shop around for home insurance and a lot of people end up bundling their home insurance with their cars to get a better rate. A good tip to keep in mind.
For our example, according to bankrate.com, the average home insurance cost is about $120 a month for a policy with a $250,000 in dwelling coverage. https://www.bankrate.com/insurance/homeowners-insurance/homeowners-insurance-cost/#how-much-is-home-insurance So for the purpose of this video, we will triple it to get our insurance cost for $750,000 in dwelling coverage.
So $360 = our monthly payment for insurance.
Keep in mind, all states are not created equal when it comes to home insurance. Every state has different risks that impact insurance rates- According to bankrate.com the state with the lowest home insurance rate is Hawaii and the highest is Oklahoma so check with your state to see what the average cost is for your budget. I can tell you that here in Maryland, your home owners insurance would most likely be less than $360 a month.
As for mortgage insurance, or PMI, this is generally required until your loan reaches 78% of the purchase price. So if you’re putting less than 20% down when you buy the house, you want to add in this number to your budget which will vary depending on the type of loan you get and how much you are putting down. According to Freddie Mac, for a $800,000 house, the PMI will range from $190/month for 15% down to $730/month for 5% down https://myhome.freddiemac.com/resources/calculators/mortgage-insurance
For our example, let’s use $400/month and like I said, this will go away once you have the 20% equity in your home.
You can always add payments allocated towards principal to shorten the length of the PMI.
So to review, so far we have
$666 (property tax)
$360 (insurance)
$400 (PMI)
Now we need to calculate the principal and interest. We’re going to use the mortgage calculator from bankrate.com with a down payment of 10% for a 30 year fixed rate. https://www.bankrate.com/mortgages/mortgage-calculator/
** This is a good time to remind you I am not a lender or a financial advisor and interest rates can vary depending on your specific situation. This is purely for educational purposes only and I will put links to all of the sites that I’ve used to get these numbers in the description and on my blog needhomeinfoblog.com . To really know your specific numbers, you should contact a local lender who will quote you what is appropriate for you and your situation.
For our example, lets go over what bank rate is showing us for today in November of 2023. https://www.bankrate.com/mortgages/mortgage-calculator/
Home price $800,000
Down payment: 10% $80,000
Interest rate: 7.8%
Principal and Interest: $5183
Lets add our other numbers
$666 (property tax)
$360 (insurance)
$400 (PMI)
And we get a total of $6,609 a month.
Please keep in mind, these numbers are averages. Your property tax, homeowner’s insurance and PMI could all be different depending on where you live.
Let’s move on to your other living costs.
These numbers are hypothetical322 – only you know how much you spend on each.
Fixed Costs per month
$6609 (housing)
$400 (utilities)
$350 (health insurance)
$300 (car payment)
$100 (gas)
$100 (cell phone)
$120 (internet & tv)
Other costs per month
$400 (groceries)
$200 (entertainment)
$100 (misc)
$200 (CC)
$200 (Student loan)
$300 (savings)
This totals to $9379
9379 x 12= $112,548 which is what you need to net after taxes just to pay the expenses.
Now we need to figure out how much you need to make in order to have only 40% of your income go towards your mortgage.
So to figure that out we divide 6609/.40 = $16,522
So in order to live comfortably and not be house poor, you would need to bring home $16,522 a month. Or $198,270 a year. Now this is what you are bringing home.
In order to calculate how much you would need to make (your gross income) we need to do a little more math. In order to figure your gross income, if we assume your net income is 75% of your gross income, we take the monthly net and divide it by .75
So 16522/.75= 22,029. 22029 x 12= $264,352 which is a LOT of money. Even if this is spit between 2 people, it’s still a lot of money.
Now keep in mind, this is putting 40% of your income towards your mortgage. I know this seems very overwhelming. My numbers may look very different from yours so take them and adjust to your lifestyle.
And not to further depress you, but it does cost money to actually buy the house. You have your down payment, closing costs and inspections/appraisal. With a $800,000 price, it will be around 3% give or take for your closing costs (at least here in Maryland) plus the 10% down and appraisal and inspection. So $80,000 DP + $24,000+ $500 (appraisal) and $700 inspection = $105,200.
If I have totally depressed you, take a breath, go for a walk, have a drink, whatever you need to do to clear your head and then look again at the numbers and start to plug in what you think they are.
Then speak to a local lender to plug in the loan numbers.
I hope you found this helpful. Remember this is for educational purposes only, everyone’s situation is specific to them.