馃攳
How to Buy A House WITHOUT GOING BROKE | How Much Home Can I Afford | Real Estate Investing - YouTube
Channel: Next Level Life
[0]
Being house broke is one of the toughest things
to have to deal with when it comes to personal
[5]
finance.
[6]
And unfortunately, there is a fairly sizable
number of us that have experienced being house
[10]
broke at one point or another in our lives.
[13]
And in the interest of trying to lower the
number of home buyers that will end up being
[17]
house broke in the future, I thought it would
be a good idea to do a quick video on how
[21]
much we should be spending on housing.
[24]
As is the case with many other big financial
decisions there are a few different rules
[28]
of thumb that people throw out there when
asked the question how much home can I afford
[32]
so today we're going to analyze the three
major ones, talk about their advantages and
[37]
disadvantages, and show some examples of how
they work in tandem with the rest of our budget
[42]
so that you can decide which rule of thumb
would be best for your situation.
[47]
Hey everyone Daniel here and welcome to Next
Level Life a channel where you can learn about
[53]
investing, debt, retirement, and many other
financial topics besides, because, let鈥檚
[56]
face it, the school's aren't going to teach
it for us.
[59]
So if any of those topics sound interesting
to you or if you want to learn how to better
[62]
handle your money and have more financial
freedom be sure to hit that subscribe button
[65]
and the bell next to my name to be notified
every time I upload a video.
[69]
And if you want to further support the growth
of this channel you can check out some of
[72]
the links I鈥檝e left down in the description
below which includes a 30-day free trial of
[76]
Audible and 2 free audiobooks of your choice
as well as a list of some books on money I鈥檇
[82]
recommend checking out with your free trial,
or you can smash that like button if you haven鈥檛
[86]
already, share this video with a friend, and
leave a comment below letting me know what
[89]
topics you鈥檇 like me to cover in future
videos.
[92]
How much house can I afford?
[94]
This is a question that many people ask every
single day and financial experts have come
[98]
up with a few different rules of thumb to
use when answering that question.
[103]
The three rules of thumb are the 28/36 rule,
the 30% solution, and the 25% method.
[111]
Let's take a look at each of these individually.
[113]
The first rule of thumb that people use to
figure out how much house they can afford
[117]
is the 28/36 rule.
[118]
The 28/36 rule states that you should spend
no more than 28% of your gross income on your
[125]
mortgage payments including the principal,
interest, insurance, property taxes, PMI if
[133]
you have it, and HOA and other related fees
and dues if you have them.
[138]
The rule also states that no more than 36%
of your gross income should be spent on your
[144]
housing and all other debts.
[148]
Or in other words, 36% of your gross income
should go towards your mortgage principal
[152]
(or rent if you're a renter), interest, insurance,
property taxes, PMI, HOA fees, and other debt
[158]
payments like a car, student loans, or other
personal loans.
[162]
The main advantage of using the 28/36 rule
as your rule of thumb is that it enables you
[167]
to purchase the second most expensive house
out of these three rules while taking into
[173]
account other areas of your financial picture,
in this case, your non-housing related debts.
[180]
And in most situations, so long as nothing
horrific happens, people should be able to
[184]
make these payments without going over budget.
[188]
The disadvantage or potential disadvantage
to using this rule as opposed to some other
[192]
rule of thumb when figuring out how much house
you can afford is that, well, it delegates
[198]
the largest amount of your income toward liabilities
out any of these three rules, at least explicitly.
[204]
In doing so it automatically means that you
don't have as much money left at the end of
[208]
the month to put towards other goals whether
that's giving, paying off debts, investing
[213]
for your future, or just saving for a vacation.
[215]
Let鈥檚 take a look at how this works.
[217]
Let鈥檚 say that John and Jane are looking
to buy a new home.
[221]
Together they earn $72,000 a year or $6,000
a month (roughly the average income in the
[226]
US according to the most recent data from
the Bureau of Labor Statistics) and have the
[231]
following debts.
[233]
$5,000 on a credit card which is costing them
$100 a month in minimum payments, $10,000
[237]
left on a car loan that has a minimum payment
of $185 a month, and $30,000 of total student
[244]
loan debt that has a total minimum payment
of $300 a month.
[248]
John and Jane鈥檚 total minimum monthly debt
payments add up to $585 a month and account
[253]
for roughly 9.75% of their gross income.
[257]
So they are a little bit above the 8% recommendation
of this rule of thumb when it comes to the
[261]
percentage of their income going to non-housing
debt, but that鈥檚 okay, that鈥檚 part of
[277]
what gives this rule of thumb an advantage
over the other rules of thumb on this list.
[281]
Because based on these numbers John and Jane
would have to either pay off some of their
[285]
debts before buying a new home or simply adjust
how much of their income they are going to
[290]
put towards their housing costs.
[292]
In this case, if they decided to not pay off
any of their debts before buying the new home
[298]
they would need to spend no more than 26.25%
of their gross income on their housing so
[305]
that their debts and housing costs together
could still be no higher than 36% of their
[311]
gross income.
[312]
This would mean that the most they could afford
to spend on a new home (including the mortgage
[316]
principal, interest, taxes, insurance, and
any related fees) would be $1,575 a month
[323]
or $18,900 a year.
[326]
The amount of home that this would buy John
and Jane would vary depending on a number
[329]
of factors including what interest rate they
received, how much property taxes and homeowners
[334]
insurance are where they want to live (because
this can vary by a surprising amount), how
[338]
much of a down payment they put on the home
and whether or not it was enough to avoid
[342]
having to get private mortgage insurance or
PMI, and what other fees may have come with
[347]
the home.
[348]
If we assume that property taxes are roughly
1.5% of the homes value, homeowners insurance
[353]
costs John and Jane $100 a month, they have
no PMI because they put 20% down on the home,
[359]
there were no HOA or other fees associated
with the home, and they received an interest
[363]
rate of 4% on the mortgage then John and Jane
would be able to buy a home of roughly $270,000
[369]
on a 30-year loan and a $190,000 home on a
15-year loan under
[389]
the 28/36 rule.
[400]
The second rule of thumb that people use to
figure out how much house they can afford
[404]
is the 30% solution.
[406]
The 30% solution states that no more than
30% of your gross income should be allocated
[411]
towards housing costs which basically includes
the same things as before.
[416]
Its primary advantage is the fact that, of
the three rules we鈥檙e going over today,
[420]
it allows you to buy the most expensive house.
[424]
Looking back to John and Jane鈥檚 example
from earlier.
[427]
They make $6,000 a month, meaning that under
the 30% solution they can allocate no more
[432]
than $1,800 a month to housing.
[435]
Assuming the same scenario we described before
this would allow them to purchase a $335,000
[442]
home on a 30-year loan and a $235,000 home
on a 15-year loan.
[447]
A potential disadvantage to using this method
is that it does not really take into account
[453]
how the rest of your money is divvied up,
or at least it isn't as explicit about it
[457]
as the 28/36 rule.
[459]
Technically the 30% solution does advise that
you have no more than 20% of your take-home
[464]
pay going towards non-housing debts, but unlike
the 28/36 rule, it doesn't have a second layer
[470]
for you to adjust your housing costs if you
are in a situation where you're up to your
[474]
eyeballs in debt.
[475]
As we just saw using the 28/36 rule in a situation
where your debts are higher than recommended
[480]
it would force you to adjust the percentage
of your budget going to housing down so that
[485]
you could still fit under that 36% ceiling
however the 30% solution has no such adjustments.
[490]
If you followed it to a tee, then you鈥檇
basically still be putting 30% of your gross
[494]
income towards housing and then figuring out
your debts another time which could lead to
[498]
some very tight budgets.
[501]
So if you are up to your eyeballs in debt
it may not actually be a smart move to put
[505]
30% of your gross income towards housing costs
if you can avoid it while you get yourself
[510]
out of debt.
[511]
The same goes for those who are looking to
retire early.
[514]
While having a bought-and-paid-for home is
certainly very helpful when going into early
[517]
retirement putting 30% of your budget towards
housing, unless you get a really good deal,
[523]
will probably make it a little bit tougher
to achieve the goal of early retirement compared
[527]
to a more conservative rule of thumb.
[529]
Which leads us into the third most common
rule of thumb when it comes to deciding how
[533]
much you can afford to pay for your home.
[534]
The third rule of thumb that people use to
figure out how much house they can afford
[535]
is the 25% method.
[536]
The 25% method is the one popularized by Dave
Ramsey and it states that you should allocate
[542]
no more than 25% of your take-home pay, towards
your housing costs.
[550]
This is undoubtedly the most conservative
of these three rules of thumb and generally
[559]
works very well especially in situations where
you need to allocate a large portion of your
[563]
income towards other financial goals such
as giving, paying off debt, or investing in
[568]
your future.
[569]
However, the downside is it can be tough especially
in more expensive areas to find a decent house
[577]
in a decent neighborhood on this little of
your income.
[580]
Again let鈥檚 look back at John and Jane鈥檚
situation, they make $72,000 a year which
[585]
after taxes would look suspiciously like $60,000.
[588]
Following this rule of thumb that would mean
that we would need to allocate no more than
[592]
$15,000 a year or $1,250 a month towards their
housing costs.
[598]
This would enable them to buy a $225,000 home
on a 30-year loan and a $160,000 home on a
[606]
15-year loan.
[607]
Again, that's certainly doable in many areas
of the country but it's less easy to find
[612]
a nice place in a nice neighborhood in more
expensive areas of the country for that amount
[616]
unless you get creative.
[618]
Because even in those cases that doesn't mean
that this rule of thumb, or either of the
[621]
other ones for that matter, is impossible
to follow it just means that we have to look
[625]
at some of the other options we have available
to us.
[629]
House hacking or rent hacking, whichever is
applicable to your situation, are great things
[633]
to look into in a situation like this.
[636]
Say John and Jane are living in a higher cost
of living area where the studio apartments
[640]
in decent and relatively safe neighborhoods
go for about $1,500 a month and three bedrooms
[645]
are in the neighborhood of $3,600 a month.
[648]
John and Jane could take on the studio apartment
pay the $1,500 a month plus any utilities
[653]
and internet and other things that go into
it all on their own or they could move in
[657]
with a couple of other people that they trust
and split the cost of the $3,600 a month three
[662]
bedroom apartment and pay $1,200 each.
[664]
Now course we would still have to figure in
utilities and stuff but since they're splitting
[669]
that as well in the 3-bedroom apartment, I
presume, it would still be a more manageable
[673]
situation for them then it would be had they
gone out on their own.
[676]
They could do a similar thing with housing
by renting out bedrooms or even entire floors
[680]
(if the house has them) full-time or even
just occasionally on a site like Airbnb to
[685]
others and using that to offset some of their
housing costs.
[691]
But those are three common rules of thumb
that are used to help us determine how much
[697]
home we can afford.
[699]
And one thing that I do want to add that I鈥檓
sure many of you have already been asking
[702]
yourself while watching this: Can we really
trust these rules of thumb when everyone鈥檚
[706]
situation is so different?
[708]
My answer would be that these, like many other
rules of thumb is it depends.
[709]
I wouldn鈥檛 just go with any of these rules
of thumb blindly, not because they can鈥檛
[714]
work, but because doing so discourages us
from looking deeper into our own situations
[720]
and trying our best to take into account the
rest of our financial picture and what else
[725]
goes into buying a new home.
[727]
Because there are other things to consider
beyond these rules of thumb and how much of
[731]
a down payment you can afford to make on the
home, such as moving expenses, furniture and
[735]
appliances that you might need to buy, or
at least upgrade, for the home, repairs and
[740]
remodels that you may or may not end up needing
to do early on with the houses, closing costs,
[743]
and a whole bunch of other things.
[762]
So I鈥檇 recommend using these rules of thumb
as a starting point.
[775]
Use them as a way to understand what costs
go into housing and then do some further research
[784]
on your own because for many of us a house
is one of the biggest purchases we will ever
[789]
make so it definitely can鈥檛 hurt to be a
little extra thorough in our investigations
[794]
to make sure we don鈥檛 make any major mistakes.
[797]
But that'll do it for me today once again
if you enjoyed this video be sure to smash
[800]
that like button if you haven鈥檛 already,
subscribe, and hit that Bell next to my name
[804]
so that you'll be notified of all my future
uploads.
[806]
I generally upload every single Monday, and
if you have a friend that would be interested
[809]
in this kind of content be sure to share it
with them and let's really get this information
[813]
out there and start our own Financial revolution.
Most Recent Videos:
You can go back to the homepage right here: Homepage