What metric or ratio does everyone use to determine how much primary house to buy (rules of thumb)?
From reading Millionaire Next Door awhile back, the author recommended total mortgage debt to be no more than double your annual income (pre-tax).
I was close to this when purchasing our first home a couple of years ago. I find this metric more useful than comparing monthly payments to income because it makes you more aware of the total purchase price of the home.
What are everyone’s thoughts?
@Account Closed - Are you talking about a house to reside in without any renters? So you are going to pay the full mortgage yourself?
If so, I don't know if I fully agree with the rule of thumb you mentioned. For me, I would make sure that I have cash reserves such that I would be able to pay my mortgage for at least one year. For example, if the mortgage payment is $2,000 per month, I would want to have $24,000 in reserves after closing before purchasing a house that I do not rent.
@Craig Curelop Yes. House without renters. Apologies for lack of clarity. To give an example of this guideline, hypothetically, one making 100k annual pre-tax income would only take out a loan of 200k. Obviously, depending on size of down payment you could buy more house. But total debt load on primary residence would be limited to double your annual income (guideline from Millionaire Next Door).
I do like your guideline as well. You would be mitigating a lot risk as a homeowner.
Let me know if this clarifies things.
Seems like a no brainer. I’ve never come close to breaking that rule on any of the houses we’ve lived in. Not sure that we would qualify for a loan in a property that breaks that rule.
@Max T. That's great! Definitely have seen banks more than willing to give out a loan more than double household income. Curious as to what everyone decides is comfortable for them.
Half of what the realtors and banks tell you you can afford. :-)
@Paul Allen Ha. That'd be quite accurate.