How much should you spend on your Albuquerque home?
(Transcript Snippet): “Tracy:
We had a question this week, how much should we spend on our house? And, you know, there’s lots of theories and lots of people who will weigh in on how much should we spend on our house. And there’s ways to look at it, right, as a percentage of income, um, or a multiple of next work net worth, or, um, household income, uh, comfort level of what you’re comfortable in spending, you know? So, so the, the whole thing let’s answer that question.
Tego:
There’s an old rule of thumb about, you know, your, your family budget. That’s, it’s a 50, 30, 20 rule. And what it says is that 50% of your income should be on your necessities, your housing, transportation, healthcare, food, you know, basically your, your basic necessities, right?
Tracy:
What’s the 30%
Tego:
30% are your, your wants your, you know, your extra, the dining out. Now I know a lot of people put dining out in food and they lump them together, but
Tracy:
That’s not really in that.
Tego:
Exactly. Yeah, I guess I don’t want to go down that road, but, but anyway, so dining out, travel entertainment, um, you know, special clothes, stuff like that.
Tracy:
So then the extra 20% to get to a hundred percent what’s that
Tego:
Savings and, you know, putting some money aside, every single paycheck, you know, people say it should be 10, this, in this case, it’s saying 20% should be set aside for retirement emergencies. You know, if you do the, the Dave Ramsey rule, you need that emergency
Tracy:
66 months of, um, of expenses
Tego:
She found. So, and, and, and it could, that could be debt repayment. So, so what they’re saying is 50% is your necessities. And part of that is your housing cost, either rent or a mortgage payment. If you’re more, you have a mortgage on a house. Um, historically Tracy housing costs have been somewhere in the 30% range of your, your income,
Tracy:
30% of your income. And, but lately with the low interest rates and higher home prices, what has happened with that?
Tego:
Well, the thing that’s interesting is that, you know, home prices over the last 10 years have been historically, um, let’s say affordable when you, when you figure the mortgage payment, because one, we had, you know, we had relatively low, uh, home prices, um, until this year
Tracy:
And low,
Tego:
Low appreciation. I mean, we really had very, very slow price appreciation since about 2012. It’s been very muted if you will. And we’ve had super low interest rates, you know, we talked about it’s funny, cause we say super low interest rates that, you know, at 4% and, and now we’ve, you know, we’ve been at this kind of 3% level for the longest time. So, so what’s happened is even a home prices have gone up a lot. Recently, the actual overall cost of your housing is still lower than historic levels just because the interest rates are so low and your payments are lower.
Tracy:
I know we’ve talked about this, like for years on this radio station that the, the cost of home ownership as a portion of your income is actually more affordable now than it was 20 years ago.
Tego:
Yeah, no, no, no doubt about that Tracy nets, for sure. So I just want to make one point here. So, so we talked about these rules of thumb, right? In, in, you know, what it costs or how much you should spend the problem with rules of thumb is they don’t take into account your personal circumstances. Right. Because when you’re thinking about buying a home versus maybe renting, you know, you’ve got to look at the math, right. That’s kind of what we’re talking about in people with brains like mine, we, we were all about the map, but it’s also emotion. It’s your circumstances, you know, what are the trade-offs that you’re willing to do and take?
Tracy:
So the, the bottom line here is we’re not going to give you a number, right. We need to just talk about it. Right? Okay. Let’s look at your total picture. Talk about what your comfort level is in a house payment, um, and, and come to something that makes sense, based on interest rates. We talk with the lender, we think of us, you and a lender as kind of like a trifecta triangle, right? The three of us work together unless you’re paying cash. And then, you know, you don’t really have a house payment, you have some taxes and insurance every year, but let’s talk about it, put together a plan of what makes you comfortable and then back into your home price.
Tego:
And so, Tracy, I’m going to just pull out some of these questions here. So this was, uh, Ben Carlson. He’s a financial advisor is, and he had written a piece on this. I do want to give him credit. And he said, it’s, you know, these are some of the questions that you should be thinking about when you’re saying, okay, how much should I spend on a home? Especially if you’re a first time buyer, should you stretch a little bit further? Maybe you’re going to stretch it a little bit further if you’re a first time home buyer.
Tracy:
Well, and if you’re in a, just starting a career where your income is going to go up quite a bit over the next couple of years, you might want to stretch and take advantage of that. Lowest,
Tego:
Do an adjustable rate mortgage, whatever you do. I don’t even think they really even exist.
Tracy:
Well, they’re not a better deal right now than a 30 year.
Tego:
All right. So these are some, I thought these, these were three really good questions was how long do I plan to live in this home? Um, could I see this being my forever home? Or am I going to just be here for a little bit and move on? And, and then, you know, how, how much am I comfortably spending on my housing? And then how do I compare that cost to, you know, whatever else I’m going to do to put a roof over my head versus rent versus buying. So I think they’re great questions at a very personal question and there’s no simple answer to it.
Tracy:
Yep. There you go.