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rated:
We are currently renting a house for $2,150.00 per month in the Dallas TX area. Looking at a house listed for $520K. The NY Times calculator (https://www.nytimes.com/interactive/2014/upshot/buy-rent-calcula... tells me that equivalent rent is $1930.00 per month, which tells me we can probably afford it. I gave what I think are reasonable assumptions:

20% down, going to stay for 9 years, 4.25% 30 year mortgage, Home Price and Rent both going up at 3%, investment return of 4%, inflation rate of 2%, property tax 2.23%, 28% tax bracket, 1% maintenance cost, $50.00 HOA per month

However, from mortgage calculators (usmortgagecaculator.org), my monthly payment for PITI+HOA fees will be $3,262.14, which is quite a bit more than my current rent or NY Times equivalent rent, in addition to the $104K downpayment and closing costs. I know they consider the tax deduction of mortgage interest and property taxes, but still seems quite a large difference. Has anybody used the NY Times calculator to determine affordability? Can it be relied upon to see whether we can afford the house, if we can afford the current rent?

Additional Information:

Single income household, 117K annual base salary, plus usually reliable 25K bonus per year. We have 60K in cash for the purchase (in addition to 20k emergency fund), have about 550K in 401k/Roth IRA, no other debts. Husband 47, Wife 45. One kid in college (scholarships cover tuition), one in high school. We were planning to take 50K from Roth IRA (withdrawal of contributions, hence tax/penalty free) for down payment. Currently contribute max to 401k/IRA/Roth IRA/HSA with not much left over after that and expenses. We will have to reduce the contributions to make the monthly cashflow work, that is mainly why I feel the house is out of our price range, but if the NY times calculator is right, the per month cost is less than what we pay now. So over the long term (9+ years) which would be better, continue to rent or buy?

Dallas area prices appear to be going up faster than other areas, so if we wait we are afraid we may get priced out of the kind of houses, with the floor plan we like/need. 

I have been reading this forum for sometime and appreciate the great advice given here. Hoping that you can point out anything I have missed or should be thinking about.

Thanks.

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Note in Texas property taxes are due January 31st with bills going out in the fall. I used to pay taxes in even years i... (more)

lonestarguy (Feb. 09, 2017 @ 8:02p) |

I believe the NYT calculator accounts for standard deduction when calculating tax benefits. As has been mentioned, the m... (more)

test57 (Feb. 09, 2017 @ 9:08p) |

Your housing needs / wants could change considerably once your youngest is out of high school, unless you have reason to... (more)

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rated:
If you think you'll stay 9 years consider the Penfed 5/5 ARM or similar it will save you a lot of money, like $300+ in interest a month.

Given your income something in the mid-400s would be more realistic, but with your nest egg I think you can afford it.

rated:
Unless you HAVE to live downtown or somewhere similarly pricey, the easy zoning laws and abundance of land in the DFW area means housing prices are unlikely to 'price you out.' More desirable areas with established infrastructure might grow faster than you'd like but housing could also collapse (see 2007, see also 1980, 1990...) So no rush unless you're more concerned about interest rates or have some other factor. If you can predict real estate prices, then go do that professionally. If you're looking to see if it makes sense to buy vs continue renting, it appears to be "most likely."

Prima facie, looks like you're reasonably well positioned (financially) to buy a house and have the stability that comes with it. Downside is the limited mobility and tying up a lot of your net worth into real estate.

Down payment is a bit small for a $500k house to avoid PMI. You also might be looking to move or radically downsize your house once your second kid finishes high school soon...

The various rent vs. buy calculators, NYTimes includes, are simply tools to help you illustrate things. They're are just a fancy interface for an Excel worksheet where you choose values for all the different variables. PM me if you need a more nuanced discussion on your specific situation.

rated:
No direct experience with the calculator but few comments.

1. Home price going up 3% - that is a big thing that will change balance. Do you realize that 3% of 520K is like 15K per-year? In theory, that pretty much wipes out the different between the rent and overall home payment. But I hate to use home appreciation to justify buying - to me that is the extra benefit, not the base case.
2. You are obviously paying back principal in your payments. That you should exclude. I do realize that the principal is really small in per-month payments in early part of the loan.
3. Do the math on the tax deduction instead of just saying it is a large deduction. Your net savings in taxes is (interest + property tax payment - std deudction) * your tax bracket.

But be careful - one of your Trump tax proposals is to increase standard deduction to 30K. That might take away most of your tax benefit.

 

rated:
test57 said:   Single income household, 117K annual base salary, plus usually reliable 25K bonus per year. We have 60K in cash for the purchase (in addition to 20k emergency fund), have about 550K in 401k/Roth IRA, no other debts. Husband 47, Wife 45. One kid in college (scholarships cover tuition), one in high school. We were planning to take 50K from Roth IRA (withdrawal of contributions, hence tax/penalty free) for down payment. Currently contribute max to 401k/IRA/Roth IRA/HSA with not much left over after that and expenses. We will have to reduce the contributions to make the monthly cashflow work, that is mainly why I feel the house is out of our price range, but if the NY times calculator is right, the per month cost is less than what we pay now. So over the long term (9+ years) which would be better, continue to rent or buy?
 

  If you have to dip into IRA for downpayment and have to reduce retirement contribution to make the monthly cash flow, you are buying way more house than you can afford. You have a kid in HS; presumably a good school district will not be important in ~3 years or less. Less expensive houses should be easy to get in the DFW area. I would Target a house in the 250-300k region.

rated:
fwuser12 said:   
test57 said:   Single income household, 117K annual base salary, plus usually reliable 25K bonus per year. We have 60K in cash for the purchase (in addition to 20k emergency fund), have about 550K in 401k/Roth IRA, no other debts. Husband 47, Wife 45. One kid in college (scholarships cover tuition), one in high school. We were planning to take 50K from Roth IRA (withdrawal of contributions, hence tax/penalty free) for down payment. Currently contribute max to 401k/IRA/Roth IRA/HSA with not much left over after that and expenses. We will have to reduce the contributions to make the monthly cashflow work, that is mainly why I feel the house is out of our price range, but if the NY times calculator is right, the per month cost is less than what we pay now. So over the long term (9+ years) which would be better, continue to rent or buy?
  If you have to dip into IRA for downpayment and have to reduce retirement contribution to make the monthly cash flow, you are buying way more house than you can afford. You have a kid in HS; presumably a good school district will not be important in ~3 years or less. Less expensive houses should be easy to get in the DFW area. I would Target a house in the 250-300k region.

along these lines....what does this 520k house have that makes it worth so much more? and are those attributes something that you'll value these 9 years? (no idea where that duration came from - might be good to explain?) 

the short answer is: you can't afford [really...maybe on paper but still] this house, unless what it provides is something of such unique value that you can't otherwise get it.

rated:
Thanks for the responses. As fwuser12 said, I also thought if I have to dip into IRA for down payment and reduce future 401k/IRA contributions, the house IS out of our price range. But the NY Times calculator seems to indicate that the cost is actually less than what I pay in rent. I realize now that the net effect comes from assumed rise in home price and the fact that my "contributions" will now go to a single asset (the home) in the form of principal payments.

There is nothing unique about this house, it is just a floor plan we like in our school district. As has been mentioned, we should be able to buy in a cheaper area once the kid is out of HS in 3 years. I was just concerned about potential rise in prices by that time - but it could potentially be lower too.

At this time, we have decided to look for a house around $400K. If we can't find one to our liking, wait out 3 years and expand our search area.

Thanks again for the thoughtful responses.

rated:
test57 said:   Thanks for the responses. As fwuser12 said, I also thought if I have to dip into IRA for down payment and reduce future 401k/IRA contributions, the house IS out of our price range. But the NY Times calculator seems to indicate that the cost is actually less than what I pay in rent. I realize now that the net effect comes from assumed rise in home price and the fact that my "contributions" will now go to a single asset (the home) in the form of principal payments.

There is nothing unique about this house, it is just a floor plan we like in our school district. As has been mentioned, we should be able to buy in a cheaper area once the kid is out of HS in 3 years. I was just concerned about potential rise in prices by that time - but it could potentially be lower too.

At this time, we have decided to look for a house around $400K. If we can't find one to our liking, wait out 3 years and expand our search area.

Thanks again for the thoughtful responses.

  That sounds like a solid plan.

rated:
Owning a home saves people less money than they think it does. It usually boils down to only two things: (1) How long do you plan to stay and are you willing to truly commit to staying in the same place for at least 7-10 years or longer? (2) How do rent prices in the local market compare to buying prices?

I recently moved into a condo rental that costs my new landlord approximately $13K/year in property taxes and condo fees. He could sell it for approximately $350-365K. I'm paying $27K/year in rent. That 14K profit he's making amounts to a 4% return on his $350K investment. Instead of buying, I'd rather keep my $350K invested in the stock market to cover the extra $14K a year I'm paying for the freedom of renting as opposed to owning.

There's another town not too far away that's also popular, but a little less expensive. Similar apartments there rent for $1900-2100/month (as opposed to the $2250 I'm paying) but they sell for only $230-250K. In that market, it would be a lot easier to justify buying.

rated:
test57 said:   ...28% tax bracket... Single income household, 117K annual base salary, plus usually reliable 25K bonus per year.No state income tax in Texas, so a 4-person household with $142K annual income is not in the 28% tax bracket, you're squarely in 25%. And if you max 401k and itemize mortgage interest and property tax, you'll be in the 15% bracket. More if you have local income tax.

rated:
jarfykk said:   Unless you HAVE to live downtown or somewhere similarly pricey, the easy zoning laws and abundance of land in the DFW area means housing prices are unlikely to 'price you out.' More desirable areas with established infrastructure might grow faster than you'd like but housing could also collapse (see 2007, see also 1980, 1990...) So no rush unless you're more concerned about interest rates or have some other factor. If you can predict real estate prices, then go do that professionally. If you're looking to see if it makes sense to buy vs continue renting, it appears to be "most likely."

Prima facie, looks like you're reasonably well positioned (financially) to buy a house and have the stability that comes with it. Downside is the limited mobility and tying up a lot of your net worth into real estate.

  

 

I don't know about that. House prices have been going up like 10% a year here, and we're still considered affordable compared to a lot of other job centers. Our property taxes do help keep the price down, but that $500k house could easily go up in the next year or two. 

rated:
The tax deductions for that kind of house with high TX property taxes can make a big difference.

4% on a $416k loan is $16,640. 2% property tax on 520k value is $10,400. Thats $27,000 deduction combined.

The exact amount you'll save on taxes is going to vary depending on the specifics of your income, taxable income, current deductions.


But its probably in the $200-500/month range.

rated:
The NYT calculator is wrong. Actually it's not 'wrong', it is just not telling you the entire story.
Yes the NYT calculator is giving you an accurate number for the principal and interest, but omits the taxes and other solid costs of home ownership.

I put the PITI at roughly $3200 per month not including PMI as you are putting down 20%. Taxes alone are going to be $950+ per month - there's the difference between the NYT estimate and the $3000 estimate the others gave you. And have you considered the additional expenses for a larger floor-plan? I had a 2677sf house in the Austin area and the summer AC bill was $300+ per month (about 10 years ago).

I see that you're getting a lower priced home, which I think is a good idea - I just wanted to help you understand why the NYT Calc wasn't doing you justice.

rated:
Dell4600 said:   The NYT calculator is wrong. Actually it's not 'wrong', it is just not telling you the entire story.
Yes the NYT calculator is giving you an accurate number for the principal and interest, but omits the taxes and other solid costs of home ownership.

I put the PITI at roughly $3200 per month not including PMI as you are putting down 20%. Taxes alone are going to be $950+ per month - there's the difference between the NYT estimate and the $3000 estimate the others gave you. And have you considered the additional expenses for a larger floor-plan? I had a 2677sf house in the Austin area and the summer AC bill was $300+ per month (about 10 years ago).

I see that you're getting a lower priced home, which I think is a good idea - I just wanted to help you understand why the NYT Calc wasn't doing you justice.

  The NYT calculator includes all of this.  Taxes, maintenance, opportunity cost on the downpayment, etc.  

http://www.nytimes.com/interactive/business/buy-rent-calculator....

rated:
test57 said:   We are currently renting a house for $2,150.00 per month in the Dallas TX area. Looking at a house listed for $520K. The NY Times calculator (https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html) tells me that equivalent rent is $1930.00 per month, which tells me we can probably afford it. I gave what I think are reasonable assumptions:

20% down, going to stay for 9 years, 4.25% 30 year mortgage, Home Price and Rent both going up at 3%, investment return of 4%, inflation rate of 2%, property tax 2.23%, 28% tax bracket, 1% maintenance cost, $50.00 HOA per month

However, from mortgage calculators (usmortgagecaculator.org), my monthly payment for PITI+HOA fees will be $3,262.14, which is quite a bit more than my current rent or NY Times equivalent rent, in addition to the $104K downpayment and closing costs. I know they consider the tax deduction of mortgage interest and property taxes, but still seems quite a large difference. Has anybody used the NY Times calculator to determine affordability? Can it be relied upon to see whether we can afford the house, if we can afford the current rent?

Additional Information:

Single income household, 117K annual base salary, plus usually reliable 25K bonus per year. We have 60K in cash for the purchase (in addition to 20k emergency fund), have about 550K in 401k/Roth IRA, no other debts. Husband 47, Wife 45. One kid in college (scholarships cover tuition), one in high school. We were planning to take 50K from Roth IRA (withdrawal of contributions, hence tax/penalty free) for down payment. Currently contribute max to 401k/IRA/Roth IRA/HSA with not much left over after that and expenses. We will have to reduce the contributions to make the monthly cashflow work, that is mainly why I feel the house is out of our price range, but if the NY times calculator is right, the per month cost is less than what we pay now. So over the long term (9+ years) which would be better, continue to rent or buy?

Dallas area prices appear to be going up faster than other areas, so if we wait we are afraid we may get priced out of the kind of houses, with the floor plan we like/need. 

I have been reading this forum for sometime and appreciate the great advice given here. Hoping that you can point out anything I have missed or should be thinking about.

Thanks.

  The ny times calc takes into account equity and appeciation of the home that you will not see until you sell.  If you have to sell sooner you will end up spending much more money by buying instead of renting. It sounds like you can afford it either way. If you are staying for much longer than 9 years owning will be much cheaper, but if you will be moving sooner renting is much cheaper for the exact same house. If the cost of renting and buying is very similar you have to consider the non financial aspects too. In many cases you can rent a home that is smaller than the smallest home you can buy, and save money. Renting an apartment is often cheaper than a house because of cheaper maintenance, utilities, taxes, and will have more amenities. Certain areas will have very few rentals and more homes or sale or vice  versa, so you have multiple commutes, family obligations and school districts to consider that will limit your rent vs buy decision. When you buy a home you pay about 3% in closing costs, and then another 7% when you sell between realtors fees and closing costs. If there is a chance of moving because of a change in job or family situation owning a home can cost a lot of money. There is a lot of risk to owning a home. You have no diversity, you own one home and you work in the same area. If anything changes that affects the economy there is a double whammy of hurting your salary, and affecting your home price. Also homes are usually leveraged. Even after putting $100k down you could end needing to bring money to closing to sell your home if the market changes. There are fluctuations in the market price based on interest rates and many other things outside of your control. After 9 years there is a little less risk of the fluctuations affecting you, but it is still a risk. If you bought a house in 2007 and wanted to sell now you would not be making a lot of money. If you bought a house in 1998 and wanted to sell in 2007 you would have done much better. Or you could be the next Detroit or Buffalo or Flint and still end up losing money. Then there are other types of risk, hail, flood, hurricanes, fire, sewage backup. Many of these will be covered by insurance but not 100%. You have to fix problems when they break instead of a landlord. When you are renting, your monthly rent is the most you pay in a month. With a mortgage the mortgage is the least you will pay in a month.

There are plenty of benefits to home ownership. You build up equity(not a lot for a few years, it is all interest at the start). It is the only asset that increases in value and has leverage for most American families. There are tax advantages. You will not have to worry about rent increases or a landlord not renewing your lease. You have more privacy than in an apartment. Your neighbors are usually also homeowners and care more about their home and neighbors. You have a lot more freedom in the changes you can make to your home.

The likelihood of Dallas homes going up in price faster than other areas is already priced into the house. A big part of why homes in Dallas are $500k while they would only be $150k in Lubbock is that the prices in Dallas are expected to keep going up, and that people who live there can afford it. Affordability is actually really important. Unless wages in the area increase, or some other cost of home ownership like taxes decreases, home prices will not change substantially.

Why are you planning on staying for 9 years and not longer? Do you want to deal with the extra work and unexpected expenses of owning a home instead of renting?

rated:
I think the equivalent rent includes the appreciation, but you don't actually get it until you sell.

rated:
Props to the Op for running the calculator and *then* starting the thread!

rated:
a good guess for the 9 year time period is the kids will be out of college by then. Find a less stressful job away from the big city or retire to a small town.

rated:
Dallas pricing isnt too crazy depending on the area. $500k in some parts will buy you a McMansion so maybe look for something lower? Separate the wants from the needs and retire early. Good luck!

rated:
jerosen said:   The tax deductions for that kind of house with high TX property taxes can make a big difference.

4% on a $416k loan is $16,640. 2% property tax on 520k value is $10,400. Thats $27,000 deduction combined.

The exact amount you'll save on taxes is going to vary depending on the specifics of your income, taxable income, current deductions.


But its probably in the $200-500/month range.

  One other factor is whether or not you currently itemize. With the current standard deduction for a married couple being $12,600 (and potentially increase, if the tax plan proposed by Trump actually goes through - big if, but one to monitor), then your true net tax benefit for buying a house should consider the marginal tax deduction that you would get over the standard.  Living in TX, you would probably be able to deduct state sales tax (or some estimated amount - also subject to the Trump tax plan), property taxes, mortgage interest, and any other potential miscellaneous deductions (do you tithe?!?!).  Through a rough back of bar napkin calculation, I'd estimate that you'd get something like an extra $14k a year in tax deductions at your top marginal tax rate(s), which is based upon your taxable income.  Not sure if the NYT calculator factors in the standard deduction as a detriment to tax savings or not.

rated:
Note in Texas property taxes are due January 31st with bills going out in the fall. I used to pay taxes in even years in January and December and then no property tax in odd years. This allowed me to get a much bigger deduction in even years and then took the standard in odd years. This works easily if you don't use escrow so you control the timing.

rated:
I believe the NYT calculator accounts for standard deduction when calculating tax benefits. As has been mentioned, the main effect comes from appreciation which we don't realize until we sell. Till that time, we will be paying more than the equivalent rent, with less money going towards other investments. The net effect is that more and more of the net worth will be in a single asset, which is risky.

The '9 years' stay was just the default provided by the calculator - I just didn't change it because we plan to stay long term in the house. Once we go above 9 years in the calculator, it didn't seem to make much difference in the calculations.

Thanks for the information about the Trump proposal to increase standard deduction and about that TX property taxes are due in Jan. Good to know.

rated:
test57 said:   One kid in college (scholarships cover tuition), one in high school.
  Your housing needs / wants could change considerably once your youngest is out of high school, unless you have reason to believe one or both of the kids will boomerang for a while before leaving the nest permanently.  Also it seems like renting a house is cheaper than renting the money to buy the house right now, so there's not even a financial penalty to waiting.  I would hold off until your needs become clearer, and maybe try out a different lifestyle by renting before buying - as in, maybe you'd like a townhouse within walking distance to nightlife or someplace close to work vs. a larger place in the suburbs.  Maybe you'll start travelling more and the maintenance starts to be a drag vs. renting.  Your $400k plan looks fine too if you're confident about your needs and wants.

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