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Visitor
davklly
Posts: 4
Registered: ‎05-25-2009

Follow the 28/36 rule

The only person who knows about your financial status is yourself unless you choose to ignore it.  Before buying a house, car, boat... Do your self a favor by doing this simple arithmetic.  Run your debt to income ratio.  http://www.creditsoup.com/resources/calculators/debttoincome.asp

 

1-Your mortgage (including tax and insurance) or rent payment should not pass 28% of your monthly income.

2-Your total debt including your mortgage, car, alimony, credit card debt... Should not pass 36% of your monthly income.

 

Then you can allocate the rest of your income for other expenses like groceries, telephone, water, electricity, insurances etc... and the rest 10% - 25% goes to your saving.  Very simple huh? How many of us follow this rule? If every one follows this rule, we would not be in this mess.

 

Now for those of you who wants to know the actual median price for a single family home in San Diego, I give you this simple formula.

                     Median family income multiplied by 3.6

 

Example, San Diego.

 

According to HUD, San Diego's median family income in 2008 was $72100

http://www.huduser.org/datasets/il/il2008/2008MedCalc.odn?inputname=METRO41740M41740*San+Diego-Carls...

 

Median home price = $72100 * 3.6= $259560 

 

Right now the median family home price in San Diego is some where around $283000 according to California Association of Realtors.

http://www.car.org/economics/historicalprices/2009medianprices/mar2009medianprices/

 

Caution, this number might go up due to the mid to upper level houses start going through foreclosure in 2010 and 2011.

http://finance.yahoo.com/news/Foreclosures-New-Waves-Will-zacks-15306283.html?.v=1

There are a lot of option arm and alt-a loans issued to houses mid to upper level homes in San Diego county.

 

For those of you who wants to know how I came up with 3.6, check this out

Say the median family income was $72100 in 2008. That is $6008 per month.

 

Using the 28% rule, mortgage including tax and insurance should not exceed $1682. So, using today's average interest rate at 5%, the maximum amount a median family can borrow is $257000.

Plug in this number at 5% 30 year fixed, 1% tax and 0.4% insurance your monthly payment will be $1682.

 

http://www.mortgagecalculator.org/

 

With 20% down payment you can afford a house worth $320000. You just have to come up with a cool $64000 cash. Including closing costs, make sure you have $75000 to $80000 cash. How many median families you know who can come up with that amount of cash in San Diego in this economic environment? That's why housing will keep going down until the fundamentals support it.

 

Even though, I said the median home is heading to the 250's range, It could pass that level and head even lower due to unemployement reaching 15% in california and commercial real estate meltdown.

Don't expect a "V" shape recovery like some people say on TV or on this forum.  This crisis is the worst since the great depression, it took years of reckless borrowing and spending, therefore it will take years to fix it.

 

D.

 

 

 

 

Visitor
wfrantz
Posts: 3
Registered: ‎04-30-2009

Re: Follow the 28/36 rule

While this is good for a rule of thumb, there are many other factors to consider when calculating your mortgage.  For example, consider a 30 year old near the start of their career that puts 10% down on a $289,000 home.  They earn $6000/mo and spend $1680 on their mortgage to stay within the 28% rule.  They lock in a 30 year fixed rate.  Their mortgage never changes but suppose they start getting a modest 3% raise every year.  By the time they are 45, they are earning $9075/mo.  Their mortgage is now 19% of their income and they still have 15 years to go!  Furthermore, their house may have appreciated a modest 3% every year and is now worth 50% more than they paid.  Their loan balance after 15 years is $177,000 and they have 60% equity ($256k) in their house.

 

While that would be a nice position to be in, it seems overkill for a 45 year old that will probably continue to increase their income and is 20 years from retirement.  I would encourage that 30 year old to be much more aggressive.  Typically, property values rise and personal incomes rise but mortgage payments are fixed for 30 years.

 

Besides, the median price is $283k for a "home" in San Diego County.  If you need a single family house in northern metro San Deigo the median price is probably twice that.

Visitor
davklly
Posts: 4
Registered: ‎05-25-2009
0

Re: Follow the 28/36 rule

Totally agree.  That's why owning a home pays off in a long run as long as a person is in his/her range of affordability based on their income.  Even at today's median range of $283,000 with 3%/year appreciation, it will take 10 years to reach at $368,000. A family has to make $100,000/year to able to afford a home at $368,000. There are a lot of houses out there for sale in this price range through out San Diego (exclude coastal and some pricey neighborhoods).  This brings us to the main point, housing is still not affordable to a median family who earns $6000 - $7000 per month.  Yes, they can buy a house in a range of $200,000-$250,000 but, in a less desirable neighborhoods.  Today, these houses are considered lower end.  
Regular Contributor
jwinston2
Posts: 64
Registered: ‎05-02-2008
0

Re: Follow the 28/36 rule


wfrantz wrote:

While this is good for a rule of thumb, there are many other factors to consider when calculating your mortgage.  For example, consider a 30 year old near the start of their career that puts 10% down on a $289,000 home.  They earn $6000/mo and spend $1680 on their mortgage to stay within the 28% rule.  They lock in a 30 year fixed rate.  Their mortgage never changes but suppose they start getting a modest 3% raise every year.  By the time they are 45, they are earning $9075/mo.  Their mortgage is now 19% of their income and they still have 15 years to go!  Furthermore, their house may have appreciated a modest 3% every year and is now worth 50% more than they paid.  Their loan balance after 15 years is $177,000 and they have 60% equity ($256k) in their house.

 

While that would be a nice position to be in, it seems overkill for a 45 year old that will probably continue to increase their income and is 20 years from retirement.  I would encourage that 30 year old to be much more aggressive.  Typically, property values rise and personal incomes rise but mortgage payments are fixed for 30 years.

 

Besides, the median price is $283k for a "home" in San Diego County.  If you need a single family house in northern metro San Deigo the median price is probably twice that.


 

This is some of the worst advice I have read on Redfin. You should always stay within the 28% rule regardless if 10 years from now you may have a cost of living increase. The situation that you describe is what every person should be striving for, within the next 20 years of working they should own the home they live in and have a substantial retirement nest egg.

 

I really can not believe I am reading someone suggesting that this is "overkill." Quite to the contrary this is always how it should be done. 

 

Contributor
wecandothis
Posts: 13
Registered: ‎06-13-2009
0

Re: Follow the 28/36 rule

D..thanks for the advice and the plain English version of the 28/26 rule...
Silver Contributor
jquick
Posts: 437
Registered: ‎05-31-2009

Re: Follow the 28/36 rule

I follow the 9/19 rule.    A max of 9% of your income pays the mortgage interest payment, while 19% of your income pays the principal down, leaving a max 28% house payment that consists of twice as much principle vs. interest.

 

Then you end up paying the loan off in 9 years, giving you 19+ years of free and clear property, or 100% equity to roll into your next property using the same 9/19 rule.

DAK
Visitor
DAK
Posts: 2
Registered: ‎04-04-2009
0

Re: Follow the 28/36 rule

Housing will not bottomed in San Diego until a working middle class family can afford a median  detached home @ $260,000 in decent neighborhood.
Super Contributor
Muppet
Posts: 293
Registered: ‎09-15-2009
0

Re: Follow the 28/36 rule


davklly wrote: 

Even though, I said the median home is heading to the 250's range, It could pass that level and head even lower due to unemployement reaching 15% in california and commercial real estate meltdown.

Don't expect a "V" shape recovery like some people say on TV or on this forum.  This crisis is the worst since the great depression, it took years of reckless borrowing and spending, therefore it will take years to fix it.


 

I totally agree.  Until Obama stops giving these handouts (see 1st time homeowner program opened up to 70% of Americans), this insanity won't stop.  These programs are artificically increasing the prices and not allowing them to bottom out.  Not so much in San Diego because you have to be a completely insane to buy a $700k home to get a $10k savings, but in the rural areas of this country where that credit really helps inflate the bottom line of the market.  

 

The prices in San Diego will continue to fall for the next few years, but they won't fall all the way down to match the salaries in the area.  There is always a "suntax" that will increase the values of the homes in beautiful San Diego.  If you want a good deal, go to Anchorage...lol

Contributor
SimpleBuyer
Posts: 10
Registered: ‎04-04-2010
0

Re: Follow the 28/36 rule

While I enjoyed this thread and hoped it would meet reality, none of this has come true.  Perhaps this is due to the new added govt cashback for buying 1st time.   Perhaps it's due to low inventory.   Whatever the reason, the list prices are not going down.  They are going up.  Some of the flippers are doing an excellent job with refurbishing top to bottom.  Some of the flippers are doing bare minimum.  No matter what the renovation, some flippers are immediately asking +$100K what MLS says they paid, this is what I have seen in the under $350K price range in Oceanside.

 

If the 28/36 rule were true, I would be seeing a lot more homes in my target range.  Household income of $100K plus 30% available for down payment.  The reality is that this is not happening - prices do not look like they will decrease.  Maybe they will flatten out for a longer term, however double-dip looks unlikely, even with more foreclosures upcoming.

 

Personally I am still on the fence.  I am now waiting until all govt cashback expires, and interest rates climb to norms, then prices must reduce to compensate - which is when I will be in a good position due to having more savings ready.

 

Super Contributor
UCWino
Posts: 246
Registered: ‎04-25-2010
0

Re: Follow the 28/36 rule

Conventional wisdom bases this rule on gross income, true?  Shouldn't it be based on net?