Bad Mortgage Advice

Generally I like BeatTheBush, but this video offers some really bad advice.

He claims:

  1.  People can afford a mortgage that is 500% of their pretax income
  2.  People should take out a 30 year mortgage.
  3.  Affordability is determine by working backwards from income.

Let’s lay out his assumptions.

$50k pretax income

$250k 30 year mortgage

$312.5k home value

Take home pay on $50k is $3008 / month.

At 4%, mortgage payment is $1194.  That alone is 40% of take home pay.  But wait!  Here come taxes and HOA.  My HOA is $320, and the condos sell for much more than $312k, so let’s use that.  The property tax is about 1.25% of value, so about $326.  Then we have insurance at $83.  This gives us a housing cost of $1923.  64% of take home pay!  That is wacky.  I don’t think the bank would even approve that, b/c it would be 46% of pre-tax income, way beyond the 28% they allow.

Dave Ramsey recommends 25% of take home pay on a 15 year.  What would this mean for our $50k guy?  $750 a month for mortgage, taxes, insurance, etc.  Obviously in this case, the bay area is a stupid place to live unless you have some very promising raises in the future and you’re ok w/ living in a small cheap rented room.

I’ve discussed this so often before, but it’s worth repeating yet again:

  1.  The amount you spend on housing may be the single most important factor determining whether you become wealthy/retired/financially independent.
  2. 20% of take home pay is the good life.  10% is the fast track to paradise.
  3. Affordability depends on your net worth goals, not your income.

This is what frustrates me about the personal finance education market.  People spew information but don’t really think about if it’s going to make the listener wealthy.

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