How much house can you actually afford?

Likely less than you think…at least if you listen to Zillow (or other companies incentivized to sell homes):

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If you’re wondering how much house you can actually afford, you’ve come to the right place! I’ve built a free tool that will accurately answer questions such as:

How much house can I afford based on my income, expenses, savings, debt?
What is the benefit of increasing the down payment?
What mortgage term/duration is right for me?
What’s the benefit of waiting for a lower interest rate?

Why do I need another mortgage calculator?

There are a lot of beautiful, intuitive, and accessible mortgage calculator tools online, but they usually have three significant flaws:

They understate the costs of purchasing and owning a home
- Many of the online mortgage calculators display advertisements for mortgage lenders and receive compensation if a potential home-buyer clicks on the link to the lenders website
- The lower the displayed cost of a mortgage, the more likely someone is to click the link
- Most notable costs typically missing are maintenance costs, utilities, and closing fees
- My estimated costs are 65% higher compared to Zillow (which insane)
They default to a 30-year mortgage term
- A 30 year mortgage offers the lowest monthly payment and may be best for you
- However, it is also the most expensive loan in terms of total cost of ownership
They tell you how much a house costs, not how much you can afford
- You probably could beat The Big Texan’s 72-ounce steak challenge, but that doesn’t mean you should…
- The reason these websites don’t take into account your savings, debt, income, or monthly expenses is because you can afford less house then you think…
- …and the less affordable something looks, the less likely you are to click on links to mortgage lenders

Sadly, these websites and companies are not your friend. They are not trying to help you out. They want your money, not your love. If the product is free, you are the product. In the context of capitalism, it is imperative you ‘follow the money’ to understand the actions of others.

Luckily, I am your friend! Well, sort of. I am indeed a stranger, but we share a common enemy (dishonest mortgage calculator tools). And honestly, I build my mortgage calculator tool for my own benefit, but now that it exists I’d rather share it than keep it to myself. Most importantly, I make $0.00 off of your use of the tool (or even visiting this website…)

The only catch is that you have to read my writing (or ya know, scroll to the bottom of the post).

What I learned

It wouldn’t be an ioverthinkso post without some reflection, and I learned more than I thought I would from this exercise:

It’s dangerous to go alone!
- Having a partner who can contribute to housing expenses makes a big difference in terms of not only what you can afford, but also how much of an emergency fund you need
- It’s not DINC-or-nothing either, even a couple hundred goes a long way
Buying a house is not just a financial decision
- For a lot of people, myself included, they want to own a house because they want to own a house
- These people, again myself included, would probably buy a house even if it were cheaper to rent
- Now this isn’t necessarily irrational because owning a house isn’t just about costs, it’s also about stability, the freedom to design your living space, and the satisfaction of calling something ‘mine’
- Names have significance (and power) and there’s a reason owning a home is commonly referred to as the American Dream
A home is not an investment until you own two of them
- We are all born with a ‘housing liability’–we need a place to live
- If you own one home and it appreciates in value, when you sell you will likely buy another home that has also appreciated similarly in value–your appreciation gains will be wiped out (especially when factoring in transaction costs such as buyer’s and seller’s fees)
- However, if you own more than one home, then you can reap the benefit of higher prices without having to pay a higher price yourself
- For the nerds it’s worth nothing that there are divergent opinions on this. Noah Smith wrote an excellent article on this topic and like most economist I agree with him in theory, but his theory ignores the realm of human psychology (few homeowners wants to sell and rent, downsize, or find roommates)
A 30 year mortgage is the best mortgage length
- Yes, it does result in the highest total cost of ownership
- However, it is also the most flexible mortgage
- You can turn a 30 year mortgage into a 15 year mortgage by making extra payments (while maintaining the option of paying less when you need to)
Don’t count on taking advantage of mortgage interest tax deduction
- I heard much about this incentive to own a home, but many homes won’t benefit from it
- You have to pay over $12K in mortgage interest per year (for single filers) to receive any benefit, which equates to a $425K home (at 6% interest and 20% down payment)

Anyways thanks for reading and without further ado, here’s the tool: House Affordability Calculator

If you have feedback on how to improve the tool, please leave it in the comments!

Appendix

Methodology Notes

My methodology is extremely conservative because no one wants to lose their home. A few callouts:

Affordability max is calculated as 25% of your post-tax income. Some suggest the limit should be 33% of gross, but I think more safety is prudent because, ya know, s*** happens.
Down payment max is limited by requiring 4 months of runway were you to lose your source of income. It is probably more room than you need, but then again it took me longer than I thought to find a job of interest.

All the other default assumptions are relatively conservative as well and while you can change them, I encourage you to not fall into the trap of manipulating the numbers to convince yourself you can afford something you likely cannot.

P.S. yes, there is a lot going on in the formulas and they could be simplified, but there is a reason why I did it this way–sensitivity analysis in excel requires the variables to be directly referenced in the output of interest.