OK, who wouldn’t love to live in a 3-bedroom condo on the 25th floor of the Seaholm Residences with a wrap-around balcony overlooking Lady Bird Lake with a short walk to work?
Unless you have a couple of million dollars to spend – keep dreaming. Or keep saving!
Capital Budget Strategies, LLC, Austin’s Best Budget Coach, urges everyone to live below their means. Sure it is cool to have a hip address, and will impress that new guy in accounting, but you’ll be house rich and poor every other way.
How to tell if your rent or mortgage is too high for your income? While counting how many ramen noodle dinners you eat at the end of the month is one way, we recommend finding your “Housing Payment Ratio” (HPR).
Harvard MBAs, and local Austin bank lenders, have developed recommended spending ratios for expenses such as rents, mortgages, savings, entertainment and even food. Spending ratios determine what percentage of your income you use – or should use – for the particular purpose. If you go over the recommended ratio you are paying too much – meaning you are living above your means.
For HPR, the magic number is 28% or less. You should not spend more than 28% of your total (gross) monthly income on housing. Remember, besides rent or mortgage, “housing costs” include any expense associated with living there, such as utilities, condo fees, Home Owners Association (HOA) fees, insurance and real estate taxes.
How to determine various Housing Payment Ratios:
APARTMENT HPR: Rent + Utilities / Total Monthly Income
CONDO HPR: Mortgage + Condo Fee + Monthly insurance + Utilities + Taxes / Total Monthly Income
HOUSE HPR: Mortgage + HOA Fee + Monthly insurance + Utilities + Monthly Taxes / Total Monthly Income
HPR EXAMPLES:
APARTMENT EXAMPLE:
Your annual income is $65,000 and that empty hipster apartment you keep driving by in East Austin rents for $2,500 a month – but it includes utilities! Sounds great, but first find your HPR to see if you can really afford it.
HPR (Apartment): Rent + Utilities / Total Monthly Income
• An annual salary of $65,000/12 = $5,416/month
• Rent – $2,500/month
• No utility costs (yea!)
Your HPR: $2,500 + $0 / $5,416 = 46% of your income
Even with my New Jersey public school education, I can see that 46% is way over the recommended 28%. Sorry, my friend, keep looking – or find a roommate!
If you are earning $65,000/year, your recommended maximum monthly housing cost would be:
$5,416 × 28% = $1,516
HOUSE EXAMPLE:
You earn $75,000 and your spouse earns $85,000 a year. Your Realtor just texted a photo of a new listing for $450,000 in Old West Austin that looks perfect! Here are the costs:
• 30-year mortgage, with 20% down, is $2,185
• Home insurance is $2,000 a year
• Real estate taxes, including Homestead Exemption, are $7,500 a year
• Utilities average $225 a month
To determine if you can “afford” this house, figure out your HPR:
Monthly income: $75,000 annually + $85,000 annually = $160,000/12 = $13,333/month
Projected monthly housing costs: Mortgage + monthly home insurance + monthly taxes + utilities
$2,185 + $2,000/12 + $7,500/12 + $225 = $2,185 + $166 + $625 + $225 = $3,201
Your HPR = Total Monthly Housing Costs / Total Monthly Income = $3,201 / $13,333 = 24%
Yea, you can afford it! Call the Realtor and offer a bid! Houses in Old West Austin go quick!
Please note, just because you can afford a house or an apartment – does not mean you can “afford” it! When you spend 48% of your income on housing that leaves very little for transportation, food, clothing, medical, entertainment and vacation!
Finding your Housing Payment Ratio (HPR) is a great way to determine affordability and stay on budget!
Capital Budget Strategies, LLC, Austin’s Best Budget Coach, can always assist you in building a personal budget that will help you meet your financial goals. We offer three great programs – all reasonably priced to fit your NEW budget!
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