The Millionaire Next Door says that one of their rules to wealth-building was to buy a house worth two times your annual income or less. This is an exceptional idea that few people are following. It could be argued that with the decrease of long term rates that three times a persons salary is the most one would pay for a home using a 30 year mortgage.
Another method would be to determine the percentage of a person’s mortgage payment amounts to the monthly total after tax income.
Most people stretch themselves to the limit to buy a house, then have very little left over for wealth accumulation. The people that stayed within the Millionaire rule have a better chance of having extra money left over each month.
Many people are preoccupied with the idea of getting a tax deduction by paying interest. Two things to consider on this. One, the government is threatening to eliminate this deduction all together. Second the cost overtime is overwhelming.
We shouldn’t care a lot about taxes and the fact that mortgage interest is deductible. Yes, it’s a nice financial exercise to calculate the “real” cost of the house once tax deductions are factored in, but in real life, very few people do this. We should care more about no debt on our balance sheets. Paying off a mortgage on a home will allow you to increase your networth dramatically.
Bigger homes and bigger mortgages are a good indication of living beyond your means which tend to cause a person to increase costs.
Many people will suggest that the formula will not work in high real estate cost areas. The solution is simple: move to a lower cost area. If you have been managing your money correctly, you should have plenty of equity to possibly pay cash for a home in a lower cost area. How would this affect your debt repayment? Quite a bit I would imagine
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