The following is a staff writer post from MikeS. He is a married father of 2. So, with the cat, he ranks number 5 in the house. He loves numbers and helping people. Please leave any questions or comments below for either Mike or Crystal.
Here is a recent Wall Street Journal article explaining that the rising price of houses is causing people to go deeper into debt to afford houses. One of the figures in the article stated that people are spending 45% of their income on mortgages and other debt. That made me curious as to how I stacked up when I bought my house almost 7 years ago. I remember thinking that things felt a little tight, so I likely stretched a bit for the house. So, just how much did I stretch?
At the time we bought the house in May 2011, my gross salary was $83,404. My net take-home pay was $62,951. I believe that I was still contributing to my 401K, but can’t tell for sure. I was eligible for an annual bonus, that year the bonus was $14,000 and was paid in March. My wife was not working outside the home. She was busy taking care of our 3-½ year old and getting ready for our second child. My salary was the only income that we had coming in.
Besides the new mortgage, we had 2 other outstanding debts, a car loan and a student loan. The car loan payment was $328 a month and the student loan was $138 a month. After we bought the house, there was some small credit card debt, likely furniture for the new house, total payments were $107 a month. These payments total $573 a month and were 8% of my gross income and about 11% of my net income.
I’ve always thought of my mortgage payment as the full number that I send every month, which includes the interest and escrow amounts. The payment at that time $2,521.34, which included principle, interest, escrow and PMI. We had to pay PMI since we didn’t have the requisite 20% down payment. Looking at the mortgage as a percentage of my income, it’s not pretty. The payment was 36% of my gross and 48% of my net. No wonder things felt tight. When combined with the other debt payments, 44% of my gross income was going to debt and 59% of my net.
Since I first took the mortgage out, I have refinanced it a few times to take advantage of better interest rates or to eliminate the PMI. Today, my mortgage payment is $2,396.26. That payment is just the principal, interest and escrow. I eliminated the PMI a couple of years ago. We have also shortened the time frame to pay off the mortgage by about 4-½ years. We still have 1 car payment at $423, but no other debt. My income has increased as well and my wife started working. For comparison, my income went up 24% since 2011 to $103,500. My net take-home pay is $64,068. That doesn’t look like a large increase, but I’ve increased my savings through my 401K and my HSA. So, the mortgage only makes up 28% of my gross income and 45% of my net income, not counting what my wife current brings in. When I add the car payment, our debt load is 33% of my gross income and 53% of my net income. I can say that I certainly feel the difference.
Wouldn’t Change Anything
Strictly following mortgage guidelines, I shouldn’t have bought my house back in 2011. I had too much debt to pay monthly and not enough of a down payment. However, I wouldn’t change a thing. We were expecting our second child and needed a bigger place, so we were going to move. Things did work out, but that was due to some hard work and luck. By keeping expenses down and not trying to keep up with the Jones’, we’ve been able to keep our debt load in check while increasing my income. That has allowed us to increase our net worth 7x the amount it was back at the end of 2011. How does your debt to income ratio look?