Mortgage Question.?
I have excellent credit, been employed 2 years plus same job, make $100k, and am getting married shortly (I expect to be making $110k by March). I would like to be able to buy a house in the $500,000 range. I have little downpayment funds. I could swing $20,000 selling an investment. I also have $10,000 in debt (credit card). Should I pay down the credit card debt or accumulate more cash for a downpayment? Also, would my salary support a mortgage of about $480,000? (If unaffordable, how much does my wife need to make also for us to be able to swing this?) The house will most likely be in Suffolk County Long Island where the taxes are high. I see taxes of $6k min to $10k prior to STAR, a gov’t giveback program that reduces the rate.
You asked for my opinion, so here it is. Let me first say that I can be a litle blunt, and that my wife and I are tight with a buck.
Short answer is you cannot afford it.
Do yourself a favor and pay off the $10M in credit cards as soon as possible. I assume these credit cards are charging you roughly 15% interest. I do not know what return you are earning on the investment, but I guess it is less than 15%. It does not make sense to borrow at 15% and then invest it at a lower rate.
This leaves you with a downpayment of $10M, or 2% of $500M. Someone will probably make you a loan with 2% down, but you will have to pay PMI (insurance to protect the lender if you default) and you will probably pay higher interest and fees. Today 10% downpayment is pretty common, if you can put down 20% you can avoid PMI (yes I realize that is $100M in cash).
Conservative bankers recommend spending 28% of your income on housing, less conservative lenders say 33%. I did some quick number crunching: Assuming a mortgage of $490M at 7% fixed for thirty years, your monthly payment is $3,260. Assume another $667 per month in taxes (middle range of your estimate is $8M per year). At $100M per year, monthly income is $8,333. Your ratio comes to 47%. This does not include PMI (never had it, do not know what it costs) and property insurance. Again, do not know what insurance on a $500M house on Long Island costs.
To bring your debt/income ratio down to 33% you need annual income $142,800. Again, this does not include PMI or property insurance. You still have not addressed the 2% down payment condition.
With annual income of $110M, as you expect shortly, your housing ratio declines to 43%.
Assuming $110M in annual income and 33% housing ratio, you are looking at purchase price of $360M. Down payment is still under 3%. Still have to pay PMI and property insurance. No, I do not know where to buy a decent house on Long Island for $360M.
Sorry if this is bad news.