How Much Home Can I Afford?

We've built a simple Cost of Home Ownership tool that can help you understand the monthly costs of homeownership in more detail.  

First and foremost, when buying a home you’ll need to pay a sizeable portion of the purchase price in cash as a down payment at Closing.  Typically in the Bay Area, mortgage lenders will expect buyers to put down at least 20% of the purchase price in cash. Given home prices in the area, this is obviously a sizeable amount of money, and may determine what price points you should target in your search.

Beyond the downpayment, the biggest component costs of homeownership are usually your mortgage payments and property taxes.  Helpfully, both can be “fixed”, or set to stay fairly flat over time (depending on which mortgage you select). This means that, assuming your income increases over time (from inflation + higher earning potential), your monthly home payments get more 'affordable' over time.  By taking out a 30-year fixed rate mortgage, the monthly mortgage payment would be fixed over the life of the mortgage. Thanks to Prop 13, property taxes in California are capped at 1% of the home's purchase price (plus some other local taxes and assessments), plus an adjustment for inflation which is capped at 2% of your property tax amount per year.

In addition to mortgage and tax costs, you should also consider the additional repair and maintenance costs that you may incur as a homeowner.  We like to segment these costs into three categories:

  • Regular maintenance and preventative projects:  these are projects that need to be done every few years, such as replacing the roof, external windows or outdoor deck, or repainting the home.  These are larger infrequent projects, and generally cost no more than the amount of 2-4 months of mortgage payments for each project. We estimate that homeowners will likely have one of these projects every 3-4 years, at an average cost of $10K per project.  
  • Unanticipated maintenance: these are the costs incurred when something unexpectedly breaks, such as the hot water system, HVAC, dishwasher, or burst plumbing.  Again, most of these projects aren't excessive (perhaps under $10,000), and you could purchase a home warranty insurance for around $4,000 per year that would cover a lot of these projects.  
  • Discretionary renovations: these might include refreshes to the home that you want to make, such as renovating the kitchen or bathrooms, or even changing the layout of the home.  These can run from the thousands to the millions of dollars or more, depending on the scope of what you want to renovate. You generally have some flexibility with these projects to limit the scope to suit your budget.

Offset against these costs, homeownership provides certain financial benefits, in addition to price appreciation.  The Mortgage Interest Deduction (MID) allows taxpayers to claim the interest on up to $750,000 of their mortgage as a deduction against their income for income tax purposes.  If you had at least $750,000 in mortgage amount and were paying 4% interest per year, this would imply $30,000 in income deductions. The net benefit of the MID depends on your marginal tax rate, and whether you are itemizing your deductions.  Assuming you are at the 32% marginal rate, and are itemizing, the net benefit would be $9,600 per year, or $800 per month.

Another indirect benefit of homeownership is accessing lower borrowing costs if and when you needed to access more capital.  Assuming the value of your home appreciates, you could likely obtain a Home Equity Line of Credit (HELOC) if you ever needed additional funds.  This allows you to borrow at close to your mortgage rate (~4%), rather than paying higher rates for credit card debt, student debt, or an auto loan.  HELOCs are also great for covering the cost of renovations and other large financial outlays.

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Buyers' Guide