Financial babble time, prompted by the quote on a coffee cup

[flexagon]

On the nonlinear evaluation of money:

If you've got a dollar and you spend twenty-nine cents on a loaf of bread, you've got seventy-one cents left. but if you've got seventeen grand and you spend twenty-nine cents on a loaf of bread, you've still got seventeen grand. There's a math lesson for you.

~Steve Martin

Yep, personal finance has been on my mind lately, and not just because of the economic wibbly-wobbly on Wall Street. I've been trying lately to help a friend work through some stuff, and my own situation crosses my mind from time to time. I learned recently about a ratio where people compare the amount of their mortgage to their annual income; I'm not sure what this is called, but apparently 3:1 or 4:1 is a pretty normal ratio. Apparently we are underhoused, because ours is about 1:1 these days. Interesting. (I think we started at around 2:1, but since then we've paid down some of the balance and gotten pay increases). Would any homeowners on this thread care to share their ratio?

Kiva.org, my favorite source of microfinance endorphins, is also up to some new antics -- two new things. They have "lending teams" now, which allow you to count your loans toward a larger total. (I just joined "Atheists, Agnostics, Skeptics, Freethinkers, Secular Humanists and the Non-Religious", who seem to be going up against "Kiva Christians" but are not winning yet. I'd like to note that I see this as a rather friendly competition though: effort from both sides is a great thing.)

The other new feature, more important, is that payments made on loans are now immediately available for reloan. I'm sure you're thinking "big deal": most payments made on loans of $25 or even $100 are only a few dollars, not enough to make a new loan. But when you have 20+ loans out at the time, as I did, with some of them almost paid back... well, it freed up $800 of Kiva credit. I was too busy to reloan right away, and so now I have $900 of credit and Kiva's out of entrepreneurs because of a surge of traffic. Zowie. Oh wait, some cattle folks from Azerbaijan just showed up, but I don't really like those... anyway, I'll be able to nudge the needle on the Atheists team all by myself if I ever get to see a good batch again.

Comments

[a-kosmos.livejournal.com]

I'm not sure about the ratio stuff, but we pay about 17% of our take home pay toward our mortgage. When we bought our house in 2003, we got a 15 year fixed interest rate of 4.25%, which I think might have been the lowest of the low rates in the housing bubble. I think that we got just the right-sized house for us: 3 bedrooms (the Bear uses one of them for a study and loves "his" room and a room for guests when we have them and Sophie when we don't); I have a little studio. We don't have the living room and den thing (I hate that idea... it just seems so old fashioned), but we have a living room and a dining room that we eat in pretty much every day (except if we eat pizza... for some reason eating pizza must be eaten in the living room.) I have a studio that was a converted garage on the side of the house that I don't get to use that often any more. Meh.

The next time we get a house, I want an entrance way, but that's ok for now.

[figmint.livejournal.com]

Shoot, my mortgage is 41% of my take-home income!

[a-kosmos.livejournal.com]

Yeah, but you couldn't buy a parking space in Chicago for what we paid for this house.

[figmint.livejournal.com]

And I thought I had a low mortgage rate with 5.875, but yours is the lowest I've ever heard of. I wonder if they'll *ever* be that low again?

[flexagon]

Sigh! Yes, we have 5.75 (30-year fixed interest) and thought we were doing really well too.

Percentage of income's another interesting number. I think I remember 30% as a rule of thumb for affordable / normal housing cost... I'm at about 20% now, but that means it's a lot higher for the half of the year I'm doing 401(k) contributions.

[figmint.livejournal.com]

My ratio is 2.6:1. Not as bad as some, apparently, but not great either.

[say-shazam.livejournal.com]

Interesting. We're 2:1, but have other debt that ties up our cash. Can't wait to be rid of it like you! Damn student loans. (Of course, the alternative isn't a good one either. Education is a good thing!)

[taegubcrusade.livejournal.com]

Okay; I'll play. 3.6:1, almost exactly. That's higher than I'd like, ideally, but here are a couple of the contributing factors:

• We are a four-person, one-income family, which means that we have a natural desire for more space and a natural shortage of cash to pay for it.
• It's a pretty recent mortgage, so this is (one hopes) the high point of that ratio.
• My job change last year into Startupsville meant no pay raise for the last little while. In fact, my nominal salary has gone down since we started the purchase process, as I went from contractor to full-timer to startuper.
• We bought in a toney inner burb (half by accident) in order to by happy with the commute-schools-neighborhood equation. (Still would have liked to have been in Cambridge, but that just wasn't happening for anywhere under 4:1.)

[flexagon]

My source says that puts you in the normal range; nothing you need to make excuses for. :) The only reason our ratio is so low is that we both work full-time.

Unless variable interest gets into the equation, I think all mortgages must start at their highest-ever ratio and sink down (to zero!), so it's really the starting ratio that should be used as a measure of how "affordable" the loan is or how safe/risky it is for the bank.

[taegubcrusade.livejournal.com]

Just to be clear, I was making excuses to myself. :-)

[hiddenbear.livejournal.com]

Actually, if you have fixed payments, and small pay increases, then would the decrease in tax write-off (only interest can be written-off) possibly match the increase in pay? In which case, the ratio could stay the same right to the last day.

[hiddenbear.livejournal.com]

Right now my ratio is over 2:1, but in five days our ratio will be right at 2:1.

As for percentage of my take-home income going to payments, that is about 21%. I haven't calculated it for our take-home yet though, as I don't know it exactly, nor do I know the impact filing jointly will have.

[niralth.livejournal.com]

I'm not a home owner, but our *rent* is about 21% of our take home pay (note: I maximize my 401(k), but M doesn't have access to one).

The spreadsheet I keep for such things tells me that if we bought a modest 2 bedroom condo (here in San Francisco), with 20% down at the current interest rate, before the tax benefit we'd be spending 32% of our current take home pay on the mortgage. The HOA, insurance and property taxes nearly exactly cancel out the tax benefit, interestingly.

In a few years we'll be a four person, single income family just like taegubcrusade. I don't think home ownership (in San Francisco) is in the cards for a while. :D

I think the ratio is only useful against the original principal balance of the mortgage, not the ongoing balance. So I'd say that pay raises "count" to lower the ratio, but paying down the principal does not. The payments aren't changing, after all.

[flexagon]

I'd say that pay raises "count" to lower the ratio, but paying down the principal does not. The payments aren't changing, after all.

I think paying down the principal counts because it helps change how fast you could pay off the mortgage. The payments you refer to are only the minimum payment -- most mortgages let you overpay. Ours definitely does.

Also, even if you don't overpay, a lower principal value lets you refinance to a longer-term loan with lower payments, which also increases the overall safety of the loan.

[niralth.livejournal.com]

Refinancing the remaining interest into a new mortgage with cheaper monthly payments is an interesting point. The ratio of mortgage principal to income has always been used, when I've seen it, to measure affordability of a home for a particular family or person. So all that part about paying down the principal faster and what pretty much doesn't enter the picture for folks on the edge of their ability to pay their mortgage. So, to compare apples to apples, then original principal to income ratio seems the more logical.