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WendyBG,

You wrote, Sorry if this isn't perfect...suggestions are welcome. :-)

Ok. I've got one for you. My answer is 20.0645%. That's greater than 20%, but less than 21%.

I'm rounding down to make the number fit one of your categories... ;-)

Also, my mortgage interest payments are 3.93% of after tax income...

- Joel
BTW, Anyone want to buy a house in Irving, TX? It needs some work, so you can get it cheap... :-)
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Example for renters:

Gross Income $3000
Tax -$500

Take-home pay $2500
Debt service -$250 (10%)
Rent -$750 (30%)

Etc. all other expenses

Here, your answer would be 10% + 30% = 40%.


I guess I screwed up your numbers then, because I assumed debt meant, well, debt. Stuff that gets carried over from month to month.

So you're going to have to wait until Friday when the paycheck comes in. I have so much taken out I've forgotten what I actually get after taxes.

Sorry about that.

Nancy
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Debt service + mortgage interest + property tax = 21% of after tax pay.

foolazis
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I'm finding all of this quite interesting!

I had to guess on this one. I don't really know the amount that goes to interest vs principal on our home loans. I just know the total payment. I could check at home and see what went where, but I don't tend to think in those terms. I'm more concerned with my overall payment and with the principal payment than the interest!

And I just realized I probably put down the wrong one because my tax payment is not paid monthly so I forgot about it when I clicked. I'm probabl yin the 11-20% not 10% with that included. (We self-escrow. This month, we paid 10% of my monthly income to property taxes bcause a payment was due but on most months we pay $0 since it is paid only in 4 installments. So I forget about it.)

Selphiras

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I'm with Selphiras. I have no idea what the interest vs principal vs insurance escrow is on my mortgage. I don't really look at the statements that often, because the amount is just deducted from my banking account each month.

Why would a question about cash flow and debt ignore the principal of a mortgage? Most people pay PITI to their mortgage company.

Karen - didn't answer

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Why would a question about cash flow and debt ignore the principal of a mortgage? Most people pay PITI to their mortgage company.

Because money used to pay off the principal of a mortgage is actually an investment in your home, and you get equity in your (usually) appreciating home in return. This distinguishes it from paying off principal on credit cards, where you get nothing back, or paying off principal on an auto loan, where you may be paying off enough principal each month to keep from being upside down in a depreciating asset.

AJ
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kaudrey,

You wrote, Why would a question about cash flow and debt ignore the principal of a mortgage? Most people pay PITI to their mortgage company.

Since the original question was constrained to cash-flow, you are correct. However, as an outside observer I'm less interested in your cash-flow than your expenses relative to your income.

From an accounting perspective, principal payments are not part of your expenses - they're an asset transfer and in the case of a house, they amount to personal savings.

For instance, a person that's "treading water" may be doing so only from a cash-flow perspective. However, they may be making payments well in excess of their new obligations and this could be resulting in substantial wealth-building.

Obviously the reverse could also be true. They could be loosing ground because say their home is financed by a reverse-amortization loan so part of the finance charges are being recapitalized each month.

In any case, their cash-flow tells you nothing about their long-term financial prospects - and that's what I would really be interested in. Are you gaining ground? Or loosing it?

Clearly you need to know whether or not you have a cash-flow problem. But personal finance only begins there...

- Joel
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aj485,

Hello Love...

You wrote, Because money used to pay off the principal of a mortgage is actually an investment in your home, and you get equity in your (usually) appreciating home in return. This distinguishes it from paying off principal on credit cards, where you get nothing back, or paying off principal on an auto loan, where you may be paying off enough principal each month to keep from being upside down in a depreciating asset.

Let me disagree.

I don't think it really makes a difference what debt you're paying down. Paying down the principal on any debt is still just a transfer of an asset to a liability. You should treat your debt obligations as independent of the asset securing them - at least if you think the prospects of default are minimal. Which you choose to pay down first should be a question of cost vs. benefit relative to all alternative uses of available funds.

- Joel
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kaudrey,

You wrote, Why would a question about cash flow and debt ignore the principal of a mortgage? Most people pay PITI to their mortgage company.

Since the original question was constrained to cash-flow, you are correct. However, as an outside observer I'm less interested in your cash-flow than your expenses relative to your income.

----

Well, that's what I was kind of getting at - the OP asked about cash flow, but then asking about interest only isn't really a cash flow question. We're just breaking down different things in different ways. No big deal.

As for being interested in my cash flow relative to income (and I understand that this was probably rhetorical, but I'll answer anyway)...I save 30% of my gross income, so 70% goes to all of my expenses, including taxes, SS etc.

Karen -
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Joel, while generally I agree with you about asset transfer on the paying down of a house, that mindset can also get folks in trouble. While my house has not gone down in value, it has increased only about the equivalent of 1% a year for the 6 years we've lived here--less than $10,000. AND we've put over $20,000 of work into it (broken sewer line, new furnace, moved water heater so it was legal, lead paint abatement, new windows).

Yes, in high markets and maybe with a different house, this would be an appreciating asset. But so far, our house is costing us more money than it's going up in value!

Not that the house is in bad shape, it's just a flat market around here and we have a 100+ year old house. We're committed to paying down our mortgage and do find it part of our retirement strategy (no mortgage to pay). But I'm not so sure that once we pay off the mortgage we could sell the house for much more than the total amount of money we'd spent on fixing it up and interest payments.

And housing boom that is declining and the problems folks are having with sub-prime mortgages shows that there are plenty of folks who are getting upside down on their houses.

Selphiras
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Selphiras,

You wrote, Joel, while generally I agree with you about asset transfer on the paying down of a house, that mindset can also get folks in trouble. While my house has not gone down in value, it has increased only about the equivalent of 1% a year for the 6 years we've lived here--less than $10,000. AND we've put over $20,000 of work into it (broken sewer line, new furnace, moved water heater so it was legal, lead paint abatement, new windows).

Yes, in high markets and maybe with a different house, this would be an appreciating asset. But so far, our house is costing us more money than it's going up in value!


I'm not sure I follow you reasoning.

Worrying only about cash-flow when people think about their finances is exactly what gets them into homes they can just make the payments on. It's also why some people wind up getting upside down on their mortgages and mistakenly believe they can rely on a rising market to bail them out. If you want a stable future, you must get beyond cash-flow issues and look at building wealth instead.

As a practical matter, you must consider the purchase of any asset separately from the debt you used to finance it. If you buy a house, but your finances won't let you sell it if the market tanks, you've probably bought too much house.

For instance if you pay $300,000 for a house today and you need to move next year, but the market in your area is volatile and it has taken a 25% drop ($75,000) in value that you can't afford, then perhaps you bought too much house. When you buy an asset you have to be prepared to loose money on it. Assuming an "appreciating asset" will always go up in value is just plain foolishness. How much you should be prepared to loose depends on a reasonable risk assessment. In the case of real estate, it should be based on historical home prices in your area.

As for whether or not you can afford the loss, that depends on how much you have in assets and how far the loss might set you back on your plans for the future. In other words, it's partly subjective. However if your house is heavily leveraged and you don't at least have substantial reserves in the bank, the odds that you really can't afford your house is much greater...

Anyway, this is how I apply my old college lessons in (business) managerial accounting and risk assessment to personal property, such as a home...

- Joel
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