Why keeping our housing costs (relatively) low paid off big time

Housing is the biggest expense for most people. If you can reasonably lower your housing costs, it can free you up to save for other things in life.

Most financial experts, the banks, and even the government suggest that you spend no more than 30% of your gross income on housing.

Of course, that's just a rule of thumb. It depends on so many factors. And it's not unusual to see people spending 50% of their income on housing in our very expensive city.

So, if you and your significant other make $100,000 a year combined, you should spend no more than $30k, or $2500 a month.

First of all, that's a lot of money to spend on housing, especially if you're renting.

If you intend to buy a home, don't forget that taxes, insurance, and maintenance all count into housing costs as well. It's not just the mortgage. Part of that $2500 has to go to all those other housing costs.

For the typical middle class American family, spending 30% of their income on housing basically means they'll be spending the rest of their lives working to pay for that house.

Therefore, it pays to buy a house that you can comfortably afford, so that you can save for retirement, vacations, etc.

In other words, don't be house-poor.

My wife and I made a very comfortable income toward the end of our careers. Ok, it was mainly hers. But, we didn't always make that kind of income.

Regardless, we always made it a point to keep our housing costs low. It's one of the main reasons why we were able to save half of our income for 19 years:

1. We graduated into a volatile economy in 1997, where jobs were hard to come by. We were both "lucky" to have gotten jobs right out of college.

With her job security in the private sector questionable, and my civil service job being very secure, we decided that we would base our home purchases solely on my salary. And, we aimed for the cheapest home that we could afford in our area.

My starting pay was just under $28k, and my wife's was about $36k. So, our combined income was about $64k in 1997.

We lived at home for 3 years before getting married and buying our own first home, a tiny 1-bedroom coop.

By that time, around 2000, I'm sure my wife's salary had increased to about $60k, while mine barely budged from $28k.

With a ton of overtime, I made $30s for the first 5 years. Then, they gave us a big bump for top pay and my salary went to nearly $50k.

So, our combined income in 2000 was about $100k. At 30%, our housing budget should have been no more than $30k a year, $2500 per month, which, again, is a lot of money for that level of income.

We bought the coop for $62k. We put down our 20% down payment of about $12k and mortgaged $50k. Our mortgage was about $300 per month, and our monthly maintenance was about $500.

So, our total housing cost was about $800 per month, $10k per year. That came to about 30% of my income alone, but only 10% of our combined income. That made it possible for us to save for other things.

2. Two years later, in 2002, we sold our coop for $123k and rolled all of the gains into a townhouse that cost $450k.

Between the profit from the coop and what we managed to save in a couple years, we had the 20% down payment of $90k.

We mortgaged about $360k, which came out to about $1700 per month. Adding property taxes and insurance, our total monthly nut was just over $2000.

I had just made sergeant in 2002. So my salary was still about what I made as a cop at top pay - about $50k. That made our housing costs well above the recommended 30%, if judging solely based on my income at the time.

But, we knew that my salary would slowly increase. Top pay for sergeants back then was about $70k, which was achieved with 3 years in rank, and which would bring the housing expenses closer to 30% of my income alone.

With her bonus, she always made a very nice income. So, I think she made $100k in 2002. She always got the highest bonuses her firm could give out.

So, with a combined income of about $150k in 2002, our monthly nut of $2000 was $24k a year, or only 16% of our income. Again, it was very comfortable number that allowed us to save for other things.

3. Our family expanded. And, the neighbors our townhouse was attached to were physically the biggest, loudest bunch we've ever lived next to.

Their 3 fully grown kids would run up their staircase in the middle of the night, in marching boots apparently, and it would sound like a home invasion on our side of the shared wall. It made me jump out of bed.

They would slam their bathroom door, in the middle of the night, and our bathroom door would move on its hinges.

The neighbors on the other side were just as loud with their constant fighting, in the middle of the night of course. The husband would then go outside and smoke funny cigarettes in the shared driveway while complaining to his buddies on the phone, with his voice still on level 11.

Actual conversation:

"George. George. George! It's 3:00 in the morning!" I said, while leaning out the window.

"Oh, I'm sorry. John. Were you sleeping?"

"It's 3:00 in the morning!"

Between having a newborn, working the late shift, being a light sleeper, and being a cop who couldn't really do anything about a neighbor constantly screaming and smoking up 8 feet below your bed (he had a beef with everybody on the block, but we were always friendly to each other), it drove me nuts.

So, home #3 came along in 2007, at the height of the last real estate bubble. But, it didn't matter that we were buying at the height because we were also selling at the height (and, of course nobody knew it was a bubble at the time. In addition, NYC real estate didn't crash until a year after the rest of the country crashed).

We sold our townhouse for $575k, a gain of $125k, and bought our detached house for $680k. Not a bad exchange for only $105k more. And it was in the same neighborhood that we love.

Actually, it was right around the corner. My neighbor found me pushing our BBQ grill down the street one day and asked what I was doing. I stopped, so that he couldn't tell which direction I was headed, and answered that somebody had tossed it out in their trash.

We slowly moved all of our furniture and belongings out of the old house and drove it around the corner, one car full at a time. We didn't tell him until the last day of the move. Lol.

Of course, we still pass each other and wave hi.

Again, the gains made in the previous house, along with the money we saved in those 4 years, all went into the next house.

With our hefty down payment and a lower interest rate, our mortgage for the bigger house was barely more than the smaller townhouse. Our monthly nut was about $2500.

By that time, 2007, I had been in the rank of lieutenant for 2 years already, with a salary of about $80k. So, the $2500 a month/$30k a year nut was a bit more than 30% of my salary.

But, once again, we knew that I was due a decent salary bump after 3 years in rank, probably to about $95k at the time. That would've eventually made our housing costs roughly 30% of my salary.

But, combined with her salary, our housing costs started to take up less and less of our gross income. We were saving for other things.

And, while I've never advanced beyond the rank of lieutenant, my wife continued to climb the corporate ladder and eventually became director at her firm, with the typical Manhattan salary for that level.

We refinanced twice to take advantage of the lowering interest rates, going from 6.5% to 4.5% to finally 2.65%, a historic low that will probably never happen again.

2.65%!!

With that final move, our housing costs dropped to below 10% of our combined income.

Throughout the years, we had always paid a few hundred extra in principal every month, so our loan amount was decreasing faster than originally planned.

In addition, each time we refinanced, we not only borrowed a smaller and smaller amount, but we also shortened our loan ultimately to 10 years. (Don't ever refinance to a higher amount or longer term, if you can help it. It's one of the worst financial moves you can make).

We always kept her early retirement in mind, and the 10 year refi was more or less on track.

4. There hasn't been a need for a 4th home. Yet.

However, there was a property that we sold in 2015. It was one of the things that we had been saving for, an investment condo that we picked up in 2012. We rented it out for 2.5 years and saw an opportunity to "buy low, sell high."

We used the gains from that sale to pay off the rest of the small mortgage on our primary home. That paved the way for my wife's early retirement, which happened a year ahead of schedule, in 2016, for her 41st birthday.

We had spent a total of 8 years paying off our home, in large part due to keeping our housing costs down.

Summary:

Through a combination of working hard to move up the ladder, increasing our incomes, saving and investing, and living well below our means, (and a bit of luck in the market), we managed to keep our housing costs to a fraction of our income, which of course reinforced the cycle of being able to save and invest, which generated more income, which...

Housing is the biggest expense for most people. If you have the option, it can really pay off to keep your housing expenses low. Forget the 30% rule. Go much lower, if you can. It'll allow you the freedom to save for anything else that would not otherwise be possible.

PS:

1. Paying off a cheap loan early is not financially smart. Our final mortgage interest rate was 2.65%. It was practically free money.

Had we invested the extra money in the stock market, we would've easily made 8-10% a year the last 10 years. Therefore, we lost out on 7.35% of gains every single year. Easily tens of thousands of dollars.

2. Upgrading to a new home every few years is not financially smart. We paid transfer taxes, mortgage taxes, the realtor's commission, etc, all of which added up to tens of thousands of dollars.

3. Selling an investment property and pocketing the gains (or using the profits to pay off your own very cheap mortgage) is not financially smart. That was capital gains. We paid a HUGE tax for it.

We should have rolled that money into another investment and not paid a dime in taxes (until we eventually cash out much later down the line).

We should have saved and invested the extra few hundred dollars we paid the bank every month.

And maybe we could've stayed in that small townhouse.

But, I did gain a larger house for not much more money, my wife did retire early, and we haven't had a mortgage on our home for about 2 years.

The peace of mind has been worth it.