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You have a four year old and a toddler with another one on the way and you've outgrown your two bedroom condo. As your husband and you start dreaming of your first house, you think about Kindergarten fast approaching. You know exactly where you want to live: in the best school district in the county. It's a picture perfect vision with only one very big problem: the price of area homes is 30% higher than where you live now. You do the math and the extra $100,000 in mortgage and taxes will cost you over $600 a month. Money that you really can't afford. Buying a house is going to be tough enough, but this would be finanical suicide.
Its a fact, homes in good school districts cost more and with good reason. How much more is one important factor to consider but how many children you have and what your educational plans are need to be considered also. Also, it depends on how good the second best school district is - in other words what is your second best public alternative. For example, in California, schools are ranked with an Academic Performance Index (API) with 1000 being the best and the worst schools having scores under 600 or even less. If the best school has an API of 920 and the second best, a 700, do you really have a public school option outside of the best district?
Will You Actually Send the Kids to Public School?
I can't tell you how many times that I have seen parents sacrifice a ton to buy a small expensive house in a top rated school district only to turn around and decide that they will send their kids to private school. As if the debt load with a monster mortgage wasn't bad enough, now they are looking at a "second mortgage" for 16 straight years with private school tuition. Before you decide to buy into that great school district, make sure that you are actually going to send you kids there.
Do the Math
Figure out how much the differential between two comparable houses is. Finance the differential at the current interest rate using a PMT function in Excel or an online calculator and add to that the incremental monthly taxes are. Know of course that you will likely have to put 10-20% of this amount down as a downpayment. This is the cost that you would be paying for their "free" public education in the great school district. For instance, if the differential is $150,000 and the current interest rate is 5% your additional payment would be $805 plus the taxes of anwhere from $125 to $250 more per month. Bottom line, about $1,000 a month enough to pay for private school for one child or religious school for both.
Factor in Tax Benefits
If you itemize your taxes you will be able to deduct all or a portion of your mortgage interest so the $1,000 may be more like $700. To calculate this you need to know your marginal income tax rate for both state and federal which is based on your adjusted gross income (AGI) One of the reasons that higher income earners bid up the price of homes in good school districts is that they are able to take advantage of the home mortgage interest tax break.
Calculate Kid-Years
If you are able to buy into the more expensive neighborhood, the most important factor is how many kids times how many years of K-12 education they will have. For instance if you have a 7th grader, a 4 year old and a newborn, you are looking at 6, 13, and 13 years for a total of 32 kid-years. So for the next 18 years until your newborn graduates you are going to have 32/18ths kids in school or a factor of 1.8. Multiply this by the average private school tuition that you would expect to pay. For example, if you expected to pay $800 a month for private school then you would get $1,440 a month.
Calculate the Maximum House Price Differential Based on a Similar Term
In our example above, if you went to private school, it would cost you $1,440 a month extra on average for the next 18 years.
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