Do the Math – A Mortgage You Can Afford

Do the Math – A Mortgage You Can Afford

Love Buying a Home Series – Week 4

My step-by-step series will take you through the entire home-buying process — from finding a buyer’s agent to settlement day, and all the details in between. Every first-time buyer will find this information-packed series easy to follow and understand. Make sure to tune in for the next few weeks!

One of the biggest mistakes you can make as a homebuyer is not knowing how much you can REALLY afford when purchasing a home. The next mistake is thinking too “big picture” when it comes to price range or purchase price.

Stop right here before you make these mistakes!

You’re going to learn the correct way to do the math so that you get a mortgage you can afford and, ultimately, a home you absolutely love on your budget. You won’t be “house poor” and you won’t shortchange yourself either.

Here’s how:

Think monthly payments first and foremost.

First and foremost, you don’t want to focus solely on the purchase price, but rather first start with your desired monthly payment for your home. This monthly payment should factor in your taxes and insurance (but not utilities and general monthly maintenance).

We call this our Mortgage Rule of Thumb. It may seem backwards but it’s the one and only way to make sure you get the house you want for the price you want.

Here’s why.

Even if the purchase price is exactly the same, your monthly payment could be very different between two properties.

For example, the monthly payments for a $500,000 condo will be completely different than for a $500,000 single-family home. There are different costs you’d need to consider for each option, such as condo fees.  That’s why you should NOT focus on the purchase price first since monthly payments can vary depending on where and what you buy.

So never begin your search with a blanket statement, “I want to spend $500,000,” and not even know whether that amount will truly fit your monthly budget.

Don’t just accept what your maximum pre-qualified amount is.

Unfortunately, many buyers start with that blanket statement of price because that’s what they have been told they are pre-qualified for. Don’t think you’ve hit the jackpot, because just because you can borrow that amount doesn’t mean that you will be comfortable with that payment.

Many clients will say, “I’ve been pre-qualified for $500,000 by my lender,” but when you dig a little deeper, these clients actually want to spend a lot less in order to get the payments they truly want to commit to each month.

When you get pre-qualified, we discuss your maximum pre-qualified amount based on your “big picture” financial picture, but we also discuss the price point that you should be shopping in with the amount YOU are comfortable paying per month on a home.

Work backward to determine the “correct” purchase price for you.

First, you need to figure out how much you want to pay per month, and then you’ll need to work backward to determine a purchase price that works with this monthly budget.

Yes, it does seem backward at first, but it works!

Once you know how much you want your monthly housing payments to be per month, we can then factor in your down payment and any homebuyer assistance programs.

You’ll also need to include other potential costs of owning a home – taxes, insurance, condo fees – that will affect your monthly budget. With all these factors in mind, we can then help you figure out the correct price range to shop in.

Keep in mind, every $10,000 in purchase price adds roughly $50 to your monthly payment.  Similarly, the same goes for your down payment: Every additional $10K you put down, you are only saving yourself roughly $50 per month.

So don’t feel you have to save for years for additional down-payment funds in order to afford a home.  And remember that there are some great options to help with your down payment.

Take a look at your budget to determine what you want to pay per month.

So now that you know to work backward, how do you determine what you want to spend per month when you own a home? It’s time to make a budget!

Making a budget is an important step, so be honest about what you spend your money on each month now, what you’re willing to forgo, and what you expect in the future.

Here’s what to include and consider when determining your budget:

• List all the costs of homeownership — property taxes, mortgage insurance, home insurance, maintenance, utilities, and condo fees, parking fees, if applicable. I can help with estimates!
• List all other expenses you expect to continue — such as gym memberships, day care payments, car loans, school loans, gas or commuting fees, etc.
• Estimate yearly maintenance costs for a home. Plan to spend or save about 1% of your home’s purchase price each year. So, if you buy a $300,000 condo, you should be putting about $3,000 per year into the home for maintenance or into a savings account for when you need to replace something in the future!
• Include any tax advantages you’ll get as a homeowner. You’ll have deductions or equity in your home and can expect a larger refund that could go toward your savings. Be sure to discuss this with your CPA for your specific situation.
• Consider additional expenses, beyond your mortgage payment and maintenance costs. Decorating costs such as new furniture purchases can add up in the early years of homeownership.
• What expenses are “mandatory” for your life and general happiness?  Ask yourself some hard questions about your lifestyle now and for the future, and how that could impact your budget. For example, if you love to travel, then don’t buy a home that makes it impossible to go on a trip for years! That would not be worth it.
• What expenses could you tighten-up on to get the home you want?  If you rarely drive your car and are willing to take mass transit or bike everywhere in your new home, then that’s where you could cut some of your monthly expenses. You could then possibly afford to buy a home in the location you want.
• Remember that how much you can afford today can change next year and after that. Yes, your salary will increase but you’ll have new costs, such as kids or a new car.  This is when you do want to look at the “big picture” of your life now and down the road

Finish up the math to get an idea of how much you can afford.

You can get a very rough estimate on what you can comfortably afford by using your current rental cost situation.

Consider what you have been paying per month in rent already. Have you been able to meet your monthly savings goal comfortably? Or, do you find yourself putting more onto a credit card or just breaking even each month?

If you aren’t paying rent, try putting away a “mortgage payment” into a separate savings account each month to see if it is a suitable amount for your lifestyle.

Don’t hesitate to contact me if you have any questions about calculating a monthly budget. It’s an important first step before you start looking at homes.

Once you know your monthly budget, other steps will neatly follow. You’ll be able to determine your price range and then we will be able to discuss the mortgage products available to you and go over different down payment options.

Next up in this Love Buying a Home Series is Where to Find Money for a Down Payment. Every buyer needs to be prepared for this and this article can show you how!