How do you figure out how much home you can afford?

[seawitch]

We're moving from one part of the country (low-COL) to another (high-COL). We have previously not had a mortgage before but considering how much money we lost on selling our home, combined with the higher costs where we're moving to, we're going to need to take on a mortgage to get even a comparable house. Boo.

We have never had to think about mortgages before so I'm at a loss as to where to start. The amount of money people spend on interest baffles and saddens me. We've always paid for things up front so no car loans, etc. The concept of paying interest on something is not sitting well with me, but such is life.

I've seen those mortgage calculators on various sites but none of them seem to apply to our situation or budget and they're giving me widely varying answers, like we could get a home for 390K, or 205K, or anywhere in between - there's a wide range between the two, IMO. Short of going into a loan office, where can we get some good ballpark figures for what we can afford? I usually like to have an idea of what to expect before walking into somewhere...

[Poddi]

It doesn't sound like you have any other debts, so you can probably afford more on mortgage payment.  Usually they advise spending no more than 35% (including tax and insurance) of your income on housing.  I think that only applies to people with average income, though.  If you make 200k a year you can afford a higher payment.  I know quite a few people who spend 40%+ on housing and they do just fine (they have to as an average house here is about 600 - 700k), but wouldn't be my first choice.

Another guideline is easier to use, but less accurate, is 3 - 4 X the household income.  Say if you bring in 80k a year then the range would be 240k - 320k.  HTH. :)

[seawitch]

Is that pre-tax, though?

See, here's what makes our situation less than typical... We bring in about 4000 a month right now but none of that is taxable. We also don't have health insurance costs (well, OK, $24 a month which will rise to $75 a month when the kids are added on), and depending on the final nature of our move we will be paying only 65% of the property taxes (or if we get *really* lucky, no property taxes at all) in an area where that figures heavily into the mortgage. We are also going to be using the money from our old house almost totally into the downpayment... so let's say we are able to give 150K down, that's still going to be at least 50%, probably more (we're thinking of staying toward the lower end of the spectrum, so like a 250K house.. so 150K is still 60% of that.

So, those calculations get me a little confused. It usually asks your income before taxes instead of take-home but I don't know how much difference that would make, or how I would guesstimate what our income would be if our take-home pay was 4000... etc. And yeah, we don't have any other debt.

The other thing is while we need to get a mortgage, I will be looking for a program where there is no penalty for making payments early. While we don't want to have a payment higher than, say, $600 a month, we want to pay off extra while we have room in our budget...

[MommyDOK]

My advice is always buy lower than you can afford.  It makes the month much easier.  Another thing to factor is the cost of living is rising with inflation, utitlities costs etc.  Good luck!  Glad you have such a big down payment!

[MommyBecky]

If you just want to know how much the mortgage itself would cost you a month, then figure from there, try this calculator: https://www.navyfederal.org/calcs/mortgage-calcs.php   I believe you click on the one that says "how much will my payments be?" My Dad then divided the amount somehow and was able to tell us how much more we would pay a month per $1000 the house price went up. (probably divided the payment amount by the mortgage amount to tell how much per thousand? Can't remember) This was most helpful to us. I found the other calcs to be confusing and too involved. Good luck!

[nd_deadhead]

The first question is "How much am I willing to spend on housing?" That includes mortgage - principal and interest, property taxes (not sure how you get out of that), homeowners insurance, and utilities. This comes from your income, minus all other expenses (and savings, etc).

Look at a few homes on-line, to get an idea of the total expenses for houses in different price ranges.

When you get to the point where you're calculating principal/interest payments, remember that a longer term (like 30 years) will result in a lower monthly payment, at a slightly higher interest rate. Most mortgages do not have a penalty for early payment, so you can pay off a 30-year mortgage in 15 years, if you want to. The advantage to a 30-yr is that you are only required to make the smaller payment - if your circumstances change in 5 years, you can pay the minimum without penalty (or the cost of refinancing).

Of course I don't know how much you "lost" on your previous home, but just because you sold it for less than you paid doesn't mean that you necessarily got a bad deal. If you sold for $12K less, and

lived in the house for 2 years, it cost you $500/month to live in the house - which is probably less than you might have paid in rent.

[seawitch]

Well, the specifics of our last home... We bought it three years ago at 219K. We spent a lot of money into it. We thought we'd be there a LONG time... We replaced the roof and got all new hardwood downstairs, new paint all over, new carpet upstairs, finished the basement, did yardwork... Then we ended up selling at 205K, minus 5000 of stuff we had to fix for them, minus realtor's fees... So we ended up getting like 180K at the end. And moving costs as well, and we had to donate like all our furniture etc as well. So that's a lot of money lost. I'm going to curl up in a little ball in the corner and cry about it now, brb.

Anyway, we do want to relocate and I think we learned some good lessons. We will STICK in the new house come hell or high water, I guess. I joke that I want to be buried in the backyard cos I am so tired of moving, moving, moving.

In our previous COL area we were making it on about 1400 a month.. We had about 100$ a month home insurance, taxes annually were about $1000, then we had about 200 of utilities (we were on the standard plan where it's the same all year) 11 on garbage, 60 on Internet. The rest was for misc bills (food, gas, clothes, etc.). We made it.

However the property taxes in NY are c-r-a-z-y for even a modest house, like 8000 in some places on the same sort of house as the one we had. If my husband gets rated at 100% disabled they waive property taxes, though. If not, we'd still be getting a discount of at least 35% off, but it would still make a difference. (If we lived in SC or FL they would also waive it.) If we moved to WV the property taxes there are like $100 a year on a house... which is insanity. But oh well. Utilities are also tons higher in the NE so we'd want to spend money on a well-insulated house - more money upfront but less money monthly leaking away.

I think I want a loan for about $300 - and then pay off 2 or 3 times that while we can, or even more. As in, whenever we got any amount, it'd go right into the house. I feel weird having to have a mortgage... But I also want to be happy in the home we're in since I plan on being there, like, forever... So instead of probably buying a house that's like 150K I'd probably want to get a much nicer (not bigger, just nicer, newer, etc.) for 250K or something like that. Even though according to some of the calculators I looked at we could qualify for like a 300 house easily even conservatively... But I don't see the point in that honestly...

[tinuviel_k]

I didn't find the whole "such-and-such" percentage of your income is what you can afford on a house thing to be very helpful.

First I looked at our living expenses. I sat down with an Excel spreadsheet and wrote down every single expense that I could think of. I keep pretty good records of what we spend in my financial software, so I was able to get a realistic view of what we spend on food, clothing, monthly bills, annual bills, vacations, trips, utilities, any debts. I ended up with a number that represented how much money we spend to live every month. I cross-checked this by looking at our financial software and looking at the total amount of money we spent every month, minus our rent payment. Then I added $300 to this monthly number because "stuff happens."

Next I wanted to get a realistic view of what a house would REALLY cost. Not just the mortgage/tax/PMI, but everything: the every-day maintenance, saving for long-term maintenance (furnace, roof, paint, etc), yard work, house-hobbies (like gardening), increase in electricity/gas... every expense that I could think of that I would need to take into account that did not apply when I was renting. What I find is that in addition to the mortgage we spend $350 a month on the house: $100 a month into an everyday maintenance account that we use pretty consistently, $100 into a maintenance savings account for eventual big projects like roof issues, furnace issues, flooring, house painting, etc, $100 increase for electricity, gas, and water, and $50 on gardening and yard (extra water bills, landscaping supplies, veggie garden stuff, etc.) Id this house a fixer-upper? if so, the buyer would need to add extra each month for projected expenses.

Then I looked at our monthly income. Then I subtracted our living expenses and our home ownership expenses from our income, and wound up with a number that represented the maximum amount of mortgage we could afford.

.............................................................

Example: This family rents and would like to purchase a home. They make a total monthly take-home income of $5400. Their monthly living expenses and debt come to about $3500, not including rent. They figure that owning a home will cost them an extra $350 a month between increased utilities, home maintenance, and homeowners association fees.

Living Expenses + Extra Home Ownership Costs = Total Costs (without mortgage)
$3,500 + $350 = $3,650.

Total Income - Total Costs (w/o mortgage) = Maximum Mortgage
$5,400 - $3,650 = $1,750 Maximum Mortgage cost

So in this scenario the buyer would want to look at a home where the mortgage cost would be less than $1750. I would aim somewhere in the $1600 or less range if this were me.

.....................................................

So our hypothetical family can afford to pay $1650 a month in mortgage, lets say. So what that that get us for a home price? This is quite variable because of down payment and interest rates.

Our family has $10,000 available for a down payment. They have cahs for all of the closing costs. They have pretty decent credit, and are looking for a 30 year mortgage. They have to pay .5% PMI, and tax rates are 1.25%. Current interest rates are 5%. They can afford a $265,000 home.

Or perhaps they have $10,00 for a down payment, but the interest rates have risen to 5.5% Now they can afford a $254,000 home, which is $10,00 less than they could afford with the 5% interest.

Or wow! The interest rates just plummeted to 4.5%! Same down payment, same tax/PMI rate. Now our family can afford a home for $278,000!

....................................

What worked best for us was to figure out how much we wanted to pay per month, maximum, as demonstrated above. Then we went to our credit union and ran numbers with them. We figured out what we might need for a down payment, what we were looking at for hypothetical closing costs, and how much they were willing to loan us. Then we looked at our maximum house costs based on the current interest rate and monthly payment amout, and started looking around out there at what we could find in and below our price range.
Edited by tinuviel_k - 12/22/11 at 11:25am

[seawitch]

Well, here is currently what our expenses looked like in our previous COL... the second column is what I'm estimating them to be in the new COL area...

(OK that didn't come out formatted at ALL... sorry)

Car Fund $350.00 $350.00
Geico $80.00 $300.00 (High insurance in NY?)
AAA $6.00 $6.00
Gas $150.00 $150.00
Health Ins. $27.00 $70.00
Food $400.00 $600.00
Preschool $275.00 (None)
Phones $115.00 $115.00 (EW.)
Home Ins. $100.00 $250.00
Taxes $100.00 $250.00 (This might be waived like I said.)
Internet $60.00 $80.00
Utilities $175.00 $300.00
Garbage $11.00 $50.00
Allowance $300.00 $500.00 (This includes stuff for the house, travel, clothes, dates, etc.)
Netflix $9.00 $9.00
Star Wars $15.00 $15.00


Total $2173.00 $3045.00

Does that seem about right...?

We were actually living on a bit less than the first column. We didn't have as much to spend on allowance category and we also didn't have the expensive phone my DH now insists on and we weren't paying preschool, and we didn't have a health insurance payment. So that brings the total down to about 1500 which is what we were just about living on.

[zebra15]

I'm confused, you want a PAYMENT between $300-$600 a month?  That is going to include insurance, taxes and fees?

Just for a quick example

$100,000 loan at 7% interest for 30 years is a payment of $665.30

$50,000 loan at 7% interest for 30 years is a payment of $332.65

$100,000 loan at 7% interest for 15 years is a payment of $898.83

$50,000 loan at 7% interest for 15 years is a payment of $449.41

$100,000 loan at 4% interest for 15 years is a payment of $739.69

$50,000 loan at 4% interest for 15 years is a payment of $369.84

Obviously the better your credit the lower your rate can be.  But this gives you an example to see what payments look like and some numbers.

If you don't actively use credit, that could impact your credit score.  I would find a broker and sit down with them and look at some numbers after you decide where you want to live.  I would also meet with a financial planner as well.

http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx

[SunRise]

You are right that NY is way more expensive!  Is that where you are re-locating or is that just an option?

Taxes are much higher (my 95,000 dollar market value house has taxes of 4000 / yr). Health insurance is much higher. (not sure if your estimate is accurate for health insurance),etc.

Depending where you move to in NY though, the actual cost of the house may be less then you think. My house was/is a fixer upper (hence the low price of 85,000) but the location (university area) of the house is great and has the potential to resale at 135,000+. The homes in this kind of area range from 120,000 - 250,000.

To figure out how much you want to spend, first research the area you are planning to move to and buy. Find the house you want. And decide how much you want to put down on it. If the house you choose costs 200,000 and you have 150,000 to put down, taking a loan of 50,000 ... then amortize that loan over a 15 year mortgage...or the lowest interest rate loan possible. Since you have a chunk to put down, seems like you have lots of flexibility and ease at getting the monthly payment you desire.

[seawitch]

Yeah, I want a payment from between 300 and 600 a month. If we have 165,000 to put on a house, and we get a house at about 250K maybe... then it should equal out to around there? Our credit is about average... even though we don't have a balance we have always used cards but this past year we had a few late payments unfortunately due to moving etc. (We didn't get the bills on time, etc., not that we couldn't afford them.) We're trying to get a loan through the VA, though, so that usually means the rates are a bit lower and it's easier to qualify.

We're FROM CT and would like to go there but it just costs too much. We're going to NY because we can get some or all of the property taxes waived there - so at worst we'd be paying 65% of the rate and at best I think it's no property taxes at all, but I'm not sure. That's a huge selling point for NY - it's the only state in the Northeast that works like that for taxes. I know utilities, car insurance etc is going to be higher depending on where.

The health insurance is a national plan so that's not going to change no matter where we live.... There was a BEAUTIFUL, PERFECT, etc house that we could have had for 250K but the property taxes were like 9000 a year. Until we know how much discount we'll get we didn't want to commit to that yet. If we have no property taxes that'd be great, esp cos it was newly insulated etc so utilities were low. But since we don't know what the tax rate we will be paying yet is.... etc.

We just have to live near a VA, so we're thinking we're going to look around Albany even though it's cheaper the further west you go. (I used to live in Buffalo.)

We're definitely going to need to meet with a financial planner but considering my husband doesn't really um do finances it's all on me and I want to walk in there with a sort of plan instead of totally clueless. I don't like being clueless about anything even when I go to an "expert"!

[seawitch]

(And the health insurance is the supplement for the three of us - the kids are not added on yet so for me it's $25 a month, it will be higher once/if the kids qualify as well.) Theoretically it could go down to 0 a month and no supplement but then we would have co-pays and with the supplement there isn't any co-pay...

[zebra15]

Just something to think about, I *think* you homeschool or plan on homeschooling, New York is a red state.  Not sure if that matters to you or not

http://www.hslda.org/laws/

[seawitch]

Well *that* looks like fun.... =/

[nd_deadhead]

Hang on to all the evidence you have that your late payments were the result of moving/address issues. When DH and I refinanced our house, I had a finance mixup which caused me to bounce a couple of checks (I set up a new automatic payment for something, and it came out 2 days before I expected). I explained it all to the bank, with bank statements showing the automatic withdrawal, and our records were treated as if the bounced checks didn't happen (giving us a lower interest rate).

To stay under $600/month, you'll have to get a 30-year mortgage. As I said earlier, the advantage of this is that you can pay more any time - but you are not committed to a higher payment. In your case, 30 years vs 15 will save you $200-300/month, depending on mortgage amount and interst rate.

Your $165K for a down payment - does that still leave you with decent savings? I wouldn't empty your savings account to lower your mortgage payment.

Good luck!

[seawitch]

I don't trust having savings. There, I said it. Every time that we scrimped and saved and got a little breathing room, we had some issue or other which made savings go *poof*. The ironic thing is that had we not had those savings, we wouldn't have had the debts, either. For example... We had a car before that wiped out almost our entire savings - and while we had savings we kept feediing into the car because we thought it was worth it. It was only when we ran out of savings that we realized the car was totally worthless and we had to get a new one anyway. Another example: we had some medical issues that wiped out all our savings. Then we got accepted to Medicaid but only after we had to get rid of the savings first... That's not an issue anymore but my faith in savings has been really shattered. I'd rather put it into a house where I know it's secure. That's why I like the idea of not having a mortgage at all - they can take away the money you have in the bank but they can't take away the roof over your head, that sort of thing. I have serious security issues due to these last few years, due to being homeless since April, etc.

That said, yes, there is some savings left.. But I'm not totally hung up on having a huge amount. (It's right now about $15K and we might reduce it a bit.) But especially when we have savings DH seems to see that as a green light to spend. When we don't have much in the bank he is more frugal. He's kind of like, if there will be money to burn through, he will burn through it - regardless of what the money is intended for. And if it's in a form of savings that's hard to get to, I mean, then I don't see the point of it, because if there was some catastrophic issue then we'd be paying a penalty to get into it. I don't see the point of having savings right now anyway. We don't have to worry about college and as far as retirement goes, it's kind of complicated why, but we're not saving for that. I can explain why not if your'e interested. Medical issues are basically free now, so should the worst happen, we won't have a crazy medical expense coming up. We do have enough for short term savings, like "oh crap the xyz needs to be replaced." We also have a car fund so that in five years we'll have enough for a newer car IF we need it (but we buy Honda's so they have the potential to last longer.)

The calculators I've seen all say that based on whatever factors, the 15 year mortgage would be about $600 and the 30 year would be like $300 or $400... I'm not sure what they base their numbers on or if they're just trying to get you in the office. We'll also be trying to get a VA mortgage which I think has slightly lower rates and it's easier to qualify for them.

[PenelopeJune]

Hi, my name is Penelope and I'm a Zillow addict. Since you are not set on any one state, I thought I'd share my armchair "expertise" on house prices.

I surf for cheap houses and I was AMAZED at the house and land you can get in Maine. Does Maine work for you? Are you willing to go for a fixer upper?

Of course, since I'm from Kansas, I have no idea what Maine is like, nor what the area is like around these homes. I just enter random states into Zillow and see what I can get. :D

[seawitch]

You're from Kansas? You automatically have my respect. Both times I've been in Kansas (driving through) we were dodging tornadoes, quite literally, so I'm amazed anyone has the guts to live there, lol.

Maine is nice. I've been there before when visiting a college and even back then I was shocked at how much further money went than it did in CT (where I was from). We haven't really looked into it much but might. It's a little further north than we'd like.

We're also looking into WV and SC and here in FL, but we'd really like to be back near where we grew up.

Thanks for the suggestion, though, I will look into it a bit more.

[nd_deadhead]

Here are some numbers for you - this would be just principal and interest, not including property taxes and insurance.

First, assume a 4% loan. Here are the monthly payments for 3 different loan amounts, for 15 year and 30 year:

     Loan amount     15 year     30 year

      $75,000             $555        $358 

     $100,000            $740        $477

     $125,000            $925        $597

If you borrow at 5%, the numbers look like this:

     Loan amount     15 year     30 year

      $75,000             $593        $403 

     $100,000            $791        $537

     $125,000            $988        $671

You'd have to have a pretty small 15-yr mortgage to keep your payments under $600/month.

I sort of see your point about savings - my DH had a lot of money saved when he was in high school, but his parents took it to pay expenses on their farm (yep, it was a pretty sleazy thing to do). It took a long time before he was willing to save money again. But logically, if you're owning a home, you need some money put aside for unforseen expenses. You might be able to get along without a vehicle, but it's harder to get by without a frisge, if yours should die.

Would it work for you to keep a savings account in a different bank than your checking account? Have money automatically deposited into savings, so you don't have to think about it, but if you need it, you have to make a special trip to the bank - you can't just transfer easily by phone, but it's still readily accessible if you need it.

Good luck to you!