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Time for a House? What Can You Afford?

With rates on the rise, it may be time to lock in that 30 year fixed mortgage.  I know you girls have been dreaming of beautiful new furniture and dudes, your mancave can happen.  That’s all well and good but when is the right time?  How much money do you need? And why now?

Why Now?

  1. Federal Reserve raised interest rates this past week
  2. The Fed is also expected to hike a few times in the coming year, as well

Since 2008, the federal funds rate has been near zero.  By increasing this rate, it means the bank’s cost goes up.  And if you’ll learn anything from me, you’ll know when business cost go up, they get passed onto the consumer (a.k.a higher prices).  It’s the same concept as raising taxes on a pizza parlor, it just means it costs more for your two slices and a coke.

Now is a good time to lock in a long term mortgage before these effects are felt.

How Much Should I Save?

In an ideal world, I’m a believer in that you should have 6 months of expenses sitting in a bank account AFTER you consider your down payment.

Take the following facts for a $400,000 house:

  • Total Pre-Mortgage Monthly Household Expenses = $3,000
  • Minimum down payment (first time homebuyer) = $14,000
  • Mortgage (with $8,000 tax bill included) = $2,900 (estimate)

You’ll need around $50,000 cash to comfortably buy a house.

3,000
2,900
5,900
X 6 months
35,400
14,000
49,400 – Round up to $50K

Though this type of concept may seem a bit conservative of me, it’s the safest way to be a homeowner.  At a minimum, it provides three intangible things:

Loss of income – Who know who’s employer gets bought out or what departments are getting eliminated.  What about those who are self employed?  Since your income isn’t guaranteed, it would only make sense to build up your coffers.

Stress Relief – Let’s say you do lose your job or income source.  Having 6 months allows you take a step back, take a breath, and formulate a plan.  Rather than draining your 401K and paying a 10% penalty on your balance, you’ll have a little time to think.

Flexibility – Tired of your job or business? Rather than feeling like you have a ball and chain attached to your situation, 6 months of savings may give you enough flexibility to go ahead and make a change.

Down Payment?

The classic question for home buying is “How much should I put down?”  Of course, this will depend on your individual situation.  My advice is to formulate a budget to figure it out.  By doing so, you’ll figure out how much of a mortgage you can afford.

The down payment you should make will depend on what mortgage payment you can afford.

Use this fancy mortgage calculator to play with your figures.

Just input in a home price, down payment, estimated real estate taxes and you’ll soon have a better picture of what you can comfortably afford.

During My Research…

For those who feel like they deserve a house – this isn’t a good mentality.  For example, life milestones (i.e. getting married) doesn’t mean you NEED to own a house.  That kind of thought process can hold a couple back, as a common reason for divorce are due to financial hardship.

Recently, I was scrolling through Reddit and I came across a question from someone right out of college.  They mentioned how they were disheartened because they got a started salary of over $100K but local home prices were too high to buy.  Getting your first job (life milestone), doesn’t mean you need a house RIGHT AWAY.

Entitlement can be an ugly thing.  Homeownership is a privilege best enjoyed when properly planned for.

Final Thoughts

Of course, I am not alienating the many other viable methods.  This is just the my personal philosophy.

Given the numbers we were using, you can theoretically buy a house for 14K up front.  That being said, we need to anticipate the fact that life is not always going to go our way.  No matter how secure your income is at the moment, it can all change tomorrow.

Losers react, leaders anticipate!

 

Eric Estevez
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