Today is January 7, 2010 – Happy Birthday Dad!
Week 12 of FPU is entitled Real Estate and Mortgages. This is the class that I wish I had taken back in 1996, prior to my first home. I have recently taken a step towards this goal, but I feel it is a drop in the bucket.
Even though Dave uses the 100% down plan, this is the only area where Dave doesn’t get angry if you incur debt as long as your mortgage falls within these parameters: 15 year fixed, with payments no more than 25% of your monthly take home pay.
There is no short cut to paying off your mortgage except for big hairy payments. However, if you know how, you can still buy a house that will not own you.
How Much House Should I Buy?
In 1996, I was twenty eight years old. Cindy and I had recently returned from Okinawa where I was stationed with the U.S. Air Force at Kadena Air Base. By God’s leading, we moved to the Hampton Roads area of Virginia where Cindy took a job teaching in the Norfolk Public Schools.
We rented an apartment our first year: it would be foolish to buy a house until we knew the area a little bit better.
Our first stop was at the bank to be pre-qualified for a loan. This process simply told us how much the bank would loan us for the purposes of purchasing a home. I remember Cindy and I looking at each other with our jaws on the floor – they will loan us HOW much!?
We were young, and in love and very excited that the bank thought we were worthy/capable of such an amount of money. Now, shopping for a house became an exercise of finding a home we liked that was less than the amount the bank would loan us.
House shopping with a Payment in Mind
In order to avoid become house poor (i.e., your house is too much of your budget), you want to aim to have a mortgage payment that is no more that 25% of your total take home pay.
If I had known that, I would not have looked for how much the bank would loan me. Instead, I would have looked for how much I could pay (and still save, get out of debt, eat…you know, life).
Calculating a monthly payment is easy. The following formula and example is taken from the FPU Members Workbook.
|Rate||15 Year||30 Year|
The formula is:
Sales Prices / 1000 = #1000 X Factor = Monthly Payment
For example, if you bought a house for $150,000 on a 15 year fixed of 6.0%, your monthly payment would be $1,266.
$150,000/1000 = 150 X 8.44 = $1,266
The problem with this formula, for me anyways, is that it is still starting from the loan amount. I want to start from 25% of my take home pay!
Did you know that you can work the formula backwards?
Still using the numbers from the workbook, let’s say that 25% of our monthly take home pay is $1,266. How much of a loan would you be able to pay?
Monthly Payment / Factor X 1000 = Sales Price
$1,266 / 8.44 X 1000 = $150,000.
Instead of the bank telling you how much they will loan you, you will know if the house you want to buy is going to be a blessing or a curse to your monthly budget.