When you apply for a mortgage, the first question is always "What is your gross annual salary?" You must provide that information, but by all means do NOT use that number to determine how much you can afford. This is the important because you can't SPEND your gross annual salary- you only have your NET annual salary to spend. A quick and dirty good starting point to find out how much you can truly afford (without giving up your twice a day Starbucks habit or occasional Kate Spade spree) is to:
1. Take your gross annual salary
2. Subtract 43% (28% for taxes, 10% for your 401K, 5% for savings)
3. Subtract 75% (If you spend more than 25% of your take home for your mortgage- not good.)
4. Divide by 12
That number is the MOST you should pay a month for your mortgage (anything going to escrow- pmi, insurance, taxes.)
So, for instance- let's say your gross annual income is $50K. With the above calculations, $28500 is what you should be using as your "gross salary" number (2). $7125 /yr (3), is (4)$593.75 per month TOPS you should be contributing to your mortgage.
If you plug some numbers into a cool tool like the "How much can I borrow?" calculator on The Motley Fool's website (http://www.fool.com/calcs/calculators.htm), you'd find out you could afford (conservatively, with 5% down payment, 4.5% 30 year fixed loan, $1000/yr for insurance and taxes ) property valued around $41000. What you will be told you can afford (with the same above assumptions) by a mortgage broker is $83000- double what you can really afford. DOUBLE.
Even when you've wisely decided to use your "real" income number, you must take into consideration other obligations you may have- car payment, credit card payment, school loans, etc. It may turn out you can't afford to buy. That's a hard pill to swallow, but it's easier than bankruptcy.
When I bought my first (current) house, I used my rent payment as a guideline for what I could REALLY afford to spend a month. That was even too much. Why? Utilities for a house are astronomically higher than what you'll pay for an apartment. I didn't take into consideration having to spend $15k for new heat pump and duct work after a couple of years. There's always something- a yard meant a new lawnmower- and a building to store the lawnmower in. At first, you'll feel like you're bleeding money. BUT, if you can comfortably afford your home, it should get even easier- because that moment in time, theoretically, is the poorest you'll be. When you're wealthier (raises, bonuses, etc.) the payments are still the same.
So, what have I learned? I've learned never to implicitly trust anyone who will profit more if I fail than I succeed. I run my own numbers.
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ahhhhhhhhh!
ReplyDelete'tis working now!
so, i have to tell you, i went through and did this based on just my salary at the art gallery in old cleve-o, and i can supposedly afford a $275 a month mortgage. woo-hoo! i bet that'll buy me somethin' REEEEAL nice.
all the more reason to stay with ryan forever and ever. not that i wouldn't have anyhow, but still.
yay for your bloggery, by the way!
There you are! Glad to see you!
ReplyDeleteYou can EASILY afford 275 with no major lifestyle change. But don't get me wrong, people do much more than my conservative numbers and don't get into trouble- because they go into it knowing parts of their lifestyle will have to be sacrificed. I worry people get into trouble because they really trust banks far too much to be "on their side" and don't run some basic numbers for themselves. Doing a full on budget analysis may be too daunting for them, hence my 1-2-3-4 solution.
Besides, you can afford FREE can't you? You can always afford a room in my house. :) Having said that, here's to falling in love with rich men in our next lives. Cheers!