The highs and lows of parenting and real estate.

So What Can YOU Afford?

I know there are lots of people out there who are thinking about buying a house but struggling at the starting line. The headlines on the news are screaming: INTEREST RATES ARE HISTORICALLY LOW!! IF YOU’RE NOT BUYING NOW YOU’RE AN IDIOT!! And you don’t want to be an idiot. You want to be a ‘smart buyer’. You want to get into the market at the ‘right time’. But you have just no clue where to start.

It’s complicated to get from the purchase price of the house to a monthly payment you can afford. How do you know when $200,000 is less than or equal to the $1500 a month you’re currently paying in rent?

I spoke with a new client (a first time buyer) last night who knows he wants to buy, knows he wants three bedrooms, knows he wants to live in the East Valley, but that’s pretty much it. My standard Realtor response to clients like this is to refer them to a lender who can prequalify them and give them all of the payment information they are looking for. Generally, I do this to save both them and me time. If they are serious enough about purchasing to contact me, then it’s in both of our interests to discover as quickly as possible if this is a viable option, and what price range we should be looking in.

That said, I know there are people out there who are afraid to call a mortgage professional. I get the fear. The fear comes from the idea that you will call the mortgage professional and give him all of your information (social security number, date of birth, income, debts, etc) and that he will put it all in his computer and then laugh at you. He will laugh and laugh and say, “What? You think we will give you money? Yeah right. Have a nice day, loser!’

I understand this fear because I have it. I was TERRIFIED to call a mortgage company when we bought our first house six years ago; as in, sick-to-my-stomach, pale and clammy, terrified. And even though I know mortgage reps personally, and I’ve been dealing with mortgages and money and all of this on a daily basis now for the last four years, this fear has not totally left me. Our new house is closing in less than a week, and I got the call yesterday that we received final mortgage funding approval and I was ridiculously relieved. I had this irrational fear that they were going to call me at the last minute and say, ‘Psyc!!’

So this post is for those mortgage-phobes like me. Here is a general breakdown of purchase price to monthly payment, to give you a better idea of what you can ‘afford’ (keeping in mind that credit and income are also a factor).

Let’s take for example this little cutie:

This is a home currently listed in Mesa for exactly $200,000 (yay, big round numbers!). Let’s pretend, just for the sake of argument that you wanted to buy this home for asking price. You are a first time buyer with not a huge amount of cash. You want to get into this house with as little out of pocket money as possible, and you want to know how much it will cost you on a monthly basis. And away we go:

As a first time buyer, the current mortgage restrictions require you to put down at least 3.5% of the purchase price. You can, however, ask the seller to pay for your closing costs. Therefore, when you come to the closing table, you will need a check for: $7000.

Your mortgage will be for $200,000 minus your down payment of $7000, or $193,000.

Five monthly fees come together to make up your mortgage payment.

1. P&I – Principle and Interest, which are the payments to the bank for your loan.
2. Home Owner’s Insurance – Generally paid to the bank on a monthly basis and the bank pays to the home owner’s insurance company on a biannually basis.
3. Taxes – Also paid monthly to the bank, who pays the government twice a year.
4. PMI – Private mortgage insurance (sometimes called MIP, for mortgage insurance premium), which is to insure the bank against you defaulting on your loan. This is required if you don’t put down at least 20% of the purchase price.
5. HOA – Home owner’s association, this is the only fee that is not paid to the bank and may not be applicable. But most banks will figure it in when they are putting together your costs because most homes in Arizona come with a home owner’s association.

Back to the cute little Mesa house for $200,000. Let’s break down the monthly payment.

Today, according to Wells Fargo the interest rate for a 30-year fixed FHA loan is 5.5%. According to this mortgage calculator the monthly P&I on that loan will be $1095.83.

Homeowner’s insurance should be less than $40 per month on a house of this size.

According to the tax records for this home, the taxes for 2008 were $1037.82, so the monthly taxes would be $86.49.

PMI for this home should be less than $80 per month.

According to the MLS, the HOA fees for this house are $32 per month.

So to recap:

1. P&I – $1095.83
2. Home owner’s insurance – $40
3. Taxes – $86.49
4. PMI – $80
5. HOA – $32

For a grand total of approximately: $1334.32 monthly payment and $7000 out of pocket at close of escrow.

Obviously this is just a general example. HOA fees can vary greatly, depending on what the community offers. PMI and home owner’s insurance depend heavily on the company contracted. Taxes depend on the city and the size and value of the home. P&I is greatly affected by interest rates. At least this gives you an idea and understanding of costs.

For more specific information, call your lender!! I swear, it’s silly to be scared. I’m silly. Don’t be like me.

5 Responses to So What Can YOU Afford?

  1. It gets even better. You have to take into account the Tax benefit when the buyer itemize and writes of interest.

    Your example: P&I = $1,095.93@ say 15% tax bracket after tax savings new P&I = $931.46

    Don’t forget the Big Daddy for the Year – $7500 First Time Homebuyer Tax Credit!

    So essentially in your example the Homebuyer gets in with Zero DOWN!!!!

    If you are renting get of the fence and get out there, and lock in those low rate. Feel free to contact me for any lending questions Your Mortgage Planner http://www.MyEquityPro.com

  2. Good points! All great reasons to buy. Thanks!

  3. What kind of things does someone who has been out of the real estate game, but has owned in the past need to know? I sincerely hope with all my being that prices and interest rates remain low so that when we come back (I’m being way optimistic in assuming we will, in fact, be coming back) we can get our feet back in the door. It’s been a big source of stress to not even be able to get our feet in the door here in this area.

  4. Very well explained.
    How about an article on the ability to refinance if you owe the bank more then your house is worth now. Stupid economy.

  5. atpanda answered her own question and emailed me this link: http://www.arizonamortgageteam.com/can-you-refinance-your-house-if-you-owe-more-than-it-is-worth/

    Justin and Tammy have tons of good mortgage advice!

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