Tag Archives: much
Just How Much Mortgage Can I Afford?
The typical rule-of-thumb to answer this question is “one week’s gross income”. But because of the tax advantages of home ownership, its really higher than that. 31% of your annual gross income is a workable rule-of-thumb. So, if you have a household income of $ 100,000, then you can afford up to approximately $ 31,000 per year in monthly payments. Divided by 12 months per year, this is $ 2,583 per month.
The secret though, what the money merchants at the banks and mortgage companies don’t want you to know, is that $ 2,583 per month must cover more than merely the repayment of the loan. This payment must cover
(1) the repayment of the principle amount of the loan,
(2) the interest on the loan,
(3) the real estate (i.e., ad valorem) taxes,
(4) the homeowner’s insurance,
(5) any homeowner’s association fees (if you live in a development with common elements, and
(6) any escrow amounts the lender requires.
So let’s look at this. Assume your real estate taxes are (or would be) $ 250 per month and your homeowner’s insurance is the same. That’s $ 500 per month. Now assume you live in a development with common elements, with a payment of $ 100 per month. Now the total is $ 600 per month. We’ll assume there are no more escrow funds to set aside.
The monthly total is $ 600 per month. You can afford $ 2,583 per month. $ 2,583 less $ 600 is $ 1,983 per month. Assuming a 4.5% mortgage, payable monthly over 30 years, then you can afford to borrow approximately $ 391,000. Remember, this is a fixed-rate mortgage. The interest rate does not vary over the life of the loan.
Another work of caution. Just because you can afford to borrow $ 391,000 does not mean you should borrow $ 391,000. You probably also have some credit card debt, maybe a student loan (or two!) and every month brings emergencies you did not foresee. You also have your retirement goals to fund and maybe college educations to think about. It is, therefore, OK to borrow less than you can afford to pay back.
How do you feel about money?
The recession is teaching us all some hard new lessons about respecting money.
We all know that the love of money is the root of all evil. Yet we think of it as unclean:
o We call it filthy lucre,
o Too much of it means you are stinking rich
o Too little and you are dirt poor.
We dont talk about money openly and we treat it as if it is a vulgar subject. We routinely ask strangers what they do for a living, but would never dream of asking how much they earn. And that applies equally to family and close friends.
Its not always like that
Some cultures feel differently about money. When I tell people that I write about money for a living, it evokes little interest and they dont pursue the conversation. I wonder if it would be the same if I said I was a sports or travel or food writer.
Now theres a change
The recession has brought the subject of money out into the open and is making us love the stuff more than we did before. Most of us now believe that money is more important than it was prior to the recession. This thinking is also reducing how we value possessions. Money is a great tool and also a measure of value and a form of exchange. It buys food and clothes for us and our families; it keeps a roof over our heads, pays our bills and if were lucky, buys a few treats as well. So why is it so notoriously hard to earn and unbelievably easy to spend?
A lesson from the recession
Along comes a recession and changes our attitudes towards money. It teaches us to look after it and how to use it and invest it wisely. If we werent caught by the recession or by investing in one of the huge money frauds, we know how lucky or clever we were compared to others.
Charity keeps going
Surprisingly, research shows that people are maintaining their charitable donations and are helping family in these difficult times. It is a fact that charitable donations in the US doubled after the 1930s Great Depression because people witnessed the trauma of poverty.
More money lessons
One of the tough lessons of the recession is that of staying out of debt. Moreover, it is teaching us that saving money is good, and borrowing too much is dangerous.
We will always feel funny about money but until somebody develops an entirely different social structure, or we return to a barter system, we just have to learn to live with money. We should learn to love it, not because its money but for what it can do for us if we use it properly.
One of these days, man should start work on evolving a new financial system. Thats probably got about the same chance of success as developing a substitute for water!