How to own your home (without your home owning you)-Part 3
Part 3 of 4 part series
Once you’ve put yourself in a good financial position and determined where you do or don’t want to live, it’s time to get practical in your home buying journey
The bottom line is you have to be able to afford your house. Notice I didn’t say you have to hope that you can afford your house. And I didn’t say you have to think you can afford your house. You have to know that without a doubt, even if something happens in your life, you can afford to buy a house and continue the payments for up to 15 years.
This makes step number 3 in the process KNOWING YOUR NUMBERS before you sign the line.
It’s SO easy to get swept away with the ideas of a new house and convince yourself that you can stretch the budget to make the purchase. It’s easy to tell yourself that you won’t find a place you like for a lower price. It’s very tempting to let your emotions overtake common sense and buy more house than you can truly afford. When it comes to buying a house, the numbers do not lie. So here’s the recommendations for how to make a wise purchase that won’t make you house-poor:
-Keep your monthly payment at no more than 25% of your take-home pay. You don’t want to max out your budget just to keep a roof over your head.
-Put your mortgage on a 15-year fixed rate. When looking at the monthly payment, people often get tempted by a 30-year mortgage. But what they don’t realize is a 30-year mortgage is front loaded with interest payments, while a 15-year mortgage is much more balanced on interest vs principal with each payment. So while you’re making smaller payments each month, on a 30-year, you are mostly paying interest for the first 15-20 years. With a 15-year mortgage you are actually paying down your principal consistently every month from the beginning. And having a fixed rate keeps the bank from adjusting up a little every year. Because adjustable rate mortgages never go down…
-Finally, avoid principal mortgage insurance (PMI) by having at least 10% down payment. 20% is even better. PMI is an additional fee placed on your monthly payment as security for the lending company that your mortgage will be paid. And you’re the one that pays the fee. By putting a 20% down payment or more on your mortgage, you reduce the overall amount owned, you avoid PMI and you make your monthly payments smaller!
Now if you’re on variable income, that 25% payment can be tricky to nail down. So it’s important that you don’t make your payment the maximum 25%. Either calculate what your average monthly take home pay is, or go on the low end and give yourself freedom to pay extra during the good months. This may mean you have to drop your overall budget for several thousand dollars, sacrificing nicer houses, neighborhoods and amenities. But none of that is worth years of stress and frustration because your house payment is more than you can afford.
In our situation, we were fortunate to have one stable income with one variable income. So to relieve ongoing pressure, we calculated the 25% payment based on the stable income. In doing so, we allowed the variable income to be used as additional payments. To date, we’ve consistently been able to pay extra on our mortgage every month…even when the variable income was significantly less. And as a result, we’re on track to pay our 15-year mortgage off in about 7-8 yrs total.
Keeping your numbers in check and not letting yourself get “house fever” will help you make a wise investment for your future. Next week, I’m going to wrap up this series by talking about the one factor that can ruin your home buying experience.
p.s. If the suspense is just too much for you, schedule a call with me and I’ll give you the down-low 🙂