The housing market here in Southern California is frightening to anyone who wants to buy a house for the first time or trade up. Single-family homes in my neighborhood are well into the $700,000 range, often for a two-bedroom, one-bath. I know a lot of people are interested, though, so I thought I’d share the strategy and values that worked for my husband and me when we bought our townhouse. (Remember that I’m not a financial expert, so consult a real expert if you need individual advice.)
I think the most important thing to keep foremost in your mind is how much you want the monthly payment to be. This is not the same thing as how much you can afford. It is much less stressful to buy a house that is less than what you can afford, so that you are not stretching each month to make your mortgage payment. An unexpected big bill, such as a bill for emergency surgery, is not going to send you into credit card debt.
The best way to figure out your ideal monthly payment is to get a comprehensive and honest list of your annual and monthly expenses. This article has excellent guidance to help you determine what those are. Next, come up with a rough estimate of how much additional homeowners’ expenses would cost (e.g., yard maintainance, property taxes, insurance, etc.). You can ask some friends how much they pay in property taxes (they might be able to give you the percentage used, such as 3% of the sale price of the house, and an idea of how much it goes up each year). You could also give your insurance agent a call to get an estimate for your area.
Then, take your monthly expenses and your monthly income, and decide what a comfortable monthly mortgage payment would be. It should be a range of a few hundred dollars – for example, $1200-$1450. Next, determine how much money you have available to use as a down payment.
If you have a pretty good idea of how much the house you want to buy will cost, you can skip this next step and go on to the next paragraph. Otherwise, take your ideal mortgage payment and down payment amounts and visit Bankrate.com’s How Much House Can You Afford? calculator. Don’t get too excited by the number if it’s more than you thought it would be. Remember, how much you can afford is not the same as how much you can comfortably afford.
Here is the next step. Go to Bankrate’s Mortgage Payment calculator. Subtract your down payment amount from the price of the house you have in mind or the ball park figure you got from the How Much House Can You Afford? calculator. This is the amount you want to enter into the first box, Mortgage Amount. Fill in the rest of the numbers and see what the monthly payment amount is.
Finally, tinker with the mortgage amount and the interest rate until you find some numbers that work for you. There are many different types of mortgages, and each type has a different rate. For example, if you’re planning on moving within five years and the house you’re interested in is out of your price range with a traditional 20% down fixed rate mortgage, an adjustable rate mortgage that has a low fixed rate for the first five years might bring the house within your comfort zone. But, an adjustable rate mortgage might be too risky, depending on your situation. Bankrate.com has an overview of homebuying and mortgages, including the different types of mortgages, in Mortgage Basics. Happy house hunting!