Saturday, June 9, 2018

Numbers and Homes

First thing's first: do you know what you can afford to spend on your mortgage every month? This calculation is different for everyone.

For my husband and I, while we very comfortably could afford a home at a certain price level while still hitting our savings goals we do not ever want to be in a position where we can't afford our lifestyle anymore if one of us loses our job for a long period of time. So we based our goal mortgage payment (loan + taxes + insurance) on what we can afford on the lowest salary between us. 

 For transparency's sake, that's my income at $67k/year, and we've been looking at houses under $300k. In our 15 mile search radius, that can get us anything between a REALLY nice 4-5 bedroom, 2,600sqft house in a... let's call it "revitalizing" city with abysmal schools, or a 100 year old 2 bed, 1 bath 1,000sqft "flipper's dream!" in a very nice city with very good schools. So there are lots of interesting options.

That's why doing this calculation was so important to me. It's so hard to really see the difference between a $257k house with $7k taxes and a $275k house with $5k taxes when you're in the thick of it and looking at photos of open floorplans and walls full of shiplap. Spoiler: it's ~$130/month cheaper per month for the more expense house!

Here's the spreadsheet I created to do the various calculations. Please feel free to download it and use it as your own! I'll talk you through what you're looking at.

The green cells are what I filled in. 

-The list price for the house. 
-The percent of down payment we plan on having. **We have enough savings for a 20% down payment, which means no mortgage insurance, or "PMI". If you plan on putting down less than 20% that will be an additional factor of $50-$100/month** 
-How much I think home insurance will be. 
-The percentage I think we'll get on the loan (4.75% is about as good as you can get right now. 5.1% is predicted to be the new "good rate" in just a couple months)
-Any upgrades to the house we'll want to make right away.
-The annual property tax amount

Everything else will calculate for you!

The important thing to consider about the miscellaneous updates is that a fixer upper for $20k less than an updated house might not be worth it if you look at everything that needs updating and will cost you $30k. You also might not have that money to spend right now, but spread out over a 30 year mortgage it's more affordable.

Other things to consider: Are you a first time homebuyer? Are there programs in your area that might help you put money toward a down payment? We have those in Illinois and I'm sure other states have things like that too. But are those programs actually a good idea? Here are the three options my loan officer gave us:

Option 1: no special programs, just a conventional 30 year mortgage at 4.75% and a 20% down payment.
You'll see the total interest paid over 30 years is $175,586 (barf, right?).

Option 2: a $7,500 grant from the state to put toward the down payment with no expectation of repayment. But the interest rate increases to 5.35%. Sounds sweet, right? Free $7,500! You still get your 20% down payment, but you only have to put up some of that!

But look at the total interest: $202,057! You essentially will be paying an extra $37,000 over 30 years in order to save $7,500 right now.





Option 3: A $10,000 interest free loan applied to the down payment that you pay back over 10 years (ie: $83/month), and the interest rate on the loan is 5.1%. So you still end up paying that $10k, but you don't have to front it all up front, which can be really helpful if you ALMOST have a 20% down payment, but aren't quite there.

Again, that interest will really kill you over 30 years - $190,923. That's about $15,000 more over time than the conventional mortgage.


"Why on earth would I spend $15k-$37k more just to not spend that money now?" you might ask. 

Well, maybe you wouldn't! I wouldn't because we're in a really great place with savings. We have enough for a 20% down payment and will then still have savings for a comfortable "safety net" (6 months of expenses) plus a few thousand dollars to spend on "surprise! You're a homeowner now and the water heater broke because that's always what happens!"

But... maybe you would. Listen: having $10k in the bank RIGHT NOW is a big deal. And look at the average monthly total between Option 1 and Option 3: it's only $125/month. Yes, it will cost you more in the long run, but at what cost? What if it would take all of your savings to put 20% down, and then surprise, the water heater breaks because that's always what happens? You don't have money to fix the water heater. But if you took that loan program, you would have that money. 

Sometimes the short term is much more important than the long term. And that's okay! There's no objectively right or wrong answer.