Help me guess my mortgage and pick my house

October 1, 2009 8:19 PM

Finally getting ready to start house shopping and planning soon. I have two questions: is the total monthly mortgage payment really 1% of the costs and how crazy am I for wanting to try for a house in this range?

I know how much I'm approved for, know what I can afford, not for sure what would need to be added in just yet and now I just need to know how to determine that by house cost. I was told by a Realtor a little while back that a total monthly mortgage payment is generally 1% of the house cost including insurance and everything. Is that true cause that would help me budget tremendously just by looking at a house. Maint and HOA fees may not be included though, she wasn't specific enough.

On a salary of 32,911.20 how bad is it if I decide to get a $119,900.00 home? I'm trying to keep it under 100,000 which is around 3x my income and surprisingly, I've found a few but today a home popped up that just out of reach but as perfect as that first time dream home could be. Though the house will be mine, I wont be the only one paying for bills, food, etc for at least a year guaranteed. By the middle of next year I'm hoping to change jobs. If I stay where I am I'll get a raise (not huge but still). On top of that I'll have money saved up to cover mortgage for some months. How logical would it be to try for a house in this range or even in the 110 - 115,000. range? When subtracting the 1% from my monthly budget (after food, bills, gas money) I still have a little bit left. I'm stretching and may not even go that way but how much stretching is too much?

I haven't been able to get a very realistic view of mortgage yet. I'm with a downpayment program that only requires me to handle a few things like earnest money, appraisal, inspection and to have 1000 saved so I have no idea just yet what other costs I'll need to factor in for the monthly mortgage payments. I'm still reading and learning. Any help is appreciated.

posted by grablife365 to home & garden (27 comments total)

For a $120k home your payments, including insurance and property tax escrow (if you structure it like that) will probably be in the $850 range. Can you easily cover that? Keep in mind that a billion expenses and things that you didn't know you needed will crop up. IF you only have $1000 saved up that will vanish quickly.

Best practice in my opinion is to have at least 6 months of expenses banked. Failing that then 3 months. Failing that, you're putting yourself in a risky situation where you'll be living from paycheck to paycheck.
posted by Burhanistan at 8:27 PM on October 1

In the 'olden days' 1/3 (33%) of your take home is a realistic number to spend on housing. Here in Vancouver, the "median" monthly housing expenditure is ~70% if the "median" monthly take home.

At 1% per month (ignoring interest), you'll pay it off in 8 1/3 years. Typical mortgages that I've been seeing are in the 18 - 25 year range. If you can get a mortgage in this range, you're looking at $300 - $400/month. Less than 1/3 what I'm paying for rent in the city where I'm at.
posted by porpoise at 8:27 PM on October 1

Those are the rules of thumb I used. I mentioned it here. At least one person disagreed with me, but it was true for me. I borrowed about $100,000, and my monthly payment is about $1,000.
posted by Houstonian at 8:32 PM on October 1

I thought 120thousand would have been well into 1200 according to what she was saying. 850 is way doable. I only have to have 1000 saved up for them but of course thats not all I'm saving up for me.

I'm hoping to pay it off earlier than needed and lower payments would be awesome.

I did read those rules of thumb just a few minutes ago. How do I know which it would be without having all the paperwork in front of me? I'm planning to just be prepared for the higher numbers if I do go with a more expensive place.
posted by grablife365 at 8:46 PM on October 1

Your local library probably has a copy of the book Home Buying for Dummies. I found it extremely helpful for figuring out things like this. There are a lot of little things that come up and it was nice to have a reference book to lean on for reality checks as to what costs were reasonable.

You can use online mortgage calculators to figure the mortgage payment (you plug in the amount you're borrowing and the interest rate and the time-length of the mortgage). For example if you borrowed $115,000 at 6% interest for 30 years, the monthly payment would be $690.

There will be other costs on top of the mortgage, like private mortgage insurance (PMI) and property taxes, which can be significant. The property taxes are often listed on the property listing for each house, or your agent can find that info for you.
posted by LobsterMitten at 8:49 PM on October 1 [1 favorite has favorites]

The interest rate can make your payment lower or higher by as much as $200. Have you been "pre-approved" by a lender yet? They can give you a better idea what your actual payment might be, given particular mortgage packages.

Also, regarding any HOA or maintenance fees, they are almost always due as a lump sum at the first of the HOA's fiscal year. Your mortgage lender will most likely not escrow those for you.
posted by Burhanistan at 8:50 PM on October 1

I don't know how you should know without doing the paperwork. I can tell you that what your Realtor said has been the same thing since at least the 1980s (my dad was friends with Realtors, and he shared it with me). I can tell you it was true for me (almost exactly 1%): I closed on my house in early 2002 and my house is in Fort Bend county, but I also ran the hard numbers with my mortgage company for a house in Harris county.

To know for absolute certain what it will be, to the dollar, you've got to do all the math.
posted by Houstonian at 8:54 PM on October 1

I think you mentioned in a previous question something about maybe moving cities. Just dropping back in to say that a general rule of thumb is that you shouldn't buy unless you are going to keep the house for at least 5 years. This is partly because of the expenses of buying/selling - the agent commissions and the closing costs can be substantial and can mean that you end up losing money on the deal (ie, would have been financially better off renting). The rule of thumb is even more true if you're not putting much money down (and you say you are not putting in much cash up front).

Here's why - suppose you buy a house that costs $100,000 and sell two years later for $103,000. You have to pay realtor commissions out of the sale price, and then pay off your mortgage. If you borrowed $80,000 to begin with, you can do this easily. But if you borrowed $99,000 to begin with, you won't be able to pay the commissions plus pay off the mortgage. You'll end up losing money on the sale.

So if you're thinking of moving within 5 years, you may want to postpone buying until you're in a place where you know you'll be for 5 years or so.
posted by LobsterMitten at 9:00 PM on October 1

Here's another online how to buy a house guide that I found useful too. It has some tips about figuring extra costs.
posted by LobsterMitten at 9:04 PM on October 1

That 1% may be a rule of thumb but it can't be that general because it will be greatly affected by the mortgage rate. For instance, on a 100k 30-year fixed mortgage, the monthly payment is $733 at 8% but $536 at 5%. That's a pretty huge difference. (And both of those rates have happened in the last 10 years.)
posted by smackfu at 9:17 PM on October 1

I'm not moving LobsterMitten. A condition of the program is to be in it for at least 5 years, I believe. That or ten.
posted by grablife365 at 9:41 PM on October 1

The "rule of thumb" of 1% means that the total monthly mortgage cost, or PITI (principle, interest, taxes, and insurance), is 1% of the purchase price. This idea assumes that the buyer is getting an escrow account which I strongly recommend. Lots of people disagree with me, but miss your property tax payment by one day and the penalty cost will eat up all of the interest you potentially made.

In factoring your house carrying costs, be sure to include savings for maintenance and other "oh crap" items. Even if you buy a home warranty--which is also a good idea, as it's about $350-450 per year--there may be items the policy doesn't cover, so you'll want to have a slush fund for those.

Good luck!
posted by fireoyster at 9:47 PM on October 1

I'm not moving LobsterMitten.
Ah, sorry for the derail.
posted by LobsterMitten at 10:14 PM on October 1

It's not hard to get a better sense of your potential mortgage payments on $120K. You just have to be clear about what your assumptions are.

You're in a down payment program. I don't know entirely what that entails, but lets assume you end up with a mortgage of $120K on a house you paid $120K for.

Your mortgage payment will be principal, interest, taxes, and homeowner's and maybe mortgage insurance.

Bad news number one: Texas has the highest homeowner's insurance rates in the US, with a 2008 average of $1409/year. Yours probably won't be that high as $120K is well under the average house sale price in Texas. But let's call it $1000.

Bad news number two: Texas has high property tax rates (but lower than here in western NY if that makes you feel better). They vary depending on where you in Texas are but average 2.57% or about $3000 on $120K. You should be able to get an accurate sense of what your property taxes would be for a given house from your realtor.

So before you pay any principal or interest, you're looking at $300-350/month.

Add principal and interest to that, which is what the online mortgage calculators are good for: if you somehow get a 5% rate, your monthly payment would be about $1000/month. If you get an 8% rate, your monthly payment would be about $1200.
posted by ROU_Xenophobe at 10:36 PM on October 1 [1 favorite has favorites]

If you go talk to a bank (ideally, a local bank!) to get pre-approved for a mortgage, the mortgage loan officer will prepare for you a good-faith estimate of what all your closing costs will be and what your monthly payment will be, based on borrowing a certain amount of money. I'm sure if you asked nicely, she'd do up two forms, say with the lower and higher end of prices you're looking at.

The online mortgage calculators don't include stuff like mortgage insurance or hazard insurance or property taxes or stuff like that, so they'll considerably underestimate your monthly payment.
posted by leahwrenn at 10:58 PM on October 1

Just a word of caution. We were pushed into premature home buying by an escalating rental market and a declining mortgage market. We can very comfortably make out house payments and I have no regrets, but houses are like babies - they come with a TON of expenses you never think about until you have one. Right this second, from where I sit, I can see a sink tap that needs to be replaced (€120), a slow leak in the flat roof extension that needs to be patched (€300), and a forest of ivy growing across our shed roof over a party wall that needs to be cut back with scaffolding (€400).

I'm looking at them because I have neither €120 nor €300 nor €400 for these repairs, but that's OK because these are not immediately critical jobs. If a pipe bursts, though, or the leak was serious, I gotta tell you we'd be well and truly screwed right now. On top of your mortgage, taxes and insurance, you need a monthly savings account for the house - one we clearly do not have, but you should.
posted by DarlingBri at 11:05 PM on October 1 [1 favorite has favorites]

I have found Karl's Mortgage Calculator reasonably handy for trying to figure these things out. As ROU points out above, if your mortgage is around 6% that's a payment of 1,052.79 a month with approximated insurance and taxes. Don't forget to add in PMI if it isn't folded into your interest rate (FHA style, I guess).

If the salary you have listed is gross pay, looks like your net might be around 26,600? That's $2,200 a month, more or less. So that $1,050 is 47% of your take home. I think right now with no other debt, and depending on where you live, etc., etc., etc. the FHA max load is 43%. If $32,911 is net, the $1,050 is 38%, a more comfortable level.
posted by maxwelton at 3:37 AM on October 2

Can you still get 0% Deposit Mortgages these days? The interest rates on those would be awful though. if you can save say 10 - 20% before buying then you will get a much better Interest rate.

And I think the 1% idea is a bit rough. you should just try and work it out as well as possibley then add a contingency of 10%,
posted by mary8nne at 4:00 AM on October 2

My monthly payment, with PMI and a rate of 6.5%, is 0.9% of my total. 1% would not be out of line with a higher interest rate and/or higher taxes. Plus my homeowner's insurance keeps going up...
posted by cabingirl at 5:29 AM on October 2

.63% here, as a datapoint. We have excellent credit and got a good interest rate, plus our taxes were badly assesed (in our favor).
posted by MrMoonPie at 6:59 AM on October 2

Ask your broker to see the interest rate sheets, and how they apply to your credit score.

If you bother your broker enough, you will also discover that a 'loan processor' is little more than the person that gathers all your tax, credit, and employment info into the same file to 'process'. Hardly worth $400+ dollars IMHO.

Brokers are getting great commisions now for 15 yr. 4.25% loans, 30 yr. 4.5% loans (these are credit score based loans... good credit = great rate; ok/poor credit = bad rates) If your broker is not willing to lay his commision schedule out or show how your credit score determines your rates, go find another.

40% of income is where most banks top out their monthly payment scheds. More than a $1,000 in savings (above 5k is preferred; this means less risk) when a packet gets evaluated.
posted by buzzman at 7:29 AM on October 2

I've been thinking more about your question. I remember how scary it was to buy a home, with the uncertainty of the related costs (not just mortgage, but upkeep, etc.). A home is the single biggest purchase most people make, it's a big (and long-term, usually) commitment, and you really want to know what you're getting into before you make any moves.

People who are working through a City of Houston program for a housing initiative (they have acronyms like HAP, HOME, HOPE) are required to take 8-10 hours of homebuyer education from HUD housing counselors. If you are in that program, these are exactly the types of questions you can ask them, and they will have all your financial information in front of them so they can give you advise that's tailored to your exact situation.

I believe, though, that HUD offers this to anyone, even if they are not working through one of those programs (see here). Approved counselors in Texas are listed here and also here to see a spreadsheet of ones in Houston only (click the link in Step 1 to view the spreadsheet).

I'd urge you to talk with one of these resources, so you can feel comfortable sharing all your financial information and plans, and get really solid advise and help with the number-crunching. They will know all the things you need to add in (the tax rates, interest rates, HOA fees if applicable, insurance rate, etc.). Those are things you wouldn't want to share online, but could feel comfortable sharing with a housing counselor who's job it is to help you make the right decisions for you.
posted by Houstonian at 7:32 AM on October 2

ROU_Xenophobe mentioned the insurance costs for Texas. Don't forget that depending on where you buy, you may also need flood insurance and windstorm insurance. Where we are on the west edge of Pearland, our mortgage lender required both. If we were a mile or two further west in Missouri City, we might not have to have it.
posted by Robert Angelo at 8:21 AM on October 2

It's not clear to me whether you have an emergency fund. Even after making your downpayment and closing costs and insurance, you should have 3-6 months of expenses set aside for major catastrophes, such as job loss, illness, disability, etc. Ideally, you would also have a minor emergency fund (car break-down) and a housing maintenance fund. If you don't have cash on hand to cover all those things, then, no, you should not be buying a house just yet.
posted by acoutu at 11:16 AM on October 2

Thanks for all the advice.
I'm going to go ahead and assume that the price will be around 1% just to be on the safe side, will more than likely choose a house that's not so expensive (thanks for running those numbers, maxwelton) and will definitely try to schedule a time to get with a house counselor so thanks for bringing that back to mind. You guys have been a great help.
posted by grablife365 at 6:08 PM on October 4

"If I stay where I am I'll get a raise (not huge but still)"

Really? You're going to pin your financial well being (and the roof over your head) on money you don't actually make? Or have saved up? That would go against my better judgement.

I do not mean to imply that you are not doing your research (you obviously are), but when unemployment is this high and (correct me if I am wrong) you do not have enough savings to cover several months worth of expenses, it would be wise to be conservative in your purchase rather than try to stretch your dollar or press your luck. What if you get laid off? Will you borrow money from relatives? Take out more loans (if you can get them)? What if you have a medical emergency? Can you afford hospital bills (or maybe you have insurance) in addition to your mortgage? What if you wreck your car? Don't forget about other expenses outside of your mortgage.

"First time home," not "dream home" or "live in it forever home." Don't be afraid to see this home as a stepping stone. You will have more opportunities in life to grow your equity and get a place of your dreams. Just don't screw yourself over now with poor planning. I guess I am advocating more savings, I think 1% is a good baseline as far as monthly payments go, just read all the print and run all the numbers before you sign on the dotted line.
posted by kenbennedy at 9:38 AM on October 5

I have a very stable job where plans are made months in advance and are actually kept. I know what my duties will be in the fall of next year if I do stay. It's pretty guaranteed because the company on the top is not going anywhere. Seriously. If I stay where I am I will get a raise next year. No it wont be 100s of dollars plus per hour obviously but it is a raise and it is guaranteed every September as my raises are written into my contract. Not only that but if for some reason the company crumbles (thats one of only 2 ways for me to lose my job) then I do get paid for a number of weeks not worked.

I do have savings (as I've mentioned I can afford to pay months of mortgage on a 119,000 house without my salary but am only required to have a small amount saved), I do own side work and if I have to take a leap from here I could do fine. I just am not ready to let go of my net yet. If I do leave I will still make a pretty good amount switching over.

I have savings though I try not to have to touch them. I have medical savings since my last raise, have had health insurance for months, an emergency fund is set already, as is a house fund for the past year and something and a car savings account for about a year now. I don't borrow money and have not had to take loans. I have no debt or credit cards and am working on getting a higher credit score. Stretching is only in terms of getting the highest house price that I could actually get counting my current wage. The little bit left is after all my savings, food, mortgage, etc is taken out and is usually used for extra food or gas or something but can be put into savings or mortgage if that was a better idea.

As far as the house being a dream home, its as perfect as a first time dream home could be meaning its not perfect (no first home for me is imo) but it meets a pretty high standard that I have for my first home.
posted by grablife365 at 12:03 PM on October 8