Posted December 14th, 2011 in Real Estate by Jeremy Waller
Buying your first home can be overwhelming. You’re signing you name to a document that commits you to paying hundreds of thousands of dollars over the next 15-30 years.
That’s not a decision you should take lightly.
One of the biggest problems we’ve seen in the housing market over the last few years is people bought way more house than they could afford. To top it off, they didn’t just over extend themselves on a conventional mortgage. They over extended themselves on interest only loans and other creative financing.
How do you avoid the same mistake? How do you know how much you should spend on a house?
You can’t rely on the banks. They are often willing to lend you far more than you can actually afford. (They were the ones that were willing to do the creative financing that got so many people in trouble…) You can’t (or at least you shouldn’t) rely on what you mom, friend, neighbor, co-worker or favorite TV-personality says. They’re most likely just repeating something they heard from someone else.
There’s only one right way to make the decision. You need to understand the facts yourself and make the decision on your own.
But I Don’t Want to do Math!
Ah, you don’t have to!
The power of the internet has brought us many wonderful tools, including a plethora of mortgage calculators.
Once you put all of your information into the calculator, the mortgage payment including the principal and interest breakdown will be calculated for you.
Now you have your prospective mortgage payment – what do you do with it?
Your payment including taxes and insurance shouldn’t be more than 25% of your take-home pay. You can likely qualify for much more than that – but I don’t think the banks have a very good track record with knowing how much house someone can afford. Can you say record levels of foreclosures?
He With The Most Information Wins
You should never go into a real estate transaction without having all of your ducks in a row. You don’t have to be a math whiz to be able to run the numbers. There’s calculators online for all kinds of things. You can find a property tax calculator, estimated insurance calculator, buy to let mortgages calculator, ROI calculators and practically anything else.
There’s no excuse to not being fully informed of the financial implications of your decision.
Don’t trust someone else to tell you what you can afford. Run the numbers yourself and you can be confident that you are making the right decision for you and your family.