Should You Buy?
We believe financial health is an important factor in the quality of life. When deciding to purchase a house, you need to take a good look at your current and projected finances to determine if it makes sense. It is also a good idea to consider all of the possible housing options available to you.
A budget is important for financial health. When buying anything, it is the budget that should dictate whether the purchase is considered or not.
Time-tested Budget Strategy:
Do you have the money to cover the upfront expenses, as well as the long term payment? One way to determine the fit is to consider your budget segmentation. You should be allocating a percentage of your income to savings, emergency, and housing, in addition to the other necessities and wants, such as food and travel. Many advisers recommend starting with 30% of your gross income for housing allocation – including all housing related expenses (property tax, maintenance, HOA, ect.). This means that if you make $60,000 annually, you should spend $18,000, or $1,500 monthly for housing related expenses. We recommend using your after-tax income to determine your housing cost allocation. This way you have more money for investments.
Enter your income in the spreadsheet below to see your after tax income, as well as the allocation into each category discussed above. This spreadsheet contains 5 main sections:
1) Setup: Enter your income and select your budget strategy
2) About This Spreadsheet: Our Philosophy and Assumptions
3) Taxes: Use the After Tax Income to determine your budget and housing affordability
4) Monthly Budget: See the amounts you should be allocating to each category
5) Investment Potential: See what your investments could be worth in the future earning a fixed percentage with monthly deposits and annual compounding.
There are many costs associated with the purchase of a house. Using your monthly housing figure can help with estimating potential houses to buy.
How Much House Can You Afford?
Sticking with the spreadsheet method, we can plug in the value from your monthly budget above to get a decent idea of what size mortgage you can afford. Select the Mortgage Calculator tab in the spreadsheet below to enter in the following:
1) Monthly mortgage payment: this number comes from your budget’s housing expenses category, but should not include the monthly cost of property tax, HOA, maintenance, or any other housing fees, so make sure to remove them prior to entering this number. Looking around in areas you wish to live, or speaking with a local real estate agent can help you with these figures.
2) Down Payment: this will come from your savings, or any liquid assets you wish to part with. To avoid paying a monthly mortgage insurance, it is recommended that you have at least 20% of the total mortgage you wish to finance, so $20,000 for a $100,000 mortgage and you would finance $80.000.
3) Loan Term: You can get this information from a lender, or online resource, but the traditional terms are 15 and 30 years. The shorter the loan term, the lower the total interest paid over the life of the loan, but the smaller the total mortgage will be as well.
4) Interest Rate: Again , you can speak with a lender to get prequalified (then preapproved if you decide to go forward), or use our resource here(create pop up on same screen) to find out what your interest rate may be. This number depends on your credit history, employment, and other factors.
Example Cost of Buying a Home: 3 Beds | 2 Baths | 2,426 sqft VS Renting a Similar Property
- Purchase Price: $328,400 (Median US House Price Source: Census) || Current tax rate for mortgage: 3.92%
- Closing Fees (3.5% of loan, they include: Transfer Fees, Title Fees, https://www.investopedia.com/terms/c/closingcosts.asp) = $ 11,494
- Home Inspection = $500
- Down Payment ( 20% down avoids PMI): $32,840.00
- Mortgage Payment (interest and Principal): $1,553.00
- HOA ($200), Property Tax (1.65%), Maintenance ($300): $951.55 (951.55x12x30=$342,558)
- Total Monthly Payment: $2,504.55
- Interest paid over life of loan = $230,580.00
Unrecoverable Costs (over the life of the 30 year loan): $11,494 + $500 + $342,558 + $230,580 = $585,132
Unrecoverable Costs of renting a similar property: $2,100 median rent x 12 months x 30 years = $756,000
In this scenario, just based on costs you will not get back – unrecoverable – buying seems to make more financial sense. You will have an opportunity cost of the down payment, as well as the money put into the principal, but there is no guarantee that it would make more in another investment, as historical data is not always a reliable indicator of future returns.
This is all dependent on the area, market, and what terms you qualify for when obtaining a mortgage. It is best to grab the data and compare for the area you are looking in, or speak with a knowledgeable real estate professional who can.
Conventional home ownership is just one of the options for living. Here are some others that may be of interest
Lease PurchaseRent, then buy
If you are thinking you would like to buy a home, but are not completely sure for whatever reason, a lease purchase may be an option for you. The terms can be created to be favorable for both the buyer and seller, and instead of paying rent and incurring an unrecoverable cost, you can have a portion of your rent pout towards the cost purchasing the home.
Build a HomeUniquely Affordable
Build a Home
Depending on where you live, you may be able to buy or rent affordable land and build a livable structure. There are many obstacles to overcome such as local building codes and gaining the knowledge to build a safe, livable space, but if you are motivated you can have your own home that you built for a fraction of the cost of other homes. You can also forego land and build a home on wheels.
Living with others who have a similar mindset as yourself can help save money. In terms of real estate, a commune is a title for another form of rent. You don’t pay for ownership of real estate, but for a place to live. The maintenance and bills of the property are usually split among its residents, similar to a Co-Op.
A Co-Op, or housing cooperative, is a way to purchase a living space by purchasing a share in a company that owns the building. There may also be a monthy fee called a “pro rata” if there is a mortgage on the building. You do not own the real estate, so it’s cost can be similar to renting, but you can sell the share. As the Co-Op is a business, careful consideration of its finances and terms are required.