Friday, October 7, 2011

Is it Time For Us to Buy a House?

When do you decide that it's time to buy instead of rent? This is a conversation Mike and I have been having recently. We currently pay $1,250 a month to rent our 2 bedroom, 1 bath townhome. We pay for water and electricity, and the yard is taken care of by the Homeowners Association (the HOA fee is paid by the landlord). Any major repairs are also paid for by our landlord. If we bought a house, we would potentially be paying more for utilities (assuming we buy a bigger place) and would be responsible for basically any home-related expenses including utilities, yardwork and home repairs.

Admittedly, there are so many different ways to determine whether it is a good time to buy. I am taking a relatively simple approach at this early stage in the game and just trying to determine how much house we could purchase and still maintain a similar monthly expense budget. So below I look at what amount of loan we could afford that would be equal to our current rent payment of $1,250. Based on the mortgage calculator below (you can upload this Excel spreadsheet to your computer if you like and mess around with it), Mike and I could take on a $231,000 home loan assuming a 3% interest rate, 30 year loan term and taxes estimated at approximately 1% of the total value of the home. If we can put 20% down when we buy, we can afford a purchase price of about $289,000 and still pay $1,250 a month in mortgage and taxes.



Front-End Ratio is Hooey (IMHO)
Do you know the rule of thumb that you should apparently use to figure out how much house you can afford? As a general rule, your monthly housing expenses - including mortgage principal, interest, real estate taxes and homeowner's insurance - should not exceed 28% of your gross monthly income. If I followed this rule, then my total monthly housing expense would be more than 50% of my take home pay!! This doesn't seem anywhere near reasonable to me. How did I get to 50% of my take home? Taxes, health insurance and 401(k) deductions take a big chunk out of my paycheck each period. It seems more reasonable to base the calculation on monthly take home pay as opposed to gross monthly income. Otherwise, there is the potential to become house poor real quick.

So if we can find a house we like in that price range, then it might be reasonable to consider buying given that our monthly mortgage payment would equal what we currently pay in rent. Rather than that amount going towards someone else's investment, why not pay it to ourselves?

So should we consider buying? Mike and I are considering it if we can buy a home and keep our expenses close to where they are currently. But we will not be using the front end ratio rule to determine what we can afford.

Stay tuned,
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