What Kind of Mortgage Can You Afford?
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During the housing boom, many homeowners found themselves living beyond their means as easy money skewed expectations of what they could afford. Today, being honest with the realities of the real estate market and mortgage landscape can feel like taking a step backward. So how can homeowners and renters stay within their means and aspire to their dreams when deciding where to live?
Perception vs. reality
The first step in balancing your personal finances with your personal preferences is to assess your true priorities and determine the elements that matter most in your home and community. The key part of this process is to recognize the divide between perception of what you think you want and the reality of what you can receive.
One example of this perception disconnect is the “drive-‘til-you-qualify” trap, where people drive further and further into the suburbs to find more affordable large homes. The perception of what this offers is valid: a lower mortgage, more square footage, a big yard, and a happy family.
However, the reality for many may turn out to be very different. Rising gas prices can cancel out the mortgage savings. The coveted extra space is often left unfurnished. Large yards sit empty as overly programmed kids spend time everywhere but at home. And the happy family drifts apart as long commutes and time spent shuttling between activities replace family dinners and time together.
Balancing the budget with quality of life
In the process of searching for a new home, we often overlook viable alternatives closer to work because, for example, we perceive them to be too small or missing amenities we think we need. Ask yourself this: When was the last time you used any of the elements that led you to aspire for that larger home? When was the last time you went in your double-height foyer or took a bath in your Roman tub? When was the last time anyone other than the person mowing the grass spent time in your yard? How often do you use your spare bedroom?
Now, consider this: What would you do with thirty minutes more each day? What would you trade for your kids to be able to walk to school?
Making the numbers work
The traditional formula for determining how much home you can afford is to allocate roughly one-third of your after-tax monthly income to housing. While this is a good starting point, it doesn’t take into account one crucial variable—transportation. A new study has found that transportation alone can end up costing 25 percent of your monthly income in auto-dependent areas, where in places with multiple transit options, it can be reduced to as much as 10 percent.
Rather than planning for housing alone, a better formula is to anchor your commuting costs into your housing allowance and set aside 45 percent of after-tax income for housing plus transportation. This formula allows for more flexibility by planning for both together. If you can save on transportation, you can invest a little more in housing and still come out ahead.
This year, gas prices could hit record highs. If you are looking at a drive-‘til-you-qualify house, take caution and consider the quality-of-life gains that you might be able to find with a shortened commute. Yes, the house and yard might be a little smaller, but if you examine how you are living in the bigger home, you might find a smaller space is easier to heat, cool, and maintain. This could free up even more of your monthly budget to invest in yourself, and you might end up with a house that feels like you are moving forward, not backward.
Resources to help calculate the total cost of your commute
The following online calculators can be of great assistance in understanding the cost of commuting for a potential new home:
Housing + Transportation Index: This index includes nearly 900 metros—covering 89 percent of the US populations—and it shows what you can expect to pay for housing and transportation neighborhood by neighborhood.
True Cost of Driving Calculator: Presented by the Santa Cruz County Regional Transportation Commission, this tool adds up your direct and indirect expenses relating to commuting (auto insurance, gas mileage for the make and model of your car, and more). You might be surprised at the amount that you are spending yearly.
Marianne Cusato is an award-winning designer and author of the new book, The Just Right Home: Buying, Renting, Moving – or Just Dreaming – Find Your Perfect Match! (Workman Publishing, available April 9).
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