pjMom
backyardconservative
Carol
fuzislippers
iainswife
Obi's Sister
nicedeb
Pat Austin
Jill
Quite Rightly
retrieverheart
Sherry
just a conservative girl
Zilla
Can you afford that house payment?
One of the reasons for the housing bubble bursting was people buying homes they couldn’t afford. I don’t want to rehash all the reasons for this mess, but instead give you a different way of figuring out how much house you can afford to buy, and some insights on protecting yourself in these turbulent times.
Banks usually base payments on 28 to 33% of net income. If the household take home income is 50K per year, at 28% that translates into a payment of $1,166.66 per month including principle, interest, taxes and insurance. Using 33%, we come up with a payment of $1375.00.
Let’s explore an entirely different way to calculate your payment. My method bases your house payment on the minimum wage of the state in which you reside. I’m going to use $7.25 per hour because that seems to be the minimum wage figure in the majority of states. I’m also going to include two wage earners in the household because that seems to be the norm.
Two people working full time at a minimum wage job will make approximately $2400.00 per month in gross salary. Let’s be generous and say taxes and deductions come to $100.00 per person. That means the net income to the household is $2200.00. When you figure 28% of that figure you come up with $616.00 for a house payment. My husband and I are in our third house. We have never had a house payment over $700.00 (PITI). And, after finally sticking to Dave Ramsey’s way of managing money, we haven’t had car payments for over 20 years.
We live in unsettled times. We have a maniac in the White House who is spending money that hasn’t even been printed yet. Jobs are disappearing and new ones are not forthcoming. There are people losing their jobs who believed it “could never happen to them.” If worse came to worse and the two wage earners of the house were reduced to working minimum wage jobs, they would be able to keep a roof over their heads without too much trouble by using my “minimum wage” calculations.
To survive these turbulent times, one needs to become more self-sufficient and not be not drowning in debt.
Adrienne, 
Carol, and 
Potluck 
backyardconservative 3:40 PM on 06/03/2010 Permalink |
Definitely makes sense.
Carol 6:33 PM on 06/03/2010 Permalink |
Good advice. After reading your post I did some calculations. A couple with good (okay, very good) credit can get a thirty year fixed at four percent if they pay a couple of points. To get the kind of payment you are suggesting the couple would not finance more than 100K. The credit union I work for will not finance more than 80% which means the buyer needs to come up with a healthy chunk of change up front. We have had relatively few foreclosures at my credit union despite the fact unemployment has hit our membership base hard and I believe one of the reasons is because people are less likely to walk away when they have their own money invested in the home.
I always tell people to take a 30 year fixed but pay like it is a 15 year while you can. I also strongly urge people to never, ever take out a second mortgage on their home to payoff consumer debt unless it is the only thing standing between them and bankruptcy. Taking out a debt consolidation loan can be the biggest mistake a couple makes unless they are incredibly disciplined.
Adrienne 9:19 PM on 06/03/2010 Permalink |
Very good advice. We sort of like the 15 year loan but if you do get a 30 and pay like a 15 it works.
We simply bootstrapped ourselves up each house. The most we ever paid for a house was 90K (the one we’re in now) When the bubble pushed it to 350K we were astounded. Now it’s back to about 270K which is still a healthy profit for 10 years..