By Eric Fernwood

What can you afford? It depends on what you are comfortable paying per month; always start with this. Why? Because there are several options to keep the monthly payments down if that is the need. 

Once I know what you are comfortable paying per month and your tax rate, I calculate what you can afford.  This is important: buy only what you can afford; do not become a slave to house payments. Also, you do not necessarily need a lot of cash to get into a home; 100% loans are available so all you would need is earnest money (which apply towards closing costs) and closing costs. In some cases, I can eliminate the closing costs so all you would need is the earnest money which you would get back at close.  So, what can you afford?

The following three steps will give you a good idea but first, a word from Albert Einstein. Einstein once said: “Everything should be made as simple as possible, but not simpler.” Einstein wouldn't be too happy with the following because what you actually pay depends on more factors than I can include in this message including credit score, interest rates, the specific loan program and other such factors. However, the following three steps are accurate enough to give you a general idea of what is possible.

Step 1: Comfortable Payment

What are you comfortable paying per month in rent? $1,000, $1,200, $1,500, $2,000?Remember not to “stretch”: a home should be a joy; not a financial millstone about your neck.

Step 2: Equivalent Mortgage.

Look up your tax rate based on your income in one of the two tables below depending on whether you file taxes as single person or jointly as a married couple.

One of the many advantages of home ownership is that property taxes and mortgage interest are generally deductible as opposed to rent where nothing is deductible. Being able to deduct the interest and taxes means that a portion of your house payment is offset by the tax deduction. To determine the equivalent "after tax benefit" of the "comfortable payment" you choose in Step 1, plug the payment and your tax rate into the following formula.

Equivalent Mortgage = Comfortable Payment X (Tax Rate+1)

For example, if your Comfortable Payment was $1,200 and you are single with an annual income of $55,000, the calculation would be as follows.

Equivalent Mortgage = $1,200X(25% +1) or $1,200X(1.25) or $1,500

If you did not understand the above calculation, don't worry about it. Just understand that you can afford to pay more each month due to the tax benefits of home ownership without changing your current cash flow. Also, please understand that the above calculation is only approximate. Now that we have the Equivalent Mortgage, lets look up the price of home you can afford based on the monthly payment.

Step 3: What Can You Afford?

Slide down the left column in the table below until you find the range containing your Equivalent Mortgage. Immediately to the right is the approximate price of the home you can afford.

For example, if your Equivalent Mortgage is $1,500, you could afford a home priced around $190,000. What do homes cost? Look at the Sample Home Prices to get an idea of what homes cost.

When you are ready to look for a home, please call upon me. I will save you time, money and risk in the purchase of your next home.  Plus, I know how to handle many special problems such as no money to put down or a first home. Check out Handling Special Problems if you have any concerns about being able to afford a home.

© 2005 Eric Fernwood - all rights reserved.

Eric Fernwood
EricFernwood@Gmail.com
702-358-8884