By Kathy McSherry | Ask Kathy
Hi Kathy:
I have been renting in Mission Valley for approximately three years. My fiancé and I have been saving for a 20 percent down payment this whole time and think we can afford a home of about $600,000. We are DINKS (double income no kids) and gross about $170,000 combined income.
Our FICO scores are in the low 700s for both. Typically, how are mortgage payments broken down in comparison to paying a monthly rent?
—Bruce T.
Hi Bruce:
What a great question. When couples start looking to make the plunge into home ownership you must first ask yourselves what you are comfortable paying each month. A lender can tell you what you qualify for, but only you can tell what you are comfortable paying each month. There are other costs of homeownership that you should prepare yourself for like appliances, repairs, and/or maintenance for the home. Think about what an affordable home looks like to you with these considerations.
Here’s an easy calculation. Estimate how much your home mortgage payment will be. Look at how much of your income or what percentage goes towards this payment. Then, how much do you have left over for other monthly expenses.
Your total monthly home payment will include principal and interest (often referred to as PITI).
The principal is the amount you pay every month that goes towards reducing the loan while the interest goes towards paying what it costs you to borrow the money. If you are putting less than 20 percent down on the loan for your down payment, then you are looking at paying mortgage insurance, an additional cost, as you are now more of a risk to the lender.
Next you would want to figure your property taxes. Taxes here in Mission Valley are 1.1 percent. Take 1.1 percent of the purchase price of the home you are buying and divide this by 12 to get the approximate monthly payment for your property taxes.
Then I would call a local insurance agent for approximate homeowner’s insurance, which is required by any lender. Rates will differ for a detached home vs. a condominium. On a condominium worth about $600,000, a basic rate may be $45 per month.
Next, are there any HOA fees? If so, you would add those in as well. This will give you your total monthly home payment.
A mortgage lender rule of thumb is that your total monthly home payment should be about 28 percent or below of your total income. A lender may approve you for more or less depending on your financial picture. Estimate what is left after you subtract all debt. Total monthly income after taxes, minus total monthly home payment equals what’s left to pay all other monthly debt (student loan payments, car payment, credit cards, child support/alimony, child care, utilities, health care, gas, repairs, etc.). If you don’t have enough to pay the rest of your monthly debt, you would then want to consider paying down your debt or buying a less expensive home.
Additionally, I would consider your credit. Your FICO scores look pretty good as you will tend to pay more interest for scores lower than the 700s. Thirty-five percent of your credit score is based on how timely you are in paying your bills. Thirty percent of this credit score is based on how much debt you owe. Improving your credit score can save you $50 a month, or $100 dollars a month, or more, depending on your financial picture. An average consumer who adopts healthy habits such as paying bills on time and paying down credit cards may see a credit score improvement in as little as three months.
Also, when figuring your total monthly mortgage payment, interest rates and the types of loans available will all affect this. Shop around and speak to different lenders about the services or types of loans they offer.
You could say something like, “This mortgage is a big decision and I would like to get this right. Another lender is offering a different loan that may cost less. Let’s talk about what the differences are and if you may be able to offer me the best deal.”
Bruce, if you have read my past articles, you will see that I am highly in favor of home ownership versus renting with interest rates this low and all of the advantages of owning a home. Great question and good luck on your search.
—Kathy McSherry is a Realtor at Coldwell Banker Residential Brokerage. Email your questions to [email protected], or call 702-382-9905.
