How Much House Can I Afford?

Ah yes…the dream of homeownership.

Oh to be the lord of the white picket fence, front and back yard and all that comes between it. This is a standard dream that many Americans routinely have. Even after an intense housing and sub-prime lending crash that resulted in millions of foreclosed homes and billions of dollars in lost home equity. Home ownership was at a high then, just over 69%, and fell steadily before settling at the long-term average of 65%.

house

You have to admire the resilience.

So in the interest of making smart financial decisions, here is a guide to understanding exactly how much house you can afford. (You could also check out this awesome three part course for further information on how mortgages work).

The cost of a house is relative.

One thing that’s important to understand is that you can always find a more expensive home. You might be able to run down to Detroit and pick up some dilapidated shacks on the cheap or fly over to Bel-Air and drop a couple million dollars on a McMansion with a heated Jacuzzi and a parking spot for your Gulf Stream jet.

house

Like time, it’s all relative. A bad house in a good neighbourhood may be more expensive than a good house in a bad neighbourhood.

So with that in mind, don’t go chasing after the gold at the end of the rainbow. There’s always another, nicer-looking, better-located house in the metaphorical distance.

Think about any large purchase you might make. For example: a car. There’s actually a lot of similarities to buying a car when it comes to buying a house. What do you do when you buy a car? You have to decide to either pay it off all at once (unlikely for most of us) or you save up, make a deposit and then finance the rest. Data from the National Association of Realtors tells us that 87% of home buyers used mortgage financing for their purchase.

How much should that deposit be?

Well, it’s not as easy as saying, “I earn $X a year and so I can afford Y%”. Ideally, you’d like to make the biggest down payment you can make but there are things to consider, like the interest rate on your mortgage loan.

You may hear that the typical down payment is about 20% of the total property value. That’s actually pretty high and if you can manage the full 20% then good for you. The average down payment for first time buyers ranges between 5 and 10%. Take note that anything below a 20% down payment tends to make lenders ask for mortgage insurance, which is just another cost to bear. During the years before the subprime lending crisis mortgage insurance was actually ignored in many cases, and full 100% financing (0% down) became available. You can see why this is not the best idea.

Ultimately, if you can handle a higher down payment, do it. It means a cheaper mortgage for you.

Over the length of a 25 year mortgage, small differences in interest rates can add up to big savings. On a $350,000 principal and a 4% mortgage rate you can expect to pay $202,301 in interest payments. A 1% reduction in your interest rate nets you a savings of nearly $60,000!

Now, say you’ve found your dream home. A beautiful 3 bedroom, 2 bath house with a pool in the back yard and an ample and roomy kitchen with fantastic cabinets. The crown moulding is to die for. Crown moulding you guys!

It lists for $400,000. 20% of that is $80,000 so that’s what you should save up before you buy, right?

house

What are the (hidden) costs of a house?

There are a number of costs associated with buying a house and a lot of them are borne in the first year.

Home Inspection

If you are not having the house built from scratch, then you would want a home inspection performed to determine if there are any issues. Are there termites? Will your house collapse under your feet? This will cost you $300-500.

Appraisal

Your lender will order an appraisal, or a rendering of the value of the property. The bank or credit union that’s giving you the money wants to make sure that the home you are buying is worth the money you say it is and that everything lines up. This will put you back another $300-500.

Property survey

A survey that indicates the boundaries and measurements of the land and positions of major structures, or encroachments (like a neighbour’s tree hanging over into your side of the yard) on the property. Approximate cost: $600-1000

Closing Costs

This may be paid for by the seller but nonetheless be prepared to pay closing costs. This is just a name for miscellaneous fees that you can be responsible for. Title transfer fees, a fee to transfer the deed and title for the house in your name, land transfer taxes and basically any other type of fee can be lumped into “closing costs”. Expect this to add up to a few thousand dollars.

So there you have it. It seems that the only certainty in life is that there are hidden costs to everything. And we haven’t even talked about the property taxes that you’ll have to pay every year, not to mention the numerous costs of regular home maintenance and upkeep.

It’s no wonder then that Millennials are, en masse, buying fewer homes.

house

Between 1980 and 2000 the number of late twenty-somethings owning homes declined from 43% to 38%. If you think about it, a home isn’t really a good investment. Many people buy a home thinking, “well at least the value of my home will go up”.

It’s just not true. When you consider inflation and include all the associated taxes and maintenance costs most home owners will lose money over the lifetime of their “investment”. Also most people are blissfully naïve as to how long they will stay in their home. The average homeowner changes their house after just 7 years.

A house is not an investment. If you must have one, make sure you read all the fine print.

To learn more, head over to Wall Street Survivor.

 



*** BEST STOCK NEWSLETTER of 2020 ALERT ***

Updated September 13, 2020

At WallStreetSurvivor, we subscribe to dozens stock recommendation and advisory newsletters. There is ONE newsletter that is constantly outperforming all of the others--The Motley Fool Stock Advisor.

ONE of this year's Motley Fool Stock Picks Has Already quadrupled, ONE has tripled, and another TWO Have Already Doubled in just 8 months of of 2020!

We have been tracking ALL of the Motley Fool stock picks since January 2016. That's almost 5 years, 55 months and 110 stock picks. As of Friday, September 11, 2020 the Motley Fool's January 2 stock pick (TSLA) is up 333%, their March 19th pick (ZM) is up 209% in just 6 months, and another two have more than doubled. In addition, 6 of their 2019, 8 of their 2018, 8 of their 2016, 9 of theire 2017 and 13 of their 2016 picks have also doubled. Most impressively, over the last 5 years that we have been tracking every recommendation, their average stock pick is up 135%. That beats the SP500 by an average of 95%. And that's even accounting for all of this COVID mess that has wreaked havoc on most stocks. BUT, the Fool has done so well because they have quickly identified stocks this year that will perform well in the post-COVID world. THAT is how the Fool consistently does so well--they adapt and constantly pick stocks before everyone else realizes the opportunities.

  • CrowdStrike (CRWD) -- June 4, 2020 pick is already up 32%
  • Shopify (SHOP) – April 2, 2020 pick and it is already up 164%
  • Zoom Video (ZM) – March 19, 2020 pick and it is already up 209%
  • DexCom (DXCM) picked Feb 20, 2020 right before the market crashed and it is still up 41%
  • Tesla (TSLA) picked January 2, 2020 before the crash and it is up 333%
  • HubSpot (HUBS) picked December 5, 2019 and it is up 82%
  • Netflix (NFLX) picked November 21, 2019 and it is up 54%
  • Trade Desk (TTD) picked November 11, 2019 and up 117%
  • Zoom Video originally picked Oct 3 and it is up 398%
  • SolarEdge (SEDG) picked September 19, 2019 and it is up 105%

Now no one can guarantee that their next picks will be as strong, but our 5 years of experience has been super-profitable. They also claim that since inception, their average pick is up 529% and now we believe them. You sure don’t want to risk missing out. Many analysts are saying that we have passed the bottom of this COVID crisis and stocks will recover quickly. So make sure you have the best stocks in your portfolio.

Normally the Fool service is priced at $199 per year but they are currently offering it for a NEW SUBSCRIBER DISCOUNT of just $99/year if you click this link

CLICK HERE to get access to all The Motley Fool’s Stock Picks and their next 12 months of picks for just $99 per Year! 



GET UP TO $1,000 IN FREE STOCK

WHEN YOU OPEN A ROBINHOOD BROKERAGE ACCOUNT

Robinhood was the first brokerage site to NOT charge commissions when they opened in 2013. They just past 10,000,000 accounts and to celebrate they are offering up to $1,000 in free stock when you open a new account.

Here’s the details: You must click on a special promo link to open your new Robinhood account. Then when you fund your account with at least $10, you will receive one stock valued between $5 and $500. Then, you will get a link to share with your friends. Every time one of your friends opens an account, you will receive another free stock valued between $5 and $500. Click here to learn more about this Special Robinhood offer.

Claim your free stock NOW (before it’s too late)



2 responses to “How Much House Can I Afford?”

Leave a Reply

Your email address will not be published. Required fields are marked *