Home Loan, what can you afford??

There has been a lot of articles written about this but no one seems to read them. This is why are whole economy is in the, well you know. . . the thing you sit on when you have to take a . . . So I am going to write about it too and hope a few people read it.

First rule! The most important rule!! Numero Uno!! If you can't afford a FIXED INTEREST 30 YEAR LOAN you can't afford the house!!

If they try to talk you into a variable interest loan, with balloon payments every few years, don't do it. They will say that you will be earning more 5 years from now and can afford the increase in payment. What will happen is when the payment goes up you will lose the house! An interest only loan is bad too. They try to get you into them saying that the house will go up in value and you will then have that equity when you sell, but you might as well rent. If the market goes south, like it is right now, you still owe the full purchase price and are stuck with the house. These loans are not made for the home owner, they are for investors that are going to fix and flip the house before the loan goes bad!

Second Rule!! A house costs about 1.5% of Its total cost each month. SO, this means that if your house cost 100K then it will cost about $1500 a month for house payment, electricity, water, trash, taxes, fixing things, lawn care, trips to Home Depot. . . everything. You put the extra you didn't spend into a savings account for the big stuff like Air Conditioner, New Shingles, New Siding, Heater, Oven, Water Heater, Pest Control for Termites, New Stove. Then when you need to, you have the money for the big stuff.

Third Rule!! The monthly cost for your house should be less then 50% of your income. So if we stay with the example used above, a 100k house that costs $1500 per month to maintain, you should bring home per month at least $3000 AFTER TAXES! If you get a house that is more then 50% you end up "house poor" because you pay too much of your income to the house and have nothing left, or the house is neglected and becomes run down. You don't want your biggest investment to get neglected and loose value do you.

When I say that your house should be less then 50%, I should say you total monthly DEPT TO INCOME RATIO should be less then 50%. They will try to lend you more, but don't take it!! And when you figure your debt to income and owe on Credit Cards figure in at least 3 times the minimum payment. If you use Pay Day Loans often just forget it, you can't afford a house. Get your life back in order first, then look at buying a house. If you are in debt with Credit Cards, School Loans, Car Payments or anything else you should not go above 50% of your income including your house. Pay off your other debt first or get a cheaper house!! You can get in over your head real fast and loose everything if you go over 50% with a house.


Last Rule!! If you do the math, the first three rules work out to this last one. The house that you can afford works out to be about twice the amount you earn in a year. So, the example we used this whole article, you need to earn at least 50K a year and have very little other debt to afford a 100K house. If the house you want is more then this, find a cheaper one. Find a smaller house. Find an older house. Buy a manufactured home, or a trailer.

When you live in a house you can afford, life is much less stressful. You have the money for repairs when they are needed. You have the money to save for retirement. You don't live with the stress that you might not make the next payment. No stress that the interest rate is going up again and that will make the house payment just too much.

And the most important benefit of picking a house you can afford!! You won't become ONE OF THEM people that got in over their heads and then defaulted on their loan and destroyed our economy and hurt everyone else!!!