Winning the Mortgage Game

There’s a game that’s often mistakenly called “The American Dream”.   This game is expensive to play and fraught with risk.   It single-handedly ties up more resources for most people than anything else they ever do.

Conway's Game of Life

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The game is called Home Ownership.

At some point, most people consider buying a house.   On the traditional, idealized life-path, this step comes somewhere between marriage and kids.   That’s usually the easiest way to organize it.   If you have kids first, you’re much less likely to buy a home.  This is a game with handicaps.

Once you get to the point where you are emotionally ready to invest in the 30-year commitment that is a house, your first impulse tends to be to rush to the bank to find out how much money you can borrow.

That’s a mistake.  If you take as much as the bank will qualify you for, you’re most likely to overextend yourself and end up losing your house.   That’s the quick way to lose the home ownership game.

The best thing you could do is figure out how much you can afford before you visit a bank.   Conventional wisdom says that your mortgage payment should be no more than 28% of your gross income, but that’s absurd.   Who builds their budget on their gross income?  I like 28%, but only of your net income.    To make the numbers easier to remember, I’d round it to 30%.   If you take home $3000 per month, your mortgage payment should be no more than $900 per month.

From there, it pretty easy to figure out how much house you can afford.  Using this e mortgage calculator, you’d be able to afford a mortgage of $175,000 if we assume an interest rate of 4.5%.  Throughout most of the United States, that will buy you a reasonably sized home, though certainly nothing ostentatious.    Clydesdale Bank also has an excellent loan calculator.

Some people like to start out with an interest-only loan.   That same emortgage calculator shows that an income of $3000 per month would be able to afford a $240,000 with almost the same payment.  That seems like a good plan, but eventually, you’ll have to pay more than just the interest.   Taking out a loan that will one day be more than you can afford on the assumption that you’ll be making more money by then is not sound financial planning.    That’s the same logic that helped me bury myself in debt.

When you buy a house, make sure to base your payments and your mortgage on what you can realistically afford.  Anything else, and you’ll only end up poorer and less happy than when you started.

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  • 6 comments

    Comments

    1. Good points. The important thing is to make sure you can afford the mortgage payment with your current income. That way if anything happens a few years later, your payment is still affordable.

    2. Finally someone who gets it. Use net income when you’re trying to qualify for a house not gross income. I believe your fixed expenses should be no more than 50% of your net income. So your idea of 30% net income fro your house is ok, if you’re willing to have much less car and so and so. Great post!

    3. I like your limit of 30% of your net income. All of your tips are great!

    4. I thought the American dream was to get rich? Lol. Anyways.
      I believe that for the average person, owning a house if more of a liability than an asset.

    5. Good points. In addition, when calculating affordability, the home buyer should also factor in Property tax. If you live in high tax states like California, this could add a big number to your annual cost of home ownership.

      Regards,
      Kevin

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