Insights: How Much House Can I Afford?

How Much House Do We Need to be Happy? The news is filled with reports of skyrocketing foreclosures. Our local paper ran a story this morning and it got me to thinking….

There are many reasons for the skyrocketing foreclosure rates, but one key reason I’m going to talk about today is that for the last decade or more, Americans have been buying much more house than they can really afford. We are greedy, plain and simple.

It is easy to be fooled into thinking we can afford a newer, bigger home with more amenities in a better location. After all, at a certain point in our lives, we begin to think it is time to move up from our little starter home, plus everyone else we know lives in a nicer home. And the clincher: “the bank will loan us the money and if they will do that, we must certainly be able to afford this new home because banks don’t loan money to people that can’t afford it.”

Now for the real deal. Banks loan money everyday to people that cannot afford it. Think about all the bankruptcies caused by credit card debt. Banks even increase credit limits for customers that can barely scrape up enough money to pay the minimum payment each month! Mortgages are no exception.

For example, the HUD program backed by our United States Government guarantees loans for people that banks would not loan money to without the government’s guarantee. Needless to say, many of these mortgages end in foreclosure, at taxpayer expense.

Another example is the relatively new Adjustable Rate Mortgage (ARM). This is a poorly disguised way to market mortgages as being more affordable than they really are. One, two or three years later when the rates automatically adjust to current rates, it is a real eye opener for the homeowner.

Just because we can obtain financing for our dream home, does not mean we can really and truly afford it. The Accountant in me always like to leave some “wiggle room” in the budget. The more, the better. You never know if you will loose your job, or have to downsize to a lower paying job, unexpected medical bills, how high the price of gasoline will go, etc.

A great measuring tool to determine how much house one can honestly afford without making great sacrifices is to use the 2 and 1/2 times the gross annual income of 1 wage earner in the family rule. That means if the highest salary in your home (for those household’s where the wife works for paid employment) is $35,000 per year; the price of a home that you can comfortably afford is $87,500. Hurts, doesn’t it?

Many of us have a perception that we deserve better. Well, we can have better. It will just cost us more than many of us want to pay. It will cost us dramatically increased stress levels because we will worry about how to make ends meet, then start using credit cards when there begins to be more month left than money which ads even more stress. Sadly, it often costs the growing up years of children because the mother will feel the need to earn extra money to pay for the bigger and better home, and it harms the husband wife relationship with numerous disagreements about money, or better, the lack of it.

Better is the family that lives happily in a modest home than unhappily in a mansion.

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