Does this Budget Make Sense for a New Condo?

Question

I’ve been obsessively reading for the past week or two about how much of your gross/net income to be spending on Mortgage/Insurance/Taxes/HOA.

More conservative estimates were at 25% of your gross income.

Some others were saying up to 35% of gross income.

Super converstives estimated you should be spending 25% of your NET income, which is basically one weeks pay for me. That seems VERY conservative. I doubt most of Chicago is spending less than $1000 a month on rent/mortgage.

The most level headed of these arguments is that one should spend 28% of their gross income on mortgage and housing expenses and less than 36% of their gross monthly income on their overall debt.

In this regard, I have no other debt, so I’d only be worrying about how much this mortgage is gonna cost me.

If the price comes in at $355,000 (like I'm hoping) at an interest rate of 3.785% with 20% down, calculating about 1.5% in property tax and around $600 in homeowners insurance, plus $185 in HOA the monthly price for all of these things is $2019

Not calculating in my freelance work or overtime, I make around $2200 bi-weekly.

That’s about 28% of my gross income and nearly 50% of my net income per month, again, not counting any freelance or overtime jobs I do throughout the year. Also, not counting the tax return I’d likely get at the end of the year because I’ll now be able to write off the taxes and interest.

This leaves me with a minimum of $2300 a month for:

Electric Gas Food Gasoline (I’d walk to work from this place) Car Insurance Cell Phone Incidentals (Internet, Netflix, Dinner Out, Clothing, Gifts...) Savings for Retirement Vacations Savings for Home Repairs

This seems doable to me, especially considering I’d be making more with overtime and freelance. Do you see any red flags here? Your opinion, obviously means a lot. I’m just getting my toes wet with this mortgage stuff and I don’t wanna reach too far.

Another option is putting down 30% up front to bring the mortgage payment down to $1852 a month. That gives me nearly $300 from the first paycheck of the month to use on utilities and incidentals, leaving my entire 2nd paycheck for everything else.

Thanks for any insight you may have! I really appreciate it.

Answer 1

The 25%/35% bit is a rule of thumb that banks and mortgage companies commonly use to determine whether you qualify for the loan. I wouldn't give it too much weight, because it doesn't take into account your personal financial situation. If you're paying your sick mother's medical bills and next year you will have two kids in college and you're trying to save money for early retirement, these numbers may be way higher than you can afford. If, on the other hand, you have little in the way of other expenses and having a beautiful place to live is a very high priority for you and you're willing to sacrifice on every other expense to get it, then these numbers might be low.

The real thing to do is to figure out where your money is going now. If the mortgage on your condo will be $2000 per month and you are presently spending, say, $1400 per month rent on your apartment, then you will need to come up with an additional $600 per month minimum. Do you have $600 per month lying around that you haven't known what to do with? Or if you've been saving that amount or more towards a down payment, great. If not, can you identify areas where you can cut back? Not, "Oh, I'm sure I can cut back somewhere", but concrete things, like "I've been spending $150 a month on kick-boxing and ballet lessons. I could drop those." Etc.

If your calculations of what you can afford come to significantly different than the rules of thumb you see out there, higher or lower, that's a reason to re-check your calculations, make sure you're not missing something. But don't take a rule of thumb over your actual, personal situation.

Oh, and one thing to keep in mind: I see you mention cost of home repairs. Don't forget to take that into account. When I went from an apartment to my first house, I never thought about the fact that when the appliances or the furnace or whatever in my apartment broke, the cost of repairing that was included in my rent. I might cry and moan about how long they took to fix it, but they fixed it and it didn't cost me anything additional. When something in my house broke, it was up to me to pay to get it fixed. Those costs can be substantial and unpredictable.

When you talk about freelancing and overtime: Is that income that you are getting now and that you can reasonably expect to continue? Or is that income that you think you might possibly start collecting? I'd be very cautious about taking on a debt based on the assumption that you will soon be earning an additional $X in freelance income, when you've never done that in the past and are just guessing/hoping that you will actually be able to earn that much.

Personally, my mortgage is about 8% of my gross income, but I don't live in a big city with sky-high housing costs.

Answer 2

Sounds like you're right on top of the math. 28% of gross income is within typical recommendations. I predict you'll be able to get a loan with good rates. One thing to keep in mind is that if the interest rate is essentially the same whether you put down 20% or 30%, I'd recommend a 20% downpayment. You can always make extra payments to bring down your principal and having some cash left over as an emergency fund doesn't hurt.

Answer 3

If I got the math right, you gross $86K or so, and the condo is about 4X that. It's not too out of line given how low rates are.

When we bought our house in 1996, it was 2.5 times our income, and after 20% down, the mortgage was exactly 2X.

Keep in mind, the interest and property tax flip you to being able to itemize, but your benefit is only the difference between this and the standard deduction. In other words, you has $6000 off anyway, so you'll see a refund on the extra $9000. You don't need to wait till tax time, you should adjust your W4 as soon as you have a closing date.

A number of repairs and expenses go away with a condo, your HOA is fixed, and hopefully you won't have a surprise assessment.

Again, your numbers look in the range. In my opinion, I'd put 20% down and no more. If you find that after the first year, your next egg is increasing rapidly, and your retirement accounts are being funded to your goals, then prepaying the mortgage is an option. But put 30% down and have some unexpected expenses, and you run the risk of needing to borrow at a high cost. This is probably the lowest cost money you will ever see in your lifetime.