Frugal Lifestyle Archives » Larry & Kathy Reichle

How much house can I afford to buy?

June 26, 2018 by Kathy Reichle Leave a Comment

If you’re thinking of making the move from renter to homeowner, simply diving into home shopping is the wrong first step. What you need to do is first answer the question:

“How much house can I afford?”

The best way to determine your spending ability is to do a step-by-step calculation. While there are alternate rules of thumb for figuring out your housing budget — such as a ceiling of 2.5 times your annual salary or limiting your housing payments to a third of your gross monthly income — you should not take shortcuts on a financial decision as important as this.

Calculating ‘how much mortgage can I afford?’

Here are the major factors you will need to consider to determine how much house you can afford to buy:

Income.

First, add up the income that will be used to qualify for the mortgage, including bonuses and commissions. Make sure you have the documentation to prove every source of income; otherwise it cannot be counted when you meet with a mortgage lender.

Debt.

Add all the payments you make each month for car loans, credit cards, student loans and any other debt. Based on your income, there are limits on how much debt you’ll be allowed to carry, including your mortgage. These debts will limit how much mortgage you can borrow.

DTI ratio.

When a mortgage lender calculates your level of debt based upon how much money you make, it is known as your “debt-to-income (DTI) ratio.” Debt-to-income ratios are the province of mortgage calculators. One important ratio, referred to by mortgage professionals as your “front-end” or “top-end” ratio, is calculated by taking your proposed housing expense divided by your gross (before-tax) income. Many mortgage calculators set 28 percent as the desirable value for this ratio. The other ratio involves all of your loan payments – your housing expenses and your monthly debts (but not utilities or other living expenses) — divided by your gross monthly income. A home affordability calculator frequently set this number at 36 percent. This is called your “back-end” or “bottom-end” ratio.

Monthly obligations.

While your mortgage lender cares about your auto and credit card payments, they really don’t care whether you have cable TV, the latest iPhone or even that you eat on a regular basis. Those monthly expenses are up to you to include, and cable, smartphones and a few trips to the grocery store can easily add up to several hundred dollars each month.

Down payment.

The minimum down payment for an FHA loan is 3.5 percent; for conventional loans, the minimum is 3 percent for certain buyers and 5 percent for most buyers.

Taxes.

Today, it’s easy to get an idea on a home’s property taxes by looking at the listing online. You can also get in contact with the county tax office or ask a local Realtor to investigate for you. Most homeowners will have their property taxes paid from an escrow account attached to their monthly mortgage payments. One percent in taxes is equal to $1,000 per year for a $100,000 home.

Insurance.

Lenders require homeowners insurance to cover your property. Contact an insurance company or ask a Realtor to estimate your homeowners insurance costs which will vary according to the type of property, cost and features of the home, and its location. To get a rough idea, you can ask a family member or friend what they pay for insurance (if their home is similar to the home you are interested in buying).

Homeowners association dues.

If the property you purchase includes monthly dues, don’t forget to include those fees in your monthly payments.

Mortgage insurance.

If you make a down payment of less than 20 percent on a conventional loan, you will need to pay mortgage insurance. You can utilize HSH.com’s mortgage insurance calculator to see how much this could cost each month. For FHA loans, there is an upfront and annual mortgage insurance premium.

Interest rate.

You can check today’s mortgage rates at HSH.com, but remember that your rate will depend on your credit score, the type of property you are buying, and the choices you make regarding fees and points. A lender will be able to give you a customized mortgage quote given your situation.

Loan term.

While many buyers opt for a 30-year home loan, if you can afford higher monthly payments, you may want to consider a shorter loan term. Shorter loans have lower interest rates and cost you less over the life of the loan.

As a homeowner, you need to have enough money set aside in an emergency fund — at least three months worth of expenses – in case you lose your job or have a medical emergency, and enough reserves set aside to pay for maintenance and unexpected repairs.

Considering all your financial goals and your monthly comfort level with your mortgage payment is the key to accurately calculating how much house you can afford. It’s smart never to borrow the maximum amount you can qualify for so that you leave yourself some financial breathing room.

Keith Gumbinger

Suze Orman: First thing to do now if you want to buy a home soon

April 13, 2018 by Kathy Reichle Leave a Comment

If you’re planning to buy a home this year, you’ve hopefully saved up more than you think you’ll need for a down payment. But stockpiling money isn’t the only thing that should be on your financial checklist before becoming a homeowner.

First and foremost, you should check in on your credit score, that’s because, the higher your credit score, the better rate you’ll be able to get on a mortgage. And that matters because even a fraction of a percent can dramatically alter the total you’ll pay over time.

Your goal should be to get the best possible loan. The better your financial profile is, the lower the interest rate you will be offered. Even a small interest rate difference can add up to tens of thousands of dollars in savings over the life of a loan.

FICO credit scores range from 300 to 850 and signify your trustworthiness to financial institutions. While anything over 650 is considered decent, Orman recommends aiming for a score of 740 or higher before applying for a loan.

If your score is lower than 740, please focus on boosting it as much as possible over the next few months. Every 10 or 20 point increase can help your cause. A 700 score might earn you a better offer than a 680 score.

That’s because a high score tells lenders that you have a proven track record of being responsible with your money. It means we’re more likely to want to give you a loan, because we know you’re going to pay us back.

If your score is less than ideal, Orman recommends taking three immediate actions to improve it: pay down credit card balances, pay down other debt, such as student loans, and stop buying anything that isn’t completely necessary.

You want to improve your credit utilization ratio, which is calculated by dividing your balance by your credit limit. Ideally, you’ll never hold a balance of more than 30 percent of your limit. So If you have a card limit of $10,000, you never want your balance to exceed $3,000.

As you get ready to consider putting in an offer on a home, you want to pay down as much debt as possible and refrain from splurging.

The best advice is to charge as little as possible in the months leading up to a home purchase.

You’ll also want to have excess cash on hand that can prove to lenders that you’ll be covered even in the event of an emergency. “Though there is no hard-and-fast rule, lenders want to know that if you get laid off, or sick, you can cover the mortgage for at least a few months,” Orman says.

Be sure to do your own research on how to boost your credit score to before buying a house and read up on the four things you should be doingif you’re aiming for a perfect credit score.

Emmie Martin, CNBC

How to Adopt a Frugal Lifestyle

January 26, 2018 by Kathy Reichle Leave a Comment

While many people associate frugality with an austere lifestyle, the opposite couldn’t be more true. Being frugal actually allows consumers to spend money on what they truly value while saving on the things they don’t.

“Frugality gives you freedom because you see how spending in some areas is keeping you from what you want in other areas,” says John Schmoll, founder of FrugalRules.com. “Frugality isn’t about deprivation. It’s about being purposeful with your spending, and about finding balance and spending on what you value.”

Consumers who seek to be more frugal have to set their priorities and learn to live without certain things to be able to afford others. Although it isn’t a difficult concept to grasp, making any changes can be challenging without a guide. To begin adopting a frugal lifestyle, follow these steps.

Identify your end goal. Adopting a frugal lifestyle isn’t something that will happen overnight. It’s a journey that will have bumps along the way. In order to maintain it for the long-term and reap the benefits, experts recommend outlining your goals.

“Writing down your goals and tracking progress will help you stay motivated when things get challenging,” says Jessi Fearon, personal finance coach at JessiFearon.com. “Although you may have a few instant wins, you won’t see results overnight and tracking your goals and progress will make it easier to stick to it.”

Consumers can list goals on a piece of paper or on an Excel chart, depending on their preference. Some may even find an app such as Mint helpful for tracking their various spending and saving habits.

Assess your spending and make a budget. Learning how to live without certain items, so you can spend money on what you value most, is the center of what it means to be frugal. In order to make this a reality, however, the most crucial step is setting a budget.

“The most important frugal habit you should adopt is to create and use a monthly budget,” says Gina Lincicum, founder of MoneyWiseMoms.com. “None of the little things you do to save, such as using coupons or buying clothes on sale, will have as much of an impact if you’re overspending in other areas.”

Begin by reviewing your checking and saving accounts from the last few months to assess your financial situation and identify potential expenses and purchases you can live without. Create a plan to reduce or eliminate these items, so there’s extra money to go toward goals and other more important expenses.

Change one behavior at a time. “Starting small is the best way to start living a more frugal lifestyle,” Schmoll says. “I always recommend to individuals that they try one thing to build confidence. Once they see they can make a change and do well, they will feel more motivated to make other changes.”

As an example, Schmoll suggests that those who want to cut back on dining outshould choose one or two meals to make at home at first. “Seeing how much money can be saved over the course of a few weeks is a great way to see how frugality can help with long-term savings,” Schmoll says.

Identify spending triggers. In a world where people are bombarded by ads and deals everywhere they turn, giving into the consumerist mindset is hard to avoid. In order to take control over impulsive and excessive spending, you must understand what triggers it in the first place. Spending triggers are anything that cause mindless spending.

“Knowing your triggers gives you power,” Schmoll says. “It allows you to know your area of weakness and make a plan to avoid the particular situation.”

Avoiding spending triggers is relatively easy. For instance, if you tend to overspend at a certain store, limit the number of trips you make to that retailer. If you’re constantly indulging in deals promoted on a shopping app, remove it from your phone. And if you’re feeling bored, find another activity to keep you busy, such as taking a walk or calling a friend.

[See: 8 Big Budgeting Blunders – and How to Fix Them.]

Set a “use it up” mindset. Being less wasteful is a basic principal of frugality and this is easy to accomplish by shifting your mindset to think about using up everything you have before spending money to replace it. Think outside the box and let your creativity guide you to be more resourceful with what you already have.

“You don’t have to take things to the extreme,” Fearon says. “Start with creating new dishes out of leftovers, reuse worn-out shirts as cleaning rags and repurpose as many things as you can.”

Enjoy free activities. Being frugal doesn’t mean missing out on fun and adventure. It means looking for ways to enjoy life on less, and there are plenty of free activities available. These include hikes, picnics, watching the sunset, playing in the park, camping, hosting family game night and scheduling free days at local museums.

Lincicum suggests taking advantage of the local library for free family activities, such as arts and crafts, movie night and book and movie rentals at no cost.

Stash away cash for emergencies. The biggest challenges many people face when it comes to reaching any financial goal are those unexpected life circumstances that derail progress. A car accident, home repair or medical emergency can easily wipe out savings or add a tremendous amount of debt. Lincicum recommends setting aside cash in a separate savings fund to help weather these short-term financial storms and avoid high-interest debt.

Prioritize this emergency fund by creating a line item within your budget and fund it faster by automating a transfer between your checking and savings account every time you get paid.

Focus on lowering major expenses. While hacking away at small expenses by clipping coupons and buying used items will help boost savings over time, consumers can gain bigger financial rewards faster by reducing larger budgetary items, says Lily He-Prudhomme, founder of TheFrugalGene.com. Look at the expenses that take a bigger bite out of your monthly budget and think about how you can reduce these costs.

By Andrea Woroch