Mortgage Calculator – What House You Really Can Afford To Buy

I cringe when I read inspirational or financial books that encourage people to strive to buy their “dream home.” What kind of message does that send? That people can only be as happy as the size of the home they live in? That they are better parents for providing a bigger home for their children?

The economic and real estate collapse we’ve recently endured should deliver a big message for those people striving to buy their “dream home.” I’m going to tell you: Do not buy your dream home. Learn what you can afford on paper, and then buy a home for half that price.

I know…you’re thinking, “WHAT?”

Let me explain. After my husband finished school in 2007, we decided to buy our first home. We went online to a dozen different mortgage calculators, and we sat down with a mortgage broker.

The mortgage calculators asked about our income and any debt we had. We had no debt except our car payments, so the average mortgage calculator said we could afford a $450,000 home. I looked online and found some very beautiful homes in that price range around the Austin area.

It was exciting to see we’d be able to buy a five-thousand square-foot home, with a bonus room, office, four or five bedrooms, island kitchen with granite counter tops and possibly a swimming pool. It was like a giant carrot was dangling in front of us.

My husband and I spent our weekends driving by these homes, and imagined living in one of them very soon. But one thing puzzled us. Each time my husband and I “crunched some numbers” and saw what our new budget would be, we never had enough money (or we were stretching our budget too thin).

We asked each other, “Why do these mortgage calculators tell us we can afford a $450,000 home when our own calculator tells us otherwise?”

Mortgage calculators don’t ask you about the valuable and priceless things you want and need to do for your family. If you buy a home at the maximum you qualify for (which most Americans do), then you’ll have very little left for the most valuable things in life, or you’ll pay for the valuable things anyway and end up in credit card debt.

Here’s a list of things that are valuable to my family that the mortgage calculator never asked about:

Private Pre-K, day care, private school: $10,000 per year

College fund for both kids: $233 per month

Landscaping, home upgrades: $3,000 per year

Retirement planning, IRA, investments: $650 per month

Life insurance (for both me and my spouse): $120 per month

Health insurance: $820 per month

Disability and catastrophic insurance: $225 per month

Sponsoring three children in Africa: $105 per month

Tithing and charitable contributions: $350 per month

Gym membership: $49 per month

Personal trainer: $400 per month

Soccer training: $55 per month

Ballet class: $54 per month

Gymnastics class: $48 per month

Swimming lessons: $300 per year

Summer camp for two kids: $3,000 per summer

Sea World annual pass: $180 per year

Tickets to professional sports games: $500 per year

Tickets to concerts and theater performances: $500 per year

Family trip to Germany: $3,000 per year

Organic groceries: $4,000 per year

Doctor visits, co-payments: $600 per year

Birthday, baby shower gifts, etc.: $600 per year

How in the world would we have been able to afford a $450,000 home and still pay for a trip to Germany, private school for both children, soccer/ballet classes, summer camp, Sea World, health insurance, doctor visits, organic groceries and donations to charity?

Right, we couldn’t have afforded it without using credit cards.

So, we chose to buy a modest home for $215,000—half of what we’d qualified to buy! Our house doesn’t have granite countertops, and we don’t have a swimming pool. We converted one of the bedrooms into an office and our landscaping is sparse. But by buying a house for half of what we qualified for on paper, we have the ability and freedom to invest in our future, donate to charity, start a business, send our children to the best schools in town, eat quality food and travel the world—all without incurring a nickel of debt.

Sure, it was a bit deflating to my ego to go shopping for a 5,000 square-foot home with all the bells and whistles and end up buying a home half that size. Looking back, it was the best decision we ever made.

We had fabulous neighbors; our kids had friends throughout the neighborhood; we had walking trails, a fantastic park, soccer fields, a library and a swimming pool—all within walking distance of our home.

And believe it or not, my best friend Beth, whom I met when we were five years old, lives one block away. Priceless!

If we had bought a $450,000 home, would we have been happier? Of course not. Would our friends respect us and cherish our friendship more? I hope not (if so, then they weren’t really friends anyway). Would my parents be more proud of me? I don’t think so.

So why do we do it? Why do we feel pressured to go too far and buy the most house we possibly can—and then live under constant stress to pay for it all?

Recently, I was at my daughter’s soccer practice and started talking with one of the dads about school districts around Austin. Westlake Hills is the most affluent part of Austin. It is a beautiful area surrounding the lake and the schools are some of the best in the U.S.

Of course, the average home in Westlake probably has a sticker price of $750,000 to a million dollars. The man I was talking with said, “I would love to live in Westlake and send my kids to school there, but I don’t want the pressure always to have to keep up with the Joneses.”

I said, “Well, who’s putting pressure on you to keep up with the Joneses?”

He chuckled and said, “I guess I am.”

Exactly. People think the only way to be loved, adored and respected is to have all the material “bling” their neighbors have. This is the most crippling mentality a person can have. I don’t know about you, but I don’t cherish a friendship based on the tax bracket a person falls into. I bet the people you know could care less as well—and if they do, then you don’t want them as friends anyway.

“Money does not buy happiness; Scripture asserts this, research confirms it. Once you reach the median level of income, roughly $50,000 per year, wealth and contentment go their separate ways, and studies find that a millionaire is no more likely to be happy than someone earning one-twentieth as much.” — Nancy Gibbs, Time magazine, April 27, 2009

Why, then, do banks “qualify” you for a house that is well beyond your means? Because they make money doing so! The more money they loan you, the more interest you have to pay and then the banks make a fortune!

Why do so many Americans buy a home and then find out later they can’t truly afford it?

1) If both you and your spouse work, you will qualify for your mortgage based on both incomes. But if one spouse loses a job, is diagnosed with a serious illness, has an accident or if Mom has a child and decides to stay home with the baby, then bingo, you’re down to one income, but you’re making mortgage payments based on two incomes. I see this happen all the time. The best way to avoid this is to base your qualifications and what you can afford on one spouse’s salary—always—even if both of you have steady jobs. So if one of you can’t work, you’ll always have the means to pay your mortgage.

2) You never calculated your valuable, priceless expenses. (see my list above). I don’t know about you, but these things are far more important to my family than living in a fancy home. Also, these expenses change (and usually become more expensive) over the years. My four-year-old isn’t old enough yet, but when she’s seven or eight years old, I’d love for her to have the opportunity to go to summer camp. The going rate for the camp I went to as a child is about $3,000 for a three-week term. A few years after my daughter is old enough to attend, our son will be able to attend, too. Then the price tag to send two kids to summer camp will be $6,000! Same thing happens when kids need braces, go to college, play on sports teams, etc. You incur constant and growing expenses. If you live well below your means in a modest home, then you’ll be able to afford these things without incurring credit card debt. On the other hand, if you live in a home right at or above your means, then you will struggle to pay for your priceless, valuable expenses.

3) With a bigger house also come bigger bills. If you go from a two-bedroom home to a four- bedroom home you will incur much higher energy bills. You’ll also pay more for repairs, painting and upgrades because you have more to repair, paint and upgrade. When you get your carpets cleaned, for example, your bill will be twice what you paid before because you have more rooms. Your lawn care will be more because you have a much bigger yard. If you have a sprinkler system, your water bill will increase because you have more to water. If you hire a cleaning service, that will cost more because you have more rooms to clean. And property taxes are always higher. When we moved from our three-bedroom rental home to the house we live in now, our monthly bills—not including the mortgage—increased about $700 a month. Ouch! Also, if you’re the one cleaning, watering and mowing, those chores take time. And time is money.

4) People truly feel the grass is greener on the other side. If I just have a bigger home, I’ll feel successful and more respected. If I have a bigger home, my spouse and kids will love me more. I’ll find ultimate happiness if I can just buy that “dream home.” Believe it or not, this is the Number 1 reason people end up in debt, endure more stress and end up being unable to afford the things they really want in life—because they thought their lives would be so much better in a bigger home—when so many times it creates heartache, stress and financial failure for families. The dream home ends up being a living nightmare.

My tip for you? Don’t chase after your dream home. Instead, chase after your dream life!

What’s valuable to you and your family? What is priceless? Budget for these things first, and then see what you have to spend on a home. In five, ten or twenty years when you look back on your life, what do you want to see? That you barely made your payments on your home each month, or that you had a blast with your life? Picture your family in a smaller, more manageable home. Would your marriage be any different? Would your friends abandon you? Of course not.

What kind of home can you afford—really afford?

The Raidt Way Mortgage Calculator

Step # 1: Write down all the things that are important and valuable to your family.

Financial

▪ Retirement planning $ per month $ per year

▪ IRA or other investments $ per month $ per year

▪ College funds $ per month $ per year

▪ Health insurance $ per month $ per year

▪ Disability / catastrophic insurance $ per month $ per year

▪ Life insurance $ per month $ per year

▪ Long-term care $ per month $ per year

▪ Will / trust $ per month $ per year

Education

▪ Day care, pre-k or private school (per child) $ per month $ per year

▪ Education, seminars for Mom and Dad $ per year

Travel and Vacations

▪ Vacation 1 $ per year

▪ Vacation 2 $ per year

Entertainment, Sports and Leisure

▪ Tickets to theme parks, zoos $ per year

▪ Tickets to sporting events $ per year

▪ Tickets to museums, theater, concerts $ per year

▪ Sports programs for the kids $ per year

▪ Summer camp, swim lessons $ per year

▪ Entertainment or “date nights” for Mom and Dad $ per year

▪ Gifts for weddings, birthday parties, baby showers, etc. $ per year

▪ Gym memberships $ per month

▪ Haircuts and styling $ per month

Philanthropic Expenses

▪ Donations to service organizations $ per month

▪ Donations to needy families $ per month

▪ Church tithes $ per month

Business/Entrepreneur Expenses

▪ Licensing $ per month Accounting $ per month

▪ Legal fees $ per month

▪ Advertising $ per month

▪ Web Hosting $________per month

Home Repairs and Upgrades

▪ Exterior maintenance $ per month

▪ Interior maintenance $ per month

▪ Landscaping and lawn service $ per month

▪ Plumbing and Electrical $ per month $ per year

Hobbies

▪ Music, sports, cooking $ per month $ per year

Step # 2: Add the above expenses together. Annual total $_________________

Step # 3: Divide the annual total by 12 to get a monthly average $________________

Step # 4: If you are married, write down one (yes, only one) spouse’s take-home income $__________________________

Step # 5: Subtract your average monthly total from one spouse’s take-home income $_______________

Step # 6: This number above ____________________ equals what you can afford in a mortgage payment, including taxes and homeowner’s association fees.

If your mortgage payment is more than the above-calculated number, then you are living above your means and you’re not able to afford to use cash to pay for most valuable things in life for you and your family.

My Dream Home Plan

I know I suggested earlier that you shouldn’t buy your dream home. Well, let me explain. I think it’s fabulous when people buy a magnificent home—after they have adequately and successfully contributed to their financial future. I will own a 5,000 square-foot home one day with granite kitchen countertops, an island kitchen, a home office, bonus room, media room and a guest room. I will have a swimming pool, outdoor kitchen and beautiful landscaping.

I will reward myself with a magnificent home after I have: