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I'm Kelly - the founder of She Is Fierce! and your host on our blog featuring stories and wisdom from fierce women all over the world! 

Fierce Living

Back to School: Remedial Math for Buying a New Home

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In the 2000s, we saw a real estate bubble form that led many people to believe their all-American dream home was right around the corner.

They closed sales, moved in to their new houses, and all was well… but only for a matter of years. The bubble burst, the real estate market went into a deep freeze, and our banking system continues to shudder from the aftershocks.

A key reason the housing market imploded was because buyers and sellers alike did not follow tried and true guidelines of home ownership. Debt ratios were stretched to unmanageable amounts, and, in many cases, people found themselves saddled with mortgages they could not afford or pay and never should have gotten. There were interest only and negative amortization mortgages and no income checks. The American dream became the American nightmare.

Before speaking to a Realtor or visiting your bank, it’s imperative to crunch preliminary numbers and gauge where your finances stand. Whether married or in a domestic partnership, the formula is the same, and it’s fairly simple math.

First, combine your annual income with that of your partner, and divide by 12. Then, multiply by .28 – this is the allowable amount for which you should be able to qualify for a mortgage, principle, interest, taxes and insurance (PITI). An example equation is below, assuming each partner makes about $50,000 a year, for simplicity’s sake:

Partner A $50,000
Partner B $50,000
_______________
$100,000 / 12 = $8,333

$8,333 x .28 = $2,333

Following the math, this couple would qualify for a $2,333 maximum monthly mortgage payment. Now, let’s put another set of numbers to work: the couple’s total monthly income multiplied by .36 — in this case, $3,000 — subtracting the maximum monthly mortgage payment to determine the acceptable level of additional debt, such as car notes and student loans.

Partner A $50,000
Partner B $50,000
_______________
$100,000 / 12 = $8,333

$8,333 x .36 = $3,000
— $2,333
__________________
$667

These calculations arm you with hard numbers that relate to your current financial picture; no estimates, no gray areas. From this point, the next step is to assess how interest rates will affect your purchase, and that’s determined by your credit rating.

The better your credit score, the better interest rate you’ll receive on a mortgage. Today’s prevailing rate is 4.5%; with a perfect credit score, that rate can be yours. As the credit score number falls, though, interest rates rise; a poor score will leave only sub prime mortgages open, with staggering 8 or 9% interest rates.

Finally, plan to put 20% down on the home, with a 30-year mortgage. This will leave you with only 80% of the sell price left to finance, but also enough room to make corrections in the event of a lost job or other family emergency. This also means you will not have to get expensive PMI (Private Mortgage Insurance).

As with all financial decisions, careful planning and saving are the most important guideposts on the road to home ownership.

 

This article is intended for informational purposes only.  We I recommend that you discuss these ideas with your tax adviser. Cary’s company, United Capital, does not offer tax or legal advice; therefore, this article should not be taken as such. 

 


Cary Carbonaro, She is Fierce! Contributor

Cary Carbonaro

Cary Carbonaro aka “The Money Queen” TM is a Certified Financial Planner with an MBA in finance, and has over 25 years of experience in financial services. In 2014, she was named an Ambassador for the CFP® Board, one of only 50 in the United States.

Because of her credentials, Cary is frequently sought out for her expertise and has been quoted in a variety of well-known publications, including: The Wall Street Journal, Newsday, New York Post, USA Today, The Street.com, Bloomberg, CNBC, Bankrate, Money Magazine, More Magazine, Kiplinger’s and Investor’s Business Daily. She has also served as the Orlando Sentinel’s “Money Matters Hotline” Expert. Cary has also been a guest on “The Today Show”, CBS, Fox News, ABC, NPRand WPIX (NY) and is a frequent guest on PBS Nightly Business.

In addition to co-authoring the book TIPS from the TOP: Targeted Advice from America‘s Top Money Minds (Alpha, 2003), she was also a contributor to The Wealth Management Manual andSave Now or Die Trying.

She is Vice President of the Long Island chapter of Ellevate (formerly 85 Broads) a women’s professional networking organization, and President of the South Lake (Florida) Community Foundation, Women’s Giving Circle, which provides community based philanthropic support. Cary has also been a CFP® instructor at Fordham University in New York.

Cary is currently a Managing Director with United Capital and divides her time between New York and Florida where she is a yoga instructor in her free time.

Connect with Cary… www.moneyqueenguide.com, LinkedIn, Facebook, Twitter

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