Question: We want to buy a first home. We have a joint income of $80,000 a year and no debts of any kind. A loan officer says with $25,000 for the down payment and closing costs we could get a $250,000 mortgage. We have the cash, but our problem is the monthly cost: $2,000 – a figure made high by mortgage insurance and very steep flood insurance premiums (as much as $5,000 a year because of where we live). Is now the time for us to buy a home?
Answer: You get tremendous marks for saving money – that $25,000 up front – plus you have no debts. That’s terrific. You no doubt have a very high credit score for the simple reason that you have a solid income, savings and no payments to miss.
You earn $80,000 a year. That’s $6,666 a month. Less taxes and Social Security you bring home perhaps $4,650 in cash per month. The $2,000 payment is around 30 percent of $6,666 per month, but it’s nearly 43 percent of your spendable cash income. The monthly mortgage payment plus utilities – a separate but additional cost – would mean at first glance that you have few dollars for anything beyond housing expenses.
However, with mortgage interest, mortgage insurance and property tax deductions your income tax bill would drop significantly. That would make the monthly expense of ownership much more tolerable, but there is still a hard $2,000 monthly cost. A job loss or fewer hours could quickly drive you into foreclosure, as might new and additional expenses. A job opportunity elsewhere could be lost if you cannot sell or rent the house for enough to cover costs.