Master Your Mortgage by Brighton Gbarazia

Author:Brighton Gbarazia
Language: eng
Format: epub
ISBN: 9781777949532
Publisher: Kick Start Publishing Inc.
Published: 2022-08-15T00:00:00+00:00

CHAPTER 18

THE TRUE COST OF YOUR HOME

(NOT WHAT THE BANK SAYS)

Besides controlling your emotions, one of the challenges with buying a home wisely is the overload of information that you have to sort through. As a first-time homeowner who worked at a bank, I felt overwhelmed with the amount of information that I had to find. That feeling of being overwhelmed is why I took the time before even seeing a home to ensure the numbers made sense. At the time, I simply input the numbers into an Excel spreadsheet to ensure that after we covered all the housing expenses, we were left with enough to live our normal lives while continuing to invest in the future.

Today, there is more information available about homeownership and mortgages than ever, which makes it even more difficult to focus. So, I want to provide a quick formula that you can start with to quickly see how much of your income is being used to provide a roof over your head while also capturing the complete cost of your home purchase. Please remember this formula is designed to be a starting point, not a start and end point when purchasing or refinancing your home.

When we got our first mortgage, I wasn’t told what the final ratios were for our mortgage GDS or TDS. If you were to ask most homeowners what their GDS or TDS was when they got their mortgage, there’s a high probability many do not know.

It’s a sad truth as we all should know how much of our income is going toward putting a roof over our heads. However, another sad truth is most of us are only interested in being approved when it comes to our mortgages and care less about if we can truly afford the mortgage. I believe everyone needs a roof over their head, but I don’t believe that a home with a mortgage is the only option to provide that roof.

Now that you know how to calculate GDS and TDS, let’s utilize your knowledge about those ratios to help you calculate your true and total mortgage cost. While GDS/TDS ratios are a good starting point, you shouldn’t base your budgeting or buying decisions solely on them. Lender ratios are only important for qualifying for a mortgage.

One of the main problems with GDS/TDS ratio is it’s based on the homeowner’s gross income before taxes, not the realistic take home pay of the borrower. If you’re like me, you pay taxes, and your take home pay isn’t the same as your gross income. That’s why I want to introduce two new ratios that you should use, which I call Net Gross Debt Service ratio (NGDS) and Net Total Debt Service ratio (NTDS). I know, it’s not as easy or as marketable as GDS/TDS but call it whatever you wish as long as you follow my steps in how to calculate the ratios.

The calculations are similar to GDS/TDS ratios formula with a couple of tweaks. First, you will use your net after-tax income rather than your gross income.

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