The Laws of Money, The Lessons of Life by Suze Orman

Author:Suze Orman
Language: eng
Format: epub
Publisher: Free Press
Published: 2003-07-15T00:00:00+00:00

In Peggy’s case, her monthly payments on the two homes she liked varied considerably. With the $350,000 ranch, after she put $75,000 down, her mortgage balance would be $275,000; if her mortgage was a 30-year fixed-rate mortgage at a 6 percent interest rate, her mortgage payments would be $1,648 a month. Her property insurance and taxes would come to approximately $600 monthly. Since she would be putting more than 20 percent down, she would not have to pay PMI. With her $100 a month for maintenance and repairs her total monthly payment would be $2,348 a month.

On the $500,000 frame house, Peggy would have to take out a $425,000 mortgage. Because the amount of the mortgage that Peggy would need is above the current amount for what are called conforming loans (these are loan amounts set by agencies called Fannie Mae and Freddie Mac; as of the year 2003, the designated amount is $322,700), she would have to take out what is known as a nonconforming or a jumbo loan. This is usually 0.5 percent more in interest than is a conforming loan. So if this were a 30-year fixed-rate mortgage at a 6.5 percent interest rate, her mortgage payments would be $2,686. She would also have to pay PMI of $212 a month (0.5 percent of her mortgage), for she would not be putting 20 percent down. Her property insurance and taxes would be a little higher on this house—say, approximately $800 a month plus $100 a month for maintenance. Peggy’s total monthly payment would be $3,798.

As a “senior” teacher in her school, her annual take-home salary after taxes is $49,000, or about $4,000 a month. It was thus quite obvious to Peggy that the $500,000 home was out of her reach and her realtor friend was wrong.

But could Peggy really afford even the other home? To find out, I asked her to do another exercise—one that I want you to do before you actually buy a first or a larger home.

How to Play House

Open up a brand-new savings account. Remember, this is something you want to do well before you are really serious about buying a home. Set a date once a month—for instance, the 15th. For the next six months, on that date, I want you to deposit into your new account the exact difference between what your current housing costs (rent, or the total payments you are making on the home you currently own) and the amount you project you will have to pay on your new home.

For example, let’s say that you are renting and it costs you $1,500 a month to rent. The house you want to buy will cost you $3,500 a month (including mortgage payment, PMI, property insurance, taxes, utilities, and maintenance). You must deposit the difference between the two ($3,500 − $1,500, or $2,000 a month) into the new savings account, no later than the date you set.

Or, say that you currently own a home and want to buy a bigger home.

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