Beating Broke

Personal Finance from the Broke Perspective

Buying a House: How Much Can You Buy

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This post on behalf of Emortgage Calculator

One of the more important parts of buying a house, is not over spending on the house that you plan on buying.  Despite all the headlines during the recent real estate boom and crash, people are still trying to buy much more house than they can reasonably afford.  When they do that, any little setback can be a disaster to their housing situation.  Think about it; if you’re already stretching to pay the mortgage, and you lose your job or have some other major expense, will you still be able to pay the mortgage next month?  Probably not.   And that’s where the trouble begins.

door keyMany will say that you shouldn’t buy a house where the mortgage payment accounts for more than 40% of your income.  Some will include the escrow and utilities into that equation, some do not.  Being the frugal fellow that I am, I suggest you shoot for a far smaller number than that.  If you want to truly be able to afford your house, the mortgage payment, including escrow (but not utilities), shouldn’t exceed 25% of your income.  If you really think about it, do you really want to pay any more than one quarter of your income on just your house?  How will you afford anything else, let alone pay down debt?

There are several ways that you can estimate how much house you can buy.  Your lender will tell you how much you can buy and still qualify for the loan, but that’s a terrible way to go about it.  They are only interested in completing the loan, not whether you can pay for it for 30 years.  Many of the real estate websites will have a loan calculator on their sites as well, which can give you a pretty close estimate.  If you’re in the UK, the Emortgage Calculator can help you estimate those costs.  Most calculators will ask you a few simple questions.  How much is the house worth (value), how much will you borrow (loan total), how long will you borrow it (Term), and at what interest rate (Rate).  Using those numbers, the calculator will amortize the loan, and return the estimated monthly payment on the mortgage.  Use that number, plus an estimated escrow amount (roughly 20-25% of the payment amount makes it a safe estimate), and you’ve got a number that you can use to determine if the house is too much house for you.  Then, you can continue on with shopping for a house.

A few other notes.  Yes, an “interest only” loan gives you a much smaller payment amount and may seem like a good way to get into a house that you otherwise couldn’t afford.  But, you’re only paying interest for that period.  When the interest only period ends, so does your affordable payment amount.  Then, you’re stuck with a much larger payment, and all of the principle of the loan.  Same goes for an “ARM”, or “Adjustable Rate Mortgage”.  The payment is nice and low before the first adjustment period, but when that adjustment happens, the payment can go up by a good amount.  Avoid both and stick with the conventional 15 or 30 year mortgages.  You’ll be glad you did.

photo credit: woodleywonderworks

Taking Financial Ownership

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I was reading a story somewhere where a person was being interviewed about their debt.  In the interview, the person was speaking about how they had this credit card debt and how they just couldn’t get out from under it because of all the interest, fees, and other ways that the credit card company throws on the heap each month.  They went on to talk about how they were in fear of having their car and house repossessed because they were falling behind.  With each new problem, they were quick to point out the things that were keeping them back and causing their slide into bankruptcy.

Something occurred to me, then.  They were taking no ownership in their finances.  No matter what the financial woe was, it was always someone elses fault.  The credit card companies were tacking on interest and fees.  The bank was adding late charges onto their car loan and mortgages.  Not once did they take any ownership of their situation.  Not once did they say, “we shouldn’t have charged so much on the credit cards”, or “we bought more house than we could afford”. The blame was always on the other guy.

Saving is for wimps! I have a plan for affordable housing.If there’s one thing I’ve learned in my journey towards beating broke, it’s that it’s all my fault.  I signed that credit slip.  I signed that mortgage.  I signed the loan papers.  Yes, some of the credit card companies have interest rates and policies that border on predatory.  Yes, the banks will allow you to borrow right up to a point where you’re living paycheck to paycheck.  But, I signed on the dotted line.  Along the way, I discovered all of that, and I took financial ownership.  And, in doing so, I took control.

Through financial ownership, I have control over where my money goes.  I have control over which debt gets paid off first.  I have control of how tightly the purse-strings are held.  And, most importantly, I have control of my financial future.  A future that I plan to make as financially independent as possible.  Not at the whim and mercy of any bank, but a future where I can plan to buy things, and save money towards retirement.

My journey isn’t over, but I am beating broke.  I’m taking financial ownership and making my future one that is free from broke.

I want you be able to say the same thing.  It’s one of my goals for this site to help you beat broke.  Beating broke is the first step in your financial journey towards a life free from concerns over where next months bills are coming from.  You can do it.  But, you’ve got to take financial ownership.  You got yourself in the situation you’re in, and only you can get yourself out.  Do it today.  Accept that you are the only one that can take ownership of your financial situation, and you are the only one with the power to fix it.  Take that step.

photo credit: woodleywonderworks

Escrow Accounts: A DIY Primer

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Quick!  What’s the first thing that pops into your head when I say “escrow account”?  It’s that account that’s associated with your mortgage, isn’t it.  That’s the first thing that come to me when I hear the word.  But, that isn’t all that an escrow account is.

At it’s very basic beginnings, an escrow account is nothing more than a savings account.  Of course, the usage of the money in that savings account is designated.  So, it’s a designated funds savings account.  Simple.  More commonly, it’s used in conjunction with a mortgage.  The escrow account that is tied to a mortgage usually holds the funds designated for taxes, insurance, and other non-monthly fees.  Each mortgage payment you make has a small portion of it that gets deposited into the escrow account.  At the end of the year, that account has enough money in it to pay your property taxes, and any other things that the funds are set aside for, such as homeowners insurance.  Yet another use is in the execution of a large purchase.  Say you’re buying a car on eBay.  You want to make sure that you’re not getting taken.  So, you use an escrow account.  You put the money for the purchase into an escrow account, and the buyer gives you the car.  Once you’ve confirmed that the car is what it was supposed to be, you can release the funds in the escrow account and the buyer is free to withdraw them.

What does all this have to do with you?  You can use escrow accounts in your personal finance as well.  Remember that an escrow account is really just a savings account where the funds are designated.  Many of you probably already have one of those.  If you’re particularly saving savvy, you likely have several.

Here’s what you need.  A goal, and a savings account.  Let’s start with a goal.  I’ll pick tires for the car.  You know you’ll need to buy some in about 6 months.  You know they’ll cost you a little less than $600.  If you had to come up with that all at once, you’d be flat broke.  In fact, some of you would just throw it on a credit card.  (I used to too, I understand.)  Instead, let’s set up an escrow savings account for it.  Get yourself a savings account.  Many banks and credit unions have them.  Many of them will allow you to give them nicknames.  If you’re bank or credit union allows nicknames, name it Tires.

All set?  Ok.  We know we need $600 in 6 months to purchase tires.  So, we take the $600 and divide it into 6 equal amounts.  (I’m no math genius, which is why I’ve got some simple numbers here.)  We end up with an amount of $100.  Each month, deposit $100 into the savings account, Tires.  At the end of the 6 months, you’ll have $600 in the account.  You can then purchase the tires with CASH!  How awesome is that?  And, if you’re any good at bargaining, you might end up with a deal when you start waving around all those benjamins.

You can apply the same principle to just about any planned purchase.  And it’s repeatable.  If you know you’ll need more tires in 6 months, you can just repeat and continue on with the escrow account.  I used to think that escrow accounts were these fancy, complicated accounts.  But, in reality, all they are is a savings account with funds that are designated for something.  There is one small difference in that usually, the money is out of your control after you deposit it and until it’s released for use.  You could replicate that, if you have a family member or very close friend that you trust that could be the controlling account holder.  If you’re even slightly afraid that they might run off with your money, though, you might just have to have some self control and do the account control yourself.