One of the most popular questions that home buyers ask real estate and mortgage professionals is “How much home can I afford?”
It’s a normal question to ask, but it’s not the most effective way to plan your finances.
Banks will almost always approve you for a home loan in excess of your household budget.
The more appropriate question is: “How much do I want to spend on housing each month?”
By focusing on a home’s payment instead of its list price, home buyers exert more control over their short- and long-term financial goals. List price is only one piece of the monthly payment puzzle.
The cost of owning a home month-after-month is the sum of multiple expenses:
- The mortgage payment
- The real estate taxes on the property
- The condo/management fees to an association (if applicable)
- The cost of homeowner’s insurance
- The cost of mortgage insurance (if applicable)
In other words, because monthly payments are combination of costs, buying a home based on its list price does very little to help plan a budget. A home selling for $300,000, for example, may cost a homeowner anywhere from $1,800 to $3,000 monthly.
This is why “How much do I want to spend on housing each month?” is a better starting point than “How much home can I afford?”.
Home affordability comes from more than just the list price.
With Friday’s jobs report looming, mortgage markets are especially skittish about whether the economy is in a recession, or facing inflation.
Four Fed speakers Tuesday did little to quell the debate:
- 9:00 A.M.: Fed Chairman Bernanke stayed on message that foreclosures and falling home values are dragging down the economy.
- 10:00 A.M.: Fed Vice Chairman Kohn said that banks will “face challenges” but will not fail en masse.
- 1:00 P.M.: Federal Reserve Governor Mishkin said that deflation is more concerning to him than inflation
- 1:00 P.M.: Dallas Fed President Fisher said fighting inflation is more important than fighting recession.
Four speeches, four different perspectives.
The speakers’ mixed messages confused market participants and, as a result, mortgage rates varied wildly from hour to hour.
The confusion was so great that several mortgage lenders had to shut down their rate lock desks on three separate occasions Tuesday to re-price rates to the “new” market.
That’s a highly unusual occurrence and the market’s volatility underscored the uneasiness exiting in mortgage markets lately. Without a clear picture of where the economy is headed, investors are left to guess (and they’re not very sure of themselves).
Friday’s job report may add some clarity, but until Friday comes, consider locking a mortgage rate if you see one you like – it probably won’t stick around for very long.
After briefly exceeding its all-time high, oil closed Monday at $102.45.
Rising energy costs can lead to inflation because American Business eventually passes on its higher costs to American Consumers.
When consumers have to spend more money for the same amount of product, it’s called “inflation”.
Another way to look at inflation is like an erosion in the value of a dollar.
The presence of inflation causes mortgage rates to rise because mortgage debts are repaid in dollars. If those dollars are losing their value, the rates tied to those debts have to increase to “cancel out” the erosion.
This is why mortgage rates spiked Monday. As oil prices rose, the fear of inflation grew larger.
Over the next few weeks, expect mortgage rates to be highly sensitive to oil prices. As oil prices rise, mortgage rates should, too. As oil prices fall, mortgage rates should follow.
(Image courtesy: New York Times)
