What Can We Get?

Jennifer gives Dave her numbers and needs a breakdown of something; how big of a mortgage can they afford so they can buy a house?

QUESTION: Jennifer and her husband are on Baby Step 6. They are paying off a house that they don’t want to live in anymore. They want to move in 3 years, but don’t know what they can afford. They make $165,000 a year and have $80,000 in equity. How can they determine what they can buy?

ANSWER: If you are debt free except the house, have a fully funded emergency fund, contributing 15% to retirement and are funding the kids’ college, then you’re at the right spot. There are 2 answers to this question. The first is, if you save up the difference so you don’t go further into debt in order to do this deal. You could completely pay off this house and save up for the next one.

The other end of the spectrum is that you don’t take out a loan that is more than 25% of your take-home pay on a 15-year fixed rate mortgage. Your house payment should never be more than $2,500 because with your income, you bring home roughly $10,000 a month. When combined with your equity, you can buy a house in the $325,000 range, so you can get a $250,000 loan.

This is a really good time to borrow because the rates are so low, but you need to get your house sold before you buy. I would put the house up for sale and look for a house in the low 300s. In your position in this economy, you really could sneak up on a deal like a short sale or a bank repossession house.