Can You Really Afford That Mortgage Payment?

"Macaroni millionaire" is an old term for people who buy a house that makes them look rich, but they can't afford to eat anything other than pasta because of their giant mortgage.

Finding the perfect house is almost as difficult as figuring out how much you can afford to pay for it. Everyone has a different lifestyle, different expenses, and different goals. For an accurate and realistic method of figuring out how much you can afford, take a close and realistic look at your income and expenses. Remember that buying a property comes with several big expenses above and beyond the mortgage. Consider:

Local taxes and insurance - This expense can make your PITI (principal, interest, taxes, and insurance) payment significantly more than you had planned.

Closing costs - It will cost at least a few thousand dollars simply to purchase the home.

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Real estate transfer tax - Towns or cities that are trying to restrict growth or raise money for conservation, will add an additional tax on real estate transfers. For example, purchasing a home on Cape Cod comes with an additional tax.

Home improvements - Renovation and construction needs can surprise you after you move into a new house or purchase an investment property. Be sure you know ahead of time what changes you will want to make and how you'll pay for them.

Furniture - If you're buying a new home for your family, you'll want to fill it with furniture you love. Be sure you're not flat broke after you close, otherwise you'll end up eating dinner on a turned-over moving box for more than just moving day.

Commuting expense changes - With gas at $50 a tank for many people, a move that entails doubling your commute distance can have some significant financial consequences.

When determining how much mortgage you can afford, it's also important to take your own expenses and lifestyle into account.

• Are you saddled with big student or credit card loans? Consider the debts you have to pay every month - and factor in whether you're barely making the monthly payments or if you're paying "extra" each month in order to eliminate the debt.

• Do you like to drive the latest and greatest new car? Will you always have an expensive car or is your favorite type of car the type that is quickly paid off?

• Do you like to take a luxurious vacation every year? Some people enjoy exotic locations while others would rather spend a quiet week at the Cape with friends. Whatever your style, don't empty your vacation account to pay for the mortgage if vacation is something that means a lot to you.

• Is your kitchen stocked with just drinks and cereal? If you dine out frequently, and never bring your lunch to work, consider what you spend on food each week.

Once you have taken a good look at all of your current and potential expenses, you'll have a much better idea of what you can afford. You can then go into house hunting confidently, without being tempted to get that property that's "just a teeny bit" more expensive.

Got questions about real estate financing? Contact Debbie@westchester-mortgage.com or 617-965-1236. She'll consider them for inclusion in a future column. Debbie Siegel is president of Westchester Mortgage in Newton, Mass. She is licensed in several Northeastern states.

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January 2008

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