How much house can you afford? I recently set out to figure how exactly how much house I can afford and found out its a more interest question than you might think.

First piece for how much house you can afford: Income
The most general rule about how much house you can afford is to multiply your annual gross income by two and a half traditionally. I personally think multiply your income by 3 is a little more realistic for most people. Theres factors that raise or lower this but its a great baseline to see what your general range is. For example if you make 60k a year, you can, in general afford a house around 150-180k. If you are a couple and make say 100k combined you could afford 250-300k.

Second piece for how much house you can afford: DTI and HER
To determine how much house the bank thinks you can afford they use guidelines called debt-to-income ratios and housing expense ratios. Thats a fancy way of saying “how much you make vs how much you have to pay out every month on. Its the percentage of your month gross income before taxes that is used to pay your monthly debts. Because there are two different ratios they are written in a slash format. Front ratio vs back ratio. The front ratio is the % monthly gross income that is used on housing costs. The back ratio is the same thing except that it includes all of your debts. Thats great and all but the truth is that it is flexible and doesn’t necessarily the best indicator of how much you really can afford- one way or the other.

Third piece for how much house you can afford: Credit score
This might seem obvious but it makes a huge difference in price range. If you have great credit, you can get the best rates. If you have poor credit you cannot get near as good of rates if you can get a loan at all. Fort example taking the best rate today on my credit unions website for a 30 year fixed loan: 5.75%

Lets say you have perfect credit and get 5.75% rate on a $250,000.00 30 year fixed loan. Your monthly payment aka how much house you can afford would be about $1458.00 per month. Lets say you have a credit score a little lower, say 689. Still good, but not perfect…your rate would be more like 6.3% which would give you a monthly payment of $1547. Thats right, almost $90/month more per month for 30 years!

Some other factors to consider:

Mortgage type – If you can only afford it using an ARM, this is more house than you can afford.

Utilities – How much do you anticipate spending on utilities? Remember, the bigger the house, the more utilities are going to cost.

Maintenance – HOA fees can have a large impact on how much house you can afford

Closing Costs – how much house you can afford is actually a little less than you think simple because there are closing costs that include taxes, title insurance, financing costs, realtor costs etc.

Repairs/Remodeling – Does the house require changes once you DO buy it

Furniture etc – Filling out the house can be VERY expensive

Property Tax – There are taxes levied by city county etc that you will have to pay.

PMI – Private mortgage insurance. If you can’t come up with 20% of the purchase price you will generally have to pay PMI which can be 50-200 bucks a month.

Something for couples to consider:

Should you use both salaries in your “how much house can I afford calculations” and mortgage qualifications?

Only if you’re sure both of you will continue to be employed. If one of you becomes disabled or decides to stay home with the children, you’ve cut your income significantly. When it happens, you’ll be happy if you qualified for a mortgage using only one of your incomes. On the other hand if you are both working good jobs and are planning on building your careers then yes absolutely especially if it gives you the quality of life that you are looking for.

So how much house can you afford Jesse? 
Well I am not going to tell you that   But I will say that the house I like is right on the border and depends on a bunch of other factors.

I have lent probably 10 friends money in my life. Of those I have had 8 pay me back. Thats not necessarily a terrible ratio, and currently all of them over $100 have paid me back except one and I think he does intend to pay me back. The problem is you never know quite when you will get burned so there are a few things to take into consideration before you lend to a friend or family member and a few guidelines to follow while doing so.

Questions:

1) Do I really believe they will pay me back?

2) How badly do they need it and am I the last resort

3) Is it even remotely possible I could lose contact with this person?

If you decide after thinking about those two things that you yes you should lend them money then its time to think about a few guidelines:

1) Give them a time frame to pay you back – dont get taken advantage of

2) Write it down – dont forget about it

The best time to pay for your kids college tuition is not when they are going to college. I know that seems kind of counter intuitive, sort of like how eating more times per day can help you lose weight. No joke, look it up.

So when is the best time to save for your kids college?

When they are born (or before). A small investment when they are born will do wonders for their college costs in the future. For example a $5000 investment at birth would pay for all of an average state school tuition when they are 18. Thats assuming an 11% return which is not too much to ask for, since the stock market has averaged that since the dinosaurs roamed the earth (or so they tell me).

But ahhh what if there is a recession when they get close to college age?
There is something that is excellent to use for this, and its called an age-based 529 plan. Its basically a plan that adjusts from being very aggressive in the beginning to conservative as the child becomes closer to their college years. You pick the year they should start college, and the plan does the rest. Its basically just like a retirement plan: you want to start aggressive and slowly move toward conservative.

Should I use an age-based 529?
I personally would say no since I hate paying mutual fund managers to do what I know I can do just as well as they can (oh boy here comes the hate mail, I can feel it). But if you want someone else to manage it for you, its worth considering.

I just got back from Portland last night on business and I learned several things about life and finances that you would not expect to learn from Portland.  Its a nice city, lots of trees, too many clouds.  Well ok so the lesson really didn’t come from Portland or the business part, but the traveling part.

Whatever you do, do not buy a car that has been used as a rental car.  I really don’t care what kind of deal you think you are getting, it is not a deal.  I read an article just now in between writing this sentence and the last sentence that said a good way to save money on buying a car is to buy a used rental car.  I am going to go ahead and say I disagree 100%.

This weekend my colleagues took our rental car jeeping (it was not a jeep, but rather a charger) and did some road testing.  It was all in good fun and didn’t harm the car, but we were mild compared to some of the stories I have heard.  Allow me to give some examples of things I have heard:

-car being thrown into park while on the highway going 60
-car being jumped (over a variety of things)
-blatant disregard for speed bumps, humps, traffic calming devices and sometimes curbs. Late braking, hard accelerating, off roading, overloading, and every form of general abuse you’d never inflict on your own vehicle
-driving with parking brake engaged
-use your imagination
Now, you might argue, only a minority of people play around with rentals and an even smaller minority severely abuse them and that may well be true but the truth is even just the normal wear and tear on those cars is unbelievable.  99% of all rental cars lives have been spent purely in stop and go traffic (the worst kind of miles for cars) and many of them at one point have had a user that severely abused them.

The car being under warranty is no promise that it wont be totally hosed 2k miles out of warranty.

Buy low. Sell high. Get rich. Work from home. Own a mansion.

These are a few of my favorite things.  Its also completely unrealistic yet it seems to be every investors dream.  I must get about 10000 stock tips a day in my inbox.  Then on top of those there are the “learn to be a day trader” emails.

Of course I subscribe to each one, cause everyone knows Joe12343454469696969@hotmail.com is probably the expert on day trading.  The thing that really gets me is that they must make money doing this or they would stop sending out the emails and stop making the websites.

Thats all great and all except that even without sketchy tips, day trading has some major flaws like:

-Most people that try and day trade lose money
-There are a billion government regulations that cut profits
-Even if you make a little profit, taxes will take a chunk, trading costs will take a chunk, and the booze you buy to celebrate will drain the rest (note: if you go this route, save some booze for when you dont make profit, you’ll really want it then)
-Most day traders know very little about the companies they are trading

I don’t do it, you shouldn’t do it, and you most definitely shouldn’t buy sketchy ebooks on how to do it.

And by hiding money I mean from yourself. I am great about paying bills, doing my investments, etc but one thing I am aboslutely terrible at is golf. No just kidding, Im getting a lot better at golf, what I am actually referring to is setting aside money into a saving account. This is why I absolutely LOVE having an ING account. If I keep it in my wells fargo account which I dilligently track I am often tempted to transfer it back from my savings into my checking and invest it, spend it, or otherwise not have it around anymore. This leaves me with an interesting problem. I want to save some cash but I do not want it readily available. Luckily for me and other savings avoiders I have come up with a solution. Actually its a pretty simple solution.

Open a savings account at a different bank.

Yeah I know, its not exactly Einstein solving mass to energy conversion but it works nonetheless. My personal suggestion is open an ING savings account. With ING I have it automatically withdraw money every paycheck so I never even see the money. If I wanted to transfer the money I would have to log in to ING, and manually transfer it back to wells fargo. This little thing alone is enough to kill the temptation.

Added bonus: You get WAY better interest at ING than you do with a standard bank checking account. So basically I get to kill three birds with one stone. Now open an account there right now. (see link in my sidecare).  If you open an account with $250 we both get a bonus too!