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.

The Case Shiller Index released its monthly/yearly review:

WASHINGTON (Thomson Financial) - The collapse of US home prices was spread across the whole country according to the S&P/Case-Shiller Home Price Indexes released today, while the price index compiled by federal housing regulators showed a much less dramatic decline.

The January S&P/Case-Shiller 20-city price index was down 10.7 pct from the year before, in line with expectations of a 10.5 pct decline. The January-to-December decline was 2.4 pct.

Case Shiller index? What the hell is that?
The Case Shiller index is an index based on 20 cities that follows the residential real estate market in 20 large cities in the US.  Case Shiller uses repeat sales pricing to evaluate the housing market.  It was developed by Karl Case, Robert Shiller and Allan Weiss.  Weiss obviously got the short end of the naming stick.

Why is Case Shiller Index not even close to the Fed index?
The reason it is a far cry from the fed numbers released earlier this week is that the fed OFHEO stats are adjusted based on the season and the Case Shiller Index is not.

What does the Case Shiller Index release mean for me?
Probably nothing - we already knew prices would go down as foreclosures add up.  The long short of it is, if you are looking to buy, its going to be a good time.  If you are looking to sell, you are going to be selling a good amount lower than you would have in the past few years.

I am writing this in response to this article entitled “Why Dont more Americans give a damn about the environment.”  Actually I should have titled this article “Why I dont give a damn about people telling me to give more of a damn about the environment” but then, thats not nearly as hooky is it?

Now, the truth is I love The Dough Roller, so before anyone gets too upset Ill preface with that….but now it is time to be a hardass devil’s advocate.

I hate to interrupt the touchy feely America hating, green loving fest but I have some news, America is headed in the right direction, and most of the world is not.  Many American businesses are voluntarily doing things to help …I remember when working at HP the amount of time and money that went into computer recycling.

Whoa wait, America consumes <numbers about what we consume> and pollutes <numbers about polluting>! but the truth is Americans as a whole are actually becoming greener and greener.

In 2006, total U.S. greenhouse gas emissions were 7,201.9 Tg CO2 Eq. Overall, total U.S. emissions have risen by 14.1 percent from 1990 to 2006, while the U.S. gross domestic product has increased by 59 percent over the same period (BEA 2007). Emissions fell from 2005 to 2006, decreasing by 1.5 percent (111.8 Tg CO2 Eq.).  All of this while global warming is suddenly in question again because it is now cooling, and the polar ice caps that had melted regrew this year.

China on the other hand is rapidly increasing its CO2 emissions as well as other pollutants.  India is doing the same.  I have been a couple hands worth of European countries and guess what: a lot of them are a lot less concerned about doing environmentally sound things than we are here, the difference is often overlooked:

America is a big space with less people and we have the ability to spend more resources than anywhere else in the world.  It boils down to that.  A lot of individuals in places in Europe, if they could drive SUVs and live in 5000 SQ foot houses, would.  For trucks to bring food to Colorado from the coasts, they have to drive a LONG way.

The truth of it is, many Americans are trying very hard to be green but still enjoy a nice standard of living.

Its true there are problems.  I do believe the oil industry has stifled alternative technologies for many years now and I do believe many people are much too wasteful. My family owned a solar business and my dad went out of business due to oil companies lobbying against the solar industry.  I have no love for them, nor our dependence on oil, nor our production of CO2 or pollution.

On the other hand, all of the talk about Americans being the least caring, etc…  Much of it has been used to advance political agendas from George Bush hopping on the bandwagon to Al Gore who, despite his famous movie and prize he got lives in two properties: a 10,000-square-foot, 20-room, eight-bathroom home in Nashville, and a 4,000-square-foot home in Arlington, Va. (He also has a third home in Carthage, Tenn.) while flying around in a private jet. AND according to public records, there is no evidence that Gore has signed up to use green energy in either of his large residences.

Here is what it boils down to: I have faith in all of you that you are being green, while remaining economically sound.  Do not do things that will put your finances in jeopardy if you cannot afford it.  While putting up solar panels would be great, if it will damage you financially, wait until you can afford it.

For those who are steaming angry right now, I have some bad news if you are wanting to flame me about my selfish environment killing self: I live in 1400 sq foot house, and my water is heated by two large water drainback solar collectors (designed by my father who owned a solar business).  My bulbs are all CFLs, I ride a 60 mpg motorcycle in the summer, and my yard is filled with four 75 foot trees, as well as 3 pines, 1 crab apple, 2 maples, 1 green apple and a bunch of bushes and I recycle.  I will even include a google maps picture below:

It may have seemed like a good idea at the time, but it you will pay for it long term.

Ah yes, the cancer that is Interest only ARMs. So for those of you who aren’t quite sure what it is:

An interest only ARM is an ARM (Adjustable Rate Mortgage) where for a set amount of time the borrower pays only the interest on the principal balance, with the principal not being paid down at all.

Several years ago banks went kind of crazy lending and started handing out ARMs like they were on a mission. Well, they were on a mission - lend to as many people as possible, regardless of whether those people could afford it or not. That in and of itself means big trouble but at least homeowners could build some equity in that time.

This is where the interest only ARM came in. Interest only ARMs are the same concept except that homeowners (and I use that word loosely) only pay interest on the principal - basically banking on their home appreciating. There is one major problem, housing prices were very inflated and so now we have people with houses they couldn’t afford in the first place with their interest rates resetting to high rates while they have effectively LOST equity in their houses.

I heard one guy call into talk radio and say he has three houses with interest only ARMs that he bought assuming he could flip them but now he cant even sell them below market value…and he is about to foreclose on all three.

Here is the lesson, I want all of you readers to make me this promise: “I reader hereby do solemnly swear that I will not get an interest only ARM or an ARM of any kind for that matter and I will tell my kids to never get an ARM too.”

Since the federal reserve has been cutting rates like interest is goin out of style there has been a renewed interest in home equity loans and home equity lines of credit. So what exactly are these? What is the different? Should I care?

What is a HEL (home equity loan)?
This is a type of loan where the borrower uses the equity in their home as collateral. These loans a lot of times are used to finance home projects, pay off high interest credit card debt, or pay medical bills. A home equity loan requires good credit history and a good amount of equity in the home. In this loan, the borrower receives a lump sum at the time of closing and nothing more can be borrowed. The max amount of money that can be borrowed is determined by variables including credit history, income and the value of teh home. The amount that can be borrowed is usually up to the entire appraised value of the home minus the first mortgage. Closed end loans have fixed rates and can be amortized for periods of usually up to 15 years.

What is a HELOC (Home Equity Line of Credit)?
A Home Equity Line of Credit (often called HELOC, pronounced HEE-lock) is a loan in which the lender agrees to lend a maximum amount within an agreed period (called a term), where the collateral is the borrower’s equity in his/her house. This is also called an open-ended home equity loan.

What is the difference between a HELOC and a come equity loan?
The different is that in a HELOC the entire sum of money isn’t given to you up front. Instead you are given a line of credit, very similar to having a credit card. At closing you get a specific credit limit that you can borrow up to. During the period of time you are allowed to borrow you can borrow and pay back what you owe plus interest. Depending on how much you use the home equity line of credit you will have a monthly payment, generally only the interest on whatever is owed. Another difference is that the interest rate on a HELOC is based on the prime rate as set by the federal reserve. This means that the interest rate will change over time. Generally HELOC rates are lower than home equity loans because they are variable, however if there is significant economic turmoil you could get stuck with a very high interest rate.

For each, what are some of the advantages and disadvantages?

Home Equity Loan Advantages:
-All the money up front
-The interest is tax deductible
-Low closing costs

Home Equity Loan Disadvantages
-Fairly high interest rates
-No grace period, payments start right away
-No flexibility

HELOC Advantages:
-The interest is tax deductible
-HELOCs are viewed as not as bad in the eyes of creditors as a traditional home equity loan
-can be interest only
-no prepay

HELOC Disadvantages:
-Variable interest rates mean that rates can rise over time.
-Failure to keep to terms can and probably will result in foreclosure.
-No caps on interest rate
-Minimum draw amounts

As far as times to get home equity loans go, this is a good time. The federal prime interest rate is the lowest it has been in years. If you have sizable high interest debt, a HEL or HELOC might be a good idea…just remember putting up your home for collateral is dangerous!

I’m always on the lookout for things that can save energy costs because if it doesn’t affect the quality of life, then its just wasting money. Todays top: turning down the thermostat. Now, don’t get me wrong, I am not saying all the time. In fact I hate sitting around the house being cold…who doesn’t? But really, how about when you are sleeping? Or how about when you are at work during the day? In our case the dogs are still home, and they are definitely princesses, but they do have fur. Speaking of dogs, does anyone else have one that loves poop? Our puppy Sabra’s proudest moment was when she came in from outside, trotted up to me wagging her tail like crazy and triumphantly dropped a nice dried up frozen turd at my feet. Anyway back to finance….

According to the Rocky Mountain Institute, for every 1° you lower your thermostat, you save 2 percent in energy costs. So lets say you lower your thermostat for 8 hours while sleeping and 8 hours while at work. Thats 16 hours a day, exactly 2/3 of the day. 2/3 of 2 percent is 1 and 1/3 percent. Lets say you keep your house at 70 (a fairly common temperature). Here in Colorado heating a 2k square foot house with gas can cost up to $2000.00/yr. Lets say you were to lower your thermostat to 65 at night and during the workday:

Annual heating and cooling costs(before): $2000
Percent savings from adjusting thermostat: 6.67%
Annual savings: $133

Lets day you decide to turn it down to 60 while sleeping and away:

Annual heating and cooling costs(before): $2000
Percent savings from adjusting thermostat:13.33%
Annual savings: $266

Makes sense eh? If you go to the extreme you can save probably up to about 35% assuming a baseline of 70. Thats up to $700 in a year. Mind you I wouldn’t want to turn my own thermostat down that much. All of this becomes much MUCH easier if you have a programmable thermostat. My house doesn’t have one, and I will have to look at my girlfriends house to see if hers is (I think it is; she has a new house and I probably just made work for myself writing this article heh heh). They aren’t much to buy and will pay for themselves in less than a year. Now go!

I am replacing the lights around my house with CFLs (Compact Fluorescent Light Bulbs) and you should too.  Random?  Read on… 

I was looking around my house and I realized several things.  The first, though not related to this article is that the dishes really pile up with four guys living in a house.  The second thing I noticed was that my house is in sore need of updating and maintenance.  The college look has long since passed “cool” down to “well Ill rearrange as soon as I have some money” and then proceded on to “Seriously, have a little self respect.” 

On a completely seperate day I was doing the household bills and I was pondering how on earth four guys can rack up a utility bill topping $200.00.  Thats just for water and electricty mind you, not even including the gas bill. 

These two seperate thoughts came together in one brilliant, bright idea (har har).  I would start a series on saving money with home improvement.  The first thing on the list?  Light bulbs.  As it turns out changing out regular light bulbs in your home with CFLs can actually save you a fair chunk of money over the long run.  First lets have a look at the differences:

Well, there you go, thats visual difference.  You can pretty much get a CFL that puts out any sort of light, though I wont go into details here because I know you are all sitting in your office chairs screaming “Show me the money!” at your monitor.

Lets take my favorite kind of “regular” incandescent light bulb, namely the 100 watt light bulb.  Why do I like the 100 vs say a 60?  Quite frankly I hate dim light while Im awake.  To make the switch to a similarly bright CFL I would need to buy the 25 watt variety.  Lets assume I replace 100W incandescent bulbs with 25W CFL bulbs and that each bulb is in use for 4 hours per day on average:

(Taken from here)

In my house I counted up a total of 12 bulbs that could be changed out.  Im going to do the switch this weekend and then Ill post my energy bill next month versus the one this month.