Money minute: Making sure you can pay your mortgage

Brahm Resnik
The Arizona Republic
Jul. 23, 2004

With Valley home prices climbing to record highs, many first-time buyers are stretching to make a purchase.

But how do you know how much home you can afford?

One commonly abused rule of thumb is your monthly mortgage payment should eat up no more than 36 percent of your monthly gross income. The problem is, that's what you earn before taxes, deductions and savings are taken out. That's money you can't spend. But that doesn't matter to mortgage lenders, because in many cases they're looking to set up a home buyer in the largest mortgage possible.

"It's the credit card mentality of mortgage lending," says Bill Slater, vice president of home ownership for Neighborhood Housing Services of Phoenix, a non-profit that educates home buyers.

Better to think about your mortgage payment as a percentage of your net income - your paycheck after everything is taken out.

Do the math and you'll find 36 percent of your gross income equals 50 percent of your net income - half your take-home pay. Can you afford to spend that much money on a house?

There's a better way to figure how big a mortgage you can take on, according to Patty Brown, education coordinator at Neighbor Housing Services of Phoenix.

Let's say you're renting now for $600 a month. A lender says you qualify for a $900-a-month mortgage.

For the next few months pay your $600 rent and set aside $300 a month in savings. If you aren't making too many sacrifices, you can probably handle the $900 mortgage payment.

I say "probably," because renters will have to stretch their finances even further to pay the bills that come with a home.

"They don't understand the mental shift from being a renter to being a homeowner," Slater says.

Home insurance costs several hundred dollars a year. If you're putting less than a 20 percent down payment on the home, you'll have to pay mortgage insurance of up to $100 a month.

First-time buyers are often shocked by monthly bills for electricity, water, and cable. Those bills tack another $200 or more to the monthly cost of housing that renters weren't spending before.

And the first time something breaks, there's no landlord to call for repairs. Just you and an expensive trip to the hardware store.

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