What's your price range?
You'll need to understand how much you can afford
BY PHYLLIS FURMAN
DAILY NEWS BUSINESS WRITER
Alison Papalia, a 35-year-old marketing director at Time Inc., has been paying mortgage and maintenance for several months — but she doesn't own an apartment yet.
As she scouts for the perfect one-bedroom on the upper West Side of Manhattan in the $450,000 range, this newlywed is playing house. She's setting aside the amount of money she would need to dole out each month if she owned a home.
"Here it is the holiday season and I'm not touching that money," Papalia said. "We're ratcheting back our lifestyles." Can you afford that dream home? Don't look at those real estate listings or visit an open house before playing the real estate numbers game.
"You really have to think about it before you start looking," said Papalia's real estate broker, Corcoran Group vice president Tami Shaoul.
Understanding just how much you can afford will help you avoid the heartache of falling in love with a property that's priced beyond your bank account. In the worst case scenario, overextending yourself now could mean losing your house later.
Taking stock before buying a home has always been critical, but the issue has become even more pressing lately because of rising interest rates and sky-high utility costs, which are adding financial burdens to homeowners.
"People look at what they will have to pay in mortgage and property taxes and they think they will be okay," said New York financial planner Valerie Adelman. "They are not factoring in that utility costs have doubled since last year because of the gas crisis."
So, how much can you really afford?
Keep a few formulas in mind. Multiply your salary by four to arrive at a ballpark price for your home. That means, if you earn $65,000 a year, look for homes in the $260,000 price range.
For conservative buyers, financial planners recommend spending no more than 28% of your gross monthly income on monthly housing expenses of principal, interest, taxes and insurance. If you earn $100,000 a year, no more than $2,333 a month should go toward your housing costs.
There is another formula to consider. If you add in your other monthly debt tabs — such as credit cards, car payments and student loans — to your housing costs, your total debt should not exceed 36% of your income, Adelman said.
Of course, banks will be willing to lend you far more.
"Overall, the mortgage industry wants a FICO score (credit score) of 620 or higher and budgets your PITI (housing costs) to be 38% of your total monthly gross income," said Mario Cavallaro, consumer real estate account executive at Bank America. "Bank of America will go to 45% if the buyer attends an approved home buyer education course."
But Adelman cautions that lenders are not concerned about the other expenses that come with homeownership — but you should be.
"There's a difference between what a lender will give you and what you can afford for a comfortable lifestyle," she said. "People forget about other costs like fixing the roof, fertilizing trees, snow removal and gardening."
Once you have set aside money for a down payment, you will have to pay closing costs. The average in New York City is between $10,000 and $12,000, Cavallaro said. For co-ops, closing costs are closer to $4,000, he noted.
And remember to put away a cash reserve of at least six months worth of housing costs to cope with unforeseen circumstances, like losing your job.
You might be forced to set aside more if you buy a co-op in Manhattan. For instance, if you buy an apartment for $500,000, the co-op board likely will require that you have $125,000 left over after you close, in liquid assets, Corcoran's Shaoul said.
"Liquid assets are something you can sell tomorrow, like cash or stock," she said. "Your retirement account doesn't count."
By the numbers
You typically need to make a cash payment of 20% of the purchase price with the remainder financed through a mortgage, according to financial planner Valerie Adelman.
If you put down 10% of the purchase price, then your lender will most likely require you to buy mortgage insurance, an additional monthly expense that you need to consider.
A $400,000 house would require an $80,000 downpayment and a loan for $320,000. For a 30-year mortgage at a 6.5% interest rate, a monthly payment would be $2,022.62.
You need to consider property taxes. Assuming that is $6,000 in annual real estate taxes, it would add $1,000 a month.
Under current law, property taxes and mortgage interest are deductible. Assuming the mortgage amount is mostly interest in the early years of the loan, a $3,000 monthly mortgage payment would save approximately $1,000 a month in taxes for someone in about a 30% overall federal and state tax bracket.
The after-tax cost of those payments would then be $2,000 a month. But be cautious about using after-tax amounts since tax laws are subject to change.
Phyllis Furman
nydailynews.com
Originally published on December 4, 2005
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