“Honey, the bank thinks we’re rich!
They just approved our mortgage for how much???”
I remember a situation from many years ago when one of my (then) employees decided to dive into home ownership and buy her first house. A few days later, she came into my office walking on air, to tell me that she had just been pre-approved for a $500,000 mortgage. She then went on to describe how she was able to go look at far larger homes than she had originally thought she would be able to, for her first one. Additionally, her bank was giving her a screaming good interest rate for 3-year term.
She was so excited, but I was worried.
At the time, she was one of my most successful employees and deserved a nice home.
But I also knew how much she netted on her pay.
And, I knew that maxing out her potential pre approval was risky!
As new home buyers many years before, Jacki & I learned the hard way, just what ‘house poor’ meant. And yet, I did not want to destroy her dream.
So I asked her if I could run some numbers for her. I told her to imagine the same house and mortgage, with an interest rate just a half percent higher, three years down the road when renewal was due. Lo and behold, the buffer she had built in would have disappeared, as would the lifestyle she was planning on.
So many first home buyers look at their pre approval numbers, and look to buy a home at the top end of the number. After all, the bank approved them didn’t they? Unfortunately, we often forget that we may still want a vacation, or the car might one day need replacing, or the kids might need braces. Or the interest rate might be considerably higher at renewal.
When buying your first home, or moving up to a bigger home, remember to look at the mortgage payments as opposed to the total lump sum the bank will loan you, and find a number that really fits your lifestyle.
Take into account emergencies. Look at the expenditures that you want to continue to have beyond owning a home.
Factor in maintenance that a landlord is no longer responsible for.
Factor in potential increases in interest or taxes.
Then, look at a home in that price range.