Welcome pack for Part 2 of When Math Gets Pissed. Did you miss Part 1?
Yes, math is pissed. But math doesn’t really care. You see, math is honest. Of course there is fuzzy math, but fuzzy math isn’t really math. Math will give you the answer to your housing dilemma. There are three numbers that are as foolproof as any, when it comes to homeownership decisions.
10 Can you afford a down payment of 10%? If the answer is “no”, then the answer is “no”. This is where most people absolutely lose their mind. You can either afford this, or you can’t. It’s really that easy. Just because someone or something will sell you a house or approve you for a loan that doesn’t require a down payment of at least 10% doesn’t mean you should do it. There are some restaurants that sell 5 pound hamburgers, but that doesn’t mean you should order one. Borrowing money for a down payment or even receiving a fortuitously-timed gift, also puts you in the “can’t afford it” camp. But again, don’t sweat the “can’t afford it” camp. It’s a smart place to be in. It’s a hell of a lot better than the “thinks they can afford it even though they can’t” camp.
25 Is your mortgage payment under 25% of your net monthly income? Yes, I realize this is a more conservative number than you’re use to. But that’s the point. People kept pushing the limits of 27% of gross income, and that obviously didn’t work. The problem is that some banks will lend consumers money even though their mortgage payment would be 33% of their net income. That leaves very little room for emergencies, utilities, and other necessities.
5 Do you plan on staying in the residence for at least 5 years? According to my book, 60 Days To Change (Yes, I’m quoting my own book. Get over it. That’s just how I roll) 85% of your payment for the first five years of a 7% 30 year mortgage goes towards interest. That means that a house generally is a terrible investment if you live in it for less than five years. Most young Americans just don’t have that sort of stability. Not only that, but 5 years is a good rule of thumb in a GOOD real estate market. And we are only in a GOOD market right now if by “GOOD” I mean “fecal”.
So there it is, Holmes. There is your math served up nicely in a giant wooden table-boat that gluttonous orders of sushi are served in. If you can figure out what 10% of a purchase price is, figure out what 25% of your take home pay is, and count to five, then you are privy to the good news and the bad news. The good news is that you have just earned your ticket to the “I can afford to own a home” club. The bad news is that they are out of t-shirts because they let a bunch of math-hating lemmings into the club. Again, this comes off a bit harsh. But subtle didn’t work. Subtle didn’t work when a bunch of kids that were bad at soccer got participation trophies (me included). Some people win. Some people lose. You don’t get a trophy for losing. There is absolutely nothing wrong with that. You still get your oatmeal cream pie and a juice barrel. Some people can afford a home. And some people can’t afford a home. But unfortunately, there are no more t-shirts. Don’t complain. That’s just how it is. Besides, the kid that was terrible at soccer but great at math isn’t complaining.
Oh, and if you think that I’m suggesting that you are a loser if you can’t afford a home, then you better read tomorrow’s Part 3. Sneak peak: if you can’t afford a house, then your fate is in your hands.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.