Having already written my post on Budgeting, at Budgeting Made Easy! Part 1, I rethought the title.  I realized that budgeting really isn't that easy.  But with property estimating and planning, it can be!  That is the purpose of this post.

So we have calculated our bottom line, or disposable income to determine what we can afford out of our mortgage.  The easiest way to visualize it is with numbers.  Let's say hypothetically your disposable income after all expenses (Step 5), and the number you have come up with is $2,000.

We need to determine what that number translates to for your mortgage.  Not I wouldn't take that $2000, and assume you can afford a $2000 mortgage.  I think that is asking for issues, and overall the nation is seeing that with the subprime crisis!  We don't want you to be a statistic.

Of that $2000 figure, I would say that you should use 75% of it for a mortgage, in this case, that number would be $1500.  What that does is leave $500 per month in emergency money.  I would take that emergency money, and invest it in a savings account or somewhere you can earn a decent return.  You will appreciate it in the long run.

So our number is $1500.  That is what you can afford according to this scenario.  We will run through two different loan options, and see what this does for what purchase price you can afford.  Let's assume you are getting 100% financing.

Option 1

$175,000 purchase price

First Mortgage at 6.625% (6.9% APR) Fixed for 30 Years

$1120

Personal Mortgage Insurance

$175

Hazard Insurance

$60

Property Taxes

$180

Total $1535

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Option 2

$175,000 Purchase Price

First Mortgage at 6.875% (7% APR) Fixed for 30 Years

$919

Second Mortgage at 9% (9.125% APR) Fixed for 30 Years

$281

Hazard Insurance

$60

Property Taxes

$180

Total

$1440

So here are two scenarios.  Let me first say that these are hypothical situations, and are not deemed reliable, but merely for education purposes.  I disclose this because in my market, San Francisco, you don't have a chance of buying a home for $175,000, but the information here translates to any budget.

Of these two situations, you will see that the payments are different.  The differences are because the first scenario is for 1 loan, and the second is for two loans.  The first option has an Insurance Premium, also known as Personal Mortgage Insurance (PMI).  This premium is insurance for the lender, and they will recoup their full investment in the case of default on the mortgage.  The way PMI works is, if the value of your home increase so that what you currently owe is 75% of the value of the home, or if you pay down your mortgage below 75% of the starting loan size, your PMI premium will go away.  Poof!  Every PMI premium is different, I am simply providing this information as a basis for education.

If I was the mortgage broker for you, I would recommend you look for homes in the $175,000 range.  This will fit in your budget, and put you on the right path for a long life in your HOME.  This isn't to say that you can't qualify for a larger mortgage, but from a budget perspective, this is what I would recommend.  Please use my budget information for what it is, information!

With other questions, please feel free to email or call anytime.

Jon Vetter

650-465-5846

Mercury Lending, Inc.

San Francisco Loan Officer, for your San Francisco Home Loan.