Q: My wife and I have been married for five years. We've managed to save $15,000 for a new house and are anxious to act, since we are both sick and tired of living in an apartment. Our joint income is currently about $40,000. My question is: How do we figure out what price range to look at?
A: This is an important question, since you want to find a house you can comfortably afford. You certainly don't want to find yourself in a cash-flow bind down the road.
The price range of a house depends on three factors: the down payment, the monthly carrying costs and the certainty of your future income.
Let's take a look at each of these:
* Down payment: At the minimum, you should have 15 percent of the purchase price -- 10 percent for a down payment and 5 percent for points, fees, closing expenses, accrued taxes and contingencies.
Your $15,000 savings leads to an off-hand conclusion that you would be looking for a home in the $100,000 range -- that is $10,000 down and a $90,000 mortgage. Now, let's see if the rest of the case supports this conclusion.
* Monthly carrying costs: The three major monthly expenses to consider are mortgage payments, taxes and home insurance.
Since lenders prefer that these combined expenses not exceed 30 percent of your gross income, in your case, this translates to $12,000 a year, or $1,000 a month.
A median estimate of taxes and insurance together would be $2,400 a year. That leaves you with $9,600 a year, or $800 a month, for mortgage payments.
If you can get a 7-percent, 15-year, fixed-rate mortgage, it will cost you $8.99 a month for each $1,000. Therefore, your $800 per month will buy about a $89,000 mortgage ($800 divided by 8.99 times $1,000).
With an 8-percent, 30-year, fixed-rate mortgage, the cost will be $7.34 per $1,000 each month. In this case, $800 per month pays for around $109,000 worth of mortgage.
Keep in mind that mortgage interest and property taxes -- which make up most of your monthly payment -- are tax deductible. Given this tax break, you can certainly afford that $90,000 mortgage.
* Consistency of income: Do you expect your current income level to increase, remain stable or decline? One factor to consider is the possibility of children. If you are planning to have children, will both of you continue to work? If yes, will your income stay the same -- or will one of you have to compromise? If not, do you expect the working spouse's income to grow at a pace that will make up for the lost wages?
Remember that even if both of you continue to work, you will probably have day-care costs and other costs that will eat into your earnings.
Considering all these factors, here are my suggestions:
* Shop carefully, and negotiate hard for a house.
* Canvass at least five lenders for mortgages. Rates and points can vary quite widely.
* Contact your state government. More and more states today have low-cost mortgage programs for first-time buyers.
Susan Bondy founded her namesake financial services company 1980 to provide financial planning and asset management. She is a frequent guest on "Good Morning America," the "Today Show" and National Public Radio. She is the author of "How to Make Money Using Other People's Money." Write to Susan ZTC Bondy in care of The Sun, 501 N. Calvert St., Baltimore, MD 21278. All letters will be treated confidentially.