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“Play House” – Pretending You Have A Mortgage

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A concept I recently read from a Suze Orman book in Costco a couple days ago was to “Play House” before you purchase a home. I won’t have enough time to fully play this game (it’s six months long) if I want to buy a house by the time my apartment lease is up (end of June) but I can always backtrack the game the full six months. Essentially, pay your mortgage for six months into a savings account to see if you can handle the payments. The savings account also acts as funds you can then use as a down payment and perhaps reach that 20% to avoid PMI (or a piggyback loan).

Conceptually, it’s a great idea. It’s one thing to look at your budget numbers and guess that you can cover an additional payment; it’s another actually transfer it out of your regular checking account. I’ll give it a try.

Right now it looks like the price I will need to pay for a home is around $275,000 (!!!). Suze Orman (I don’t take what she says as gospel, but it is her game) suggests that you take whatever the monthly mortgage payment is and add 40% (I’ll call it a “reality” premium). I figure 40% is a nice conservative estimate for taxes, insurance, and incidentals. Bankrate’s front page rate for a 30 year loan is 5.53% (I figure I can probably do better, my credit score is better than average) and according to their calculator I would pay $1253.28 a month if I can put down 20% (a cool $55,000; I probably can’t put down anyway). Add 40% a month and I’m looking at a payment of $1810.54. If I put nothing down and the mortgage was the full $275k, it would be $2193.24 (with the premium). Hrm… I don’t know if I can handle the second one. $1800 a month may be do-able.

Well actually, the next step is to subtract my rent and utilities… which would be around $600. That means each month I have to put $1210.54 ($1593.24 on the full $275k) away to handle that kind of loan. Worst case, we’re talking sixteen hundred bucks. Best, almost impossible case, $1200. Once you crunch the numbers, reality starts to set in… $275k may be too far away financially.

$225k? With 20% down ($45k), we’re talking only $835.57 (with 40% premium minus rent). Without the downpayment? $1194.46.

But I’ve had two friends take out mortgages for homes more expensive than $275k. Lots of people buy homes beyond their means… perhaps interest only loans are the trick (I’m not really considering those, but they do have their merits). I probably want an ARM of some kind anyway (I don’t envision being in the home more than 7 years) and perhaps the lower rate will soften the blow. 5.53% is also probably too high a rate, I can probably do better than that. But the ballpark figures should be good enough… I’ll try playing with the rules I have for a $225k home and put all the money into an ING Direct (Or Emigrant if I can ever get it opened) and see how it goes. I can handle back paying three months but it’s the future that may concern me. Wish me luck!

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2 Responses to ““Play House” – Pretending You Have A Mortgage”

  1. Nathan says:

    Being a new homeowner myself, I can tell you that a step like this is very important. My wife and I were able to (but didn’t) save about $2000 per month before we bought our house, and now we’ve taken a huge drop in standard of living to pay our $1500 mortgage. Of course, other things factored in, like me wising up and actually saving some for the future, but we did get hit with more than we anticipated.

    Adding 40% is a good idea in my opinion. Houses are always much more expensive than their mortgage, especially if it’s your first house. You’ll need to buy a lawnmower, washer/dryer, hoses, trash cans, etc. All of that can really add up.

    Speaking of Costco, if you buy a house get a membership at Costco or SAMS, a lot of the stuff you need for your house can be purchased there at a discount. It saved me a lot of money.

  2. Johnny says:

    But what about the mortgage and tax deductions? Those are HUGE so I’m not so sure about using this method without accounting for those first.


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