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“Play House” – Pretending You Have A Mortgage

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‚Äôs 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!