When we were looking at houses a few years ago, I was paying about $600 a month in rent. I was splitting a $1189 per month, 2-bedroom apartment with a friend and my half was a little less than half. $600 a month in rent is fantastic in the Baltimore-Washington D.C. area and I was thrilled to be able to save up some cash for a house, despite housing prices soaring back then. So, when I started looking, the prospect of paying a $1500 mortgage was downright scary.
That’s when I learned the technique of “pretending” as a way of preparing yourself for major purchases. I should “pretend” I currently have that mortgage and see how it affects my financial situation.
How to Pretend
Step 1. The first step is to determine how much your monthly payment will be. If it’s a car, you’ll want an auto loan calculator. If it’s a house, find a mortgage calculator. We’ll do the mortgage case since it’s a little more complicated. I’m a fan of Dinkytown.net calculators and their mortgage calculator  is easy to use. I enter in a mortgage amount of $240,000, a term of 30 years, and my interest rate of 5.750% and find out that my monthly payment is $1,400.57. Not bad right? (one thing to remember, a $240,000 mortgage doesn’t mean a house that costs $240,000, that’s just the mortgage)
Mortgages are just the beginning when it comes to owning a home. Remember to add in property taxes (~$3,000 per year), homeowner’s insurance ($50 per month), homeowners association fees ($30 per month), and an estimate of your utility bills ($100 per month). The “extras” total $430 a month. My true monthly payment is $1,800.57 after all was said and done.
Step 2. Now you’ll want to subtract from that amount anything you currently pay for that will be replaced. In my case, I would subtract my $600 per month rent, my then-current utility bills, and renter’s insurance (I didn’t have renter’s insurance but you might). Going halfies on everything sure made my living expenses cheap, all told I think it cost me around $650 a month to live someplace!
Step 3. Here’s the fun part, could I comfortably come up with $1,180.57 per month to cover the cost of a home? The easiest way to find out was to account for it in my monthly budget. If you don’t have a budget (you should give it a try, here’s a primer on how to budget ), then start one on paper with guesses on how much you spend each month. If I could, then I knew that I could handle a $240,000 mortgage. If I couldn’t, then I knew I had to look for a less expensive home.
Step 4. If it feels like you can handle the payment on paper, it’s now time to try it for “pretend.” Start putting the $1,180.57, or whatever that amount is for you, into your savings each month. See how the payment feels. I recommend that I give this a try for at least three months, six months if you want to be sure. The process of buying a home can take months, depending on how analytical and picky you are, so this shouldn’t be too difficult. Plus, there’s really no rush because you’ll be paying for that home for thirty (or fifteen) years, so what’s a few more months?
The beauty of this strategy is that when you are ready to buy a car or a home, the savings you’ve put away so far can go towards closing costs or a sizable down payment!
Have you tried this strategy of “pretending” before?
(Photo: jhritz )