Health Now, Wealth Forever

Definition of “Real Estate”

Wikipedia:  Real estate is a legal term (in some jurisdictions, such as the USA, United Kingdom, Canada, Australia and The Bahamas) that encompasses land along with improvements to the land, such as buildings, fences, wells and other site improvements that are fixed in location — immovable.  A more common term to be used in this discussion is Real property. This refers to land and the improvements made by human efforts—buildings, machinery, the acquisition of various property rights, and the like.

Real property is also termed realty, real estate, and immovable property.

A house fits the definition of “Real Property”. There are two types of house properties: the first is the typical one – you are going to live in the house; the second is typical, too but is quite a bit different for your investment portfolio – you are not going to live in the house but you are going to lease it to someone else and they will pay you something to live in the house.

We are going to do an exercise on buying a house you to live in.

(We will be using each of the terms in “PITI”.  If you need refreshing, see the previous post.)

1. We need to determine based on our monthly income and expenses what we can afford each month to pay the mortgage (PITI).
   1. Gather all personal information:
      1. i.      Income: Need from borrower and co-borrower: net from pay stubs, interest and dividends, child support, alimony, trust fund payments, income from rentals, income from bonuses or incentives, etc.
      2. ii.      Expenses:  Need from borrower and co-borrower: groceries and eating out, entertainment, utilities, clothing, telephone, internet, credit cards, student loans, car loans, loans, automobile expenses, maintenance, charity, cable TV, travel, etc.  We do not include what we are currently paying for housing.
2. Calculate the difference between Income and Expenses.  This can be adjusted, but we will use this number to determine what we can comfortably pay each month for our new house payment.
3. We also need more information.
   1. Property Taxes (T).  Call the County Officials in the county where we wish to buy and get the mil levy (mil = 1/1000).  This rate determines our property tax (T).
   2. Homeowner’s Insurance (I).  Call a reputable insurance company and ask what their monthly rate would be on homes in the area.
   3. Mortgage Interest Rates (I):  Talk to a mortgage broker or bank, check out web sites, Google it, etc.  There are a myriad of web sites that will let us know what the current interest rates are and what the trends are.

The easiest path to buying a home is to get pre-qualified.  This will allow us the information about what price range we can look at when shopping.  (Note:  Web sites make this part simpler.  They are listed at the end of the example.)

Sample Income:  From Item 1, our working monthly income is $4,500.

Sample Expenses:  From Item 2, our monthly expense is $2.800.

-          What we have to use for monthly house payments is $1,700 for PITI

The interest rate we found was around 5.00%

The mil levy we will use is 11.00.  For a starting point let’s calculate a monthly tax of:

Annual Tax = (11.00/1000) x $325,000 = $3,575.  Monthly = $280.

-          Now we have $1,700 – $280 = $1,420 for PII.

We talked to a few insurance agents and found an average home owner’s policy costs about $720 a year or $60 per month.

-          Now we have $1,420 – $60 = $1,360 for PI (Principal and Interest)

We now have to do some math. NOT, we’ll go the easier way. Go to a site called BankRate.com.

1. Start by entering the home price – say, $300.000
2. Set the mortgage term – say, 30 years or 360 months
3. Enter the interest rate we found – 5%
4. Click on “Calculate” button.  It should say $1,610.46 per month.

Whoa!  That is more than we can afford each month.  But we forgot something:  we can use some of our hard earned savings, or we can get a family loan.  This is called a down payment or payment at closing.  Let’s say we have about $20,000 for a down payment.

Alright, back to the web site.

1. Back to 1 and enter $280,000.
2. Click on “Calculate” again.  It now says $1,501.10.  Still too high.
3. Let’s play with this and see what the PI needs to be to let us comfortably afford $1,360.00 per month.
4. After some iteration a PI of $253,300 would let us have a PI payment of $1,359.77.  Can round up to $1,360.

Summary:

We can look for a home in the range of $273,300 ($20,000 + 253,300).

Monthly house payment (PITI) will be about $1,700 ($1,360 + $280 + $60).

You should use this example to see what your numbers are.  Do it a few times.  Doing this is not required, but it will give you the information you should have when you talk to real estate agents and mortgage bankers.

Helpful Web-Sites:

www.BankRate.com

www.quickenloans.com/mortgage-options

www.lendingtree.com

www.google.com/comparisonads/mortgages.

The Next in the Series:

Real Estate – C

(Rentals!)

Filed under: Wealth by Gary