Are you in the market for a new house this fall? Most of us start the search for a new house by going to the bank to get a letter of credit that gives us a preliminary approval for a loan. I remember when we were searching for our house, we were approved for a loan that was far more than I was comfortable with repaying. So I stayed with my original estimate of what I felt we could repay rather than revising my numbers upward.
Apprisen, a financial services nonprofit, estimates that about 35 percent of the mortgages that are approved require unrealistically high payments for consumers. The danger in this is that if you believe the lender’s numbers, you may find yourself with a loan that you can’t pay back.
Caution should be your watchword here. Banks are in the business of making loans and it is in their best interest to approve your note. Take a close look at your finances and don’t be swayed by the approval amount.
The traditional house note is based on a 30-year mortgage. Payments may pinch a little at first, but as your income grows, the note should be easier to pay. That’s the premise on which most loans are based. The challenge is that we are trying to predict the future.
The bank makes decisions based on the information we give them, but it may not have a complete picture of what might change in the future. A new baby or income changes may make a big difference in what you are able to pay. Banks, in general, plan based on a best-case scenario. We have to plan based on a less-rosy future. What if someone pulls out of the employment market to raise children or return to school or faces long-term unemployment because of a downturn in our economy? These possibilities can all impact our ability to repay the note.
The rule of thumb says that we can spend up to 30 percent of our income on housing. However, make sure you include all the numbers, including the mortgage, taxes and insurance.
If you’ve lived very long in Alaska, you know that the old saying that the real estate market will always climb isn’t always true. The boom and bust of the market is very real. We’ve seen it happen before and it is likely it will again. We used to say “buy as much house as you can and you’ll grow into it,” but that isn’t the best idea anymore. Look at your house as the place you live and don’t count on it to always go up in value.
Having a larger mortgage means there is less room in the budget for other expenses. Know what basics are going to cost to run this house. Utilities in Fairbanks can really add a lot of expenses to the total budget. Ask what the previous owner spent on utilities before purchasing the house. Find out what others in the same area spend on their utilities. A recent survey by the Council for Community and Economic Research said that the average utility bill in Fairbanks is $549 per month. Your bills may be more or less, but make sure you allow enough money to be able to stay warm in your new house.
Purchasing a house is a major investment – probably one of the most expensive loans you’ll ever take out. Make sure you consider all your options and that you are able to continue to easily afford it.
Roxie Rodgers Dinstel is associate director of Cooperative Extension Service, a part of the University of Alaska Fairbanks, working in cooperation with the U.S. Department of Agriculture. Questions or column requests can be e-mailed to her at email@example.com or by calling 907-474-7201.