Retiree Considers Selling Townhouse and Buying a Larger Single-Story Home
I’m trying to figure out how much I can afford to spend. Can you recommend a good website or calculator? I would like to have a good idea of how the numbers work before contacting a real estate agent or mortgage lender.
I love your column and recently read Ilyce’s book, “100 Questions Every First Time Home Buyer Should Ask”. Even though I’m not a beginner, it was very useful and interesting. Thanks.
A: Thanks for the kind words about Ilyce’s book. In it, she walks readers through a formula that helps you calculate how much money you can spend on buying a home.
But let’s run through the numbers here, because many homebuyers are in the same situation as you. According to a report by Redfin, home buyers around the world need much higher income to qualify for a mortgage. That’s especially true in the Sun Belt, where homebuyers in Tampa, Phoenix and Las Vegas need 40% more income than last year to pay a typical mortgage payment.
This is a problem for many seniors seeking a sunny retirement but living on a fixed or limited income. Whether they want to increase in size in retirement to have more space or are looking to be closer to family or friends, affordability is always the issue. Given how quickly house prices have risen over the past five years, many readers are wondering if they’ve been left out of the price of the move entirely.
More important: seniors want to move on, but are “stuck” at home after not qualifying for a new mortgage
We’re going to make some assumptions about what you can spend. Since you’re already a homeowner, we’re going to assume that you have at least some equity in your townhouse. This should help make your next purchase more affordable. We are also going to assume that as a retiree you have a fixed income. Whatever you spend, make sure it’s affordable given your current financial situation.
First of all, how much income do you have? As a retiree, you probably have Social Security income. Do you also have a pension? Is there an annuity or investment income? Do you have a part-time or full-time job that you plan to keep? Do you have someone in your household who can provide regular income?
Next, what type of debt are you currently carrying? Do you have mortgage or credit card debt? Do you have student loan debt (for yourself or your children or grandchildren)?
What are your current expenses? What health care costs do you regularly pay outside of your Medicare check? What about food, utilities, Wi-Fi, cable, transportation, travel, or entertainment?
Once you have a good handle on your income, debts and expenses, you have the essentials of your budget. Now you need to know your credit score, as this will determine the interest rate on your loan.
If you can buy a new property without a mortgage, you will be stronger financially. If you need a mortgage, you will need to qualify like any other buyer. A lender will allow you to spend up to 36% of your gross monthly income on your total debt. So if you get $60,000 in annual income (including Social Security and a part-time job), that’s $5,000 a month. You should be able to spend 36% of $5,000, or $1,800, on your mortgage, property taxes, and insurance, plus any other debt you’re carrying.
Remember, just because a lender is allowing you to spend $1,800 a month on your total debt doesn’t mean you should. This number may be too high for you to comfortably afford other expenses you will have in the future.
The problem is that the $1,800 a month won’t go as far as it did five years ago, as house prices have skyrocketed and interest rates have doubled since the start of 2021.
More Things: What to Consider When Retiring and Refinancing Your Home
All Internet search engines offer links to mortgage calculators that you can try. If you put “mortgage calculator” in Chrome, for example, it will offer you nearly 2 million links in addition to its own, with “monthly payment” or “purchase budget” tabs.
The Chrome calculator we tried gave this result: A $300,000 30-year mortgage at 5.75% will require a monthly payment of $1,802, including $400 in taxes and fees. The calculator lets you add your state and credit score range to give you a more accurate cost estimate.
You should try several online calculators. Understand that these calculators are optimized with backlinks to mortgage companies and are designed to generate revenue for websites or browsers. That doesn’t mean you won’t get a good or fair deal. But beware and shop around.
Be sure to speak with a few different lenders (including a national bank, local bank, credit union, online lender and mortgage broker) to get a better idea of what you can afford and what type. loan they would approve. based on your income and credit history. If you need a recommendation, talk to your real estate agent or lawyer.
Ilyce Glink is the author of “100 questions every first-time home buyer should ask(Fourth Edition). She is also CEO of Best Money Moves, an app that employers provide employees to measure and reduce financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them through his website, bestmoneymoves.com.