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Apr 23 2009

How much can we spend on housing?

I’m going to figure out how much I think we can afford, which I can almost guarantee you will be a lower amount than what the lender will say we can get.
We want to make sure to have enough money to save with each paycheck for things like home improvements, maintenance, saving for another car someday, saving for travel, furniture, Johnny’s college and all the other things we could want.
Our current housing expenses:
  • Rent $770 (this will go up to $790 in June. If we go month to month on our lease, it will be an additional $50 per month).
  • Laundry $30-40 per month
  • Electric $80 is the “budget bill” amount
  • Renter’s insurance $105 annually, or $8.75 monthly
  • Total: About $920/month on housing-related things. This figure is with our new rent increase and not with the month-to-month lease. 
With those expenses we live comfortably with room to meet our savings goals. We don’t feel deprived. If we want something, we budget for it and buy it. 
I do think we can increase how much we pay for our overall housing costs. You see, right now, we’re in “save for down payment” mode. 
Once we actually get a house, we won’t need to save for a down payment, since that payment would have already happened, ya know?
I think we can have our overall housing costs at as much as $1,300 per month and still be reasonably comfortable. Here’s what I’m including in those housing costs:
  • Mortgage (principal and interest) $525 
  • PMI $60*
  • Property taxes about $250 per month depending on municipality and assessed value. Insanity, I tell you.
  • Homeowners insurance $50/month? Help me out, what number should I include in my preliminary estimate?
  • Gas & electric $250/month with a “budget bill” plan. This will vary by house. I will request to view utility bills for summer and winter for houses listed for sale. Pittsburghers, am I on target? I do know that winters can produce $300-$400/month gas bills in an older house around here.
  • Water & sewer $50 
  • Trash $15
  • Maintenance $100 [Is this reasonable? We'd set aside money each month to put toward maintenance, so it wouldn't necessarily be spent each month. Some months would be more, and of course we have an emergency fund to cover crazy things like an exploding water tank or something]
  • What else?
Total = $1,300
* When I spoke with a loan officer yesterday, I was told that we qualify for an FHA or a conventional mortgage. With the FHA, we could expect to pay around $40 per month in PMI and around $60 per month with a conventional, based on her calculations. 
If we can get a mortgage at 5 percent interest, we can afford a house around $100k to $105k, assuming my assumptions are correct. This will vary, depending on the specific property taxes of the municipality and the utility costs.
I told the loan officers that I thought $105k was our upper limit, and they approved us for the amount. They told me that we could probably qualify for a lot more, but I wasn’t interested to find out how much. No need to be tempted, since I know what we can comfortably afford — not them. And, I wouldn’t want our real estate agent to know we qualify for more either. Don’t show me what I can’t afford, lady!
So ah…to all the people who say when you rent, you’re throwing away money, I say look at how much money you’re throwing away when you buy. Mortgage interest, PMI, property taxes, more expensive homeowners insurance, closing costs, maintenance and all the extra utilities you’re on the hook for … goodness. Seems like you’re “throwing away” just as much if not more with a mortgage in the early years. The benefit is that equity that someday you might be able to see again, if things go right.

One final point: If we increase our monthly expenses by $400 or so, as I’m predicting we might, we’ll need to increase our emergency fund by $400 per month as well. For a six-month emergency fund, we’d need an extra $2,400.

Additional related posts:

  1. Forget saving 75% off–I just want to spend the least I can
  2. How much time do you spend couponing?
  3. Budgeting gave me the permission to spend



18 Responses to “How much can we spend on housing?”

  1. The only number I see there that is questionable is Maintenance. We budget $150 a month, but go over very, very often- but we’re living in a 100+ year old house. depending on what sort of house you get, there may be fewer “projects”.

    If you buy in a neighborhood, consider Homeowner’s Association fees. We’re not in one, so I have no ballpark for you :) Also, do you want to include room in your budget to over-pay on your mortgage, to get rid of PMI quicker?

    I wouldn’t recommend actually using the utility’s “budget billing” program- it’s nice in theory, but you can be overcharged or end up with a huge bill at the end of the year to make up the difference.

    We did increase our emergency fund when we got into a house- when you figure out your actual house expenses after a few months, adjust accordingly.

    And, what you say about the myth of “equity” is true. I just consider our Interest+PMI+Insurance as our “rent payment”, and it’s a nice bonus that we’ll be able to get some of the money back when we sell, but actually “building equity” is slow-going and overhyped.

  2. Thanks for sharing your maintenance costs. The houses around here are OLD, and though we might not get a house that’s 100 years old, there are still a bunch that we are looking at that are 50-90 years old.

    What sorts of projects have you taken on?

    I don’t do the budget bill now. I do my own version by setting aside the money when we have a low electric bill. This winter was much worse than last because we had more colder days, but we also had our apartment warmer because it would freeze my baby’s toes off otherwise. :)

  3. I am 47 years old and have never had a home. I have always wanted one but never had one. Then all of the sudden it has dawned on me, society makes us want homeownership but is it really the best thing for us?

    Your numbers without all the information comes up to $1,300 per month and let me tell you in owning a home there are a ton of things that can and will go wrong and many, many, many things require $$$$$. So as you say that number is likely low. The apartment would cost you around $920 to stay put we often look at rent increases as a reason to move on and this is the main reason we all wish for home ownership.
    There are ways around this, get a lease with a right to renew at the current rent price. These are standard in a number of areas and are renewable up to three years. This means the main desire to own a home is met in this one simple clause, loose all the headaches of homeownership and gain all the benefits.

  4. I’ll agree with Joanna, the Maintenance number is probably a bit low, especially if you’re going to be buying an older home. There’s always *something* that’s getting near replacement time in an older house. For example, our furnace is newer, but the water heater will need to be replaced this year. We just had the house painted last fall, and then my husband tells me that we’ll need a new roof in the next 5 years! Yes, it’s expensive, but I love home ownership! There’s a lot of pride (the good kind) that comes with owning a home :)

    I live in Wisconsin, not Pennsylvania, but the homeowner’s insurance and heating estimates seem a little high. Our homeowner’s insurance is $450/yr on a $140,000 house. Our heating bill is $250 *at the most* in the winter, so it probably averages throughout the year more in the $150-$175 range. But, again, that’s Wisconsin. Hopefully a Pittburgher will chime in with accurate numbers for your area :)

  5. …oh, and good job and doing your own figuring and not letting the mortgage broker tell you what you can afford! I think that means you’re smarter than the average American ;)

  6. Kacie, has your loan officer talked with you about doing something like an 80/15/5? You get a first mortgage for 80%, second for 15%, and then you put 5% down to avoid paying PMI. I know when we bought our house that was an option. If you buy an older house and are going to do renovations, I’ll come help paint! ;)

  7. Kacie, you will really good credit to qualify for a 80/15/5. They don’t offer them unless you ask. However, it’s basicially a first loan at say 6% and a second mortgage at 9 or 10%. So you have figure in the added cost. We got a 80/10/10 when we purchased our second home in NJ it was a blessing. We didn’t want to put down 20% it would have wiped us out financially and we bought way under our approved amount. We refinanced within 5 years and now have a 20 mortgage at 5 3/8% which will be paid off in 7 more years. We can’t wait. Also when you get enough equity in your home you may be able to get out of paying PMI. We did on our first house but the lender is not happy about sharing the information. Just keep on top of it!

  8. We also did an 80/15/5 loan and it worked out beautifully for us. The 15 started as a HELOC, then we refinanced to an HEL that actually had lower interest than our primary mortgage. We were paying it down pretty aggressively, but when we refinanced our primary mortgage for an even lower rate, we rolled the HEL into it and continued to pay extra towards the principal.

    Choosing a mortgage, then choosing if and how you want to pay it off is such a personal matter. There are tons of options, so it really pays to do your research (and you’re doing a GREAT job so far)!

  9. These are some ouf our maintenance costs just this year so far:
    washer has broken twice but hubby has been able to fix himself $100 in parts.
    Water heater kicked the bucket $550 for new one and hubby to buy parts to replace it.
    Lawn maintenance $250 per year. but lawn mower likely to be kicking the bucket soon (10 yrs old), estimated $1200 for a used one.
    Fence maintenance: $250 to paint it again and another $200 to replace some posts that need to be replaced.
    Siding: $550. To replace small section that blew away back in february.. So far this year we’ve had $1800 in actual expenses and it’s only April. There will also be landscaping expenses in the early summer. I think $100 a month it’s too late to build an adequate fun for unexpected home expenses without having to dip in your emergency fund.
    Also, here are some commong expenses as first time home owners:
    lawn mower (if you have any sort of backyard)
    snow blower (or shovel) depends on how bug area and how much snow
    tools: if hubby is handy and even if he is not he will need to get more tools for fixing things around. if he’s not handy then $100 a month is def. too low. :-)

    Mercedes

  10. see if the seller will throw in a home warranty- that way if anything major breaks down in the first year you are covered!

  11. I’m also from WI and have lower winter bills like the other poster. $250 is the total of elec and gas at the most. Some imp details: we keep the heat at 68/67 during the day (when someone’s home) and 55 at night (only a few hours as we have a night owl and a morning lark in the family). We also have a 110 year old house. And the heat doesn’t got much upstairs (IE, we do not keep the bedrooms at this temp). We do use space heaters as nec but not a ton. We do have new windows, but ketp the heat lower before we replaced them so that kind of off set things I think.

    We also did the 80/15/5 to skip PMI. It was worth it. And we paid off the 15 one within 5 years. (which was great because then we had 20% equity which we needed when the hold house ended up have lead paint all over and our kiddo needed it all abated) But anyway, I’d look into that. My DH did not have excellent credit, although I did, and we easily got one.

    Be sure to also think about the yard and how the house is situated: You can change the interior of the house, but you can’t change direction nor where it sits ont he lot. I hate our north facing house. Only one south window (in a bedroom) so we can’t use the sun to heat the house in winter much. But we have a great side yard, 1/3 of which was turned into a garden. It was also already fenced, which was great when we got dogs and kids.

  12. Wow! The costs are so much lower there!!! NY is just ridiculous! Our rent is $1350 for our house and thats cheaper than a one bed apt nearer Tim’s work (and the city). And we live in an old, drafty house and had two utility bills that neared $500! And I keep our house at 65!!! And this house has needed a lot of work! Last summer the landlord had it painted and a new roof put on. And one day Tim was in the shower and about 20 tiles just fell off the wall! So crazy things can happen, but if you have some wiggle room I’m sure you’ll be able to take care of it.
    Can you figure out an amount for your area where you’re throwing away more money in rent than if you buy? In theory if you’re putting more money into the house you’re hoping it pays off by selling for more than it’s worth. Ya know? But what’s the “breaking point”?

  13. I think your homeowners may be too high. We pay about 800 dollars a year for homeowners and we have a good sized home with a large lot. I think you will find your number may be lower. When you are ready to put a bid in on a particular house, you can call your insurance agent – give them they address and then can run numbers for you.

    I also agree that heating may be too high. With a few minor upgrades – your basic $19.99 programmable thermostat, sealing leaky windows and door drafts, new filter in the heater – you can control costs.

    I think you could need more with maintenance. We’ve had parts break on our heater, the township flagged a broken pavement and we had to get it replaced, the wind caught the door and blew it off the hinges – odds and ends are always happening. But that is what you’ve got your emergency fund for….

  14. In the year and a half we’ve lived here, we’ve replaced a tile floor, painted almost everything, replaced both a storm door and an exterior door, replaced a couple light fixtures, built a bed & bookcase, added some other shelves, added garden edging, installed an invisible fence for the dog… little stuff that adds up. Start-up costs include buying appliances and yard/lawn equipment that you have no need for in an apartment. This summer we have a big project planned- re-siding the house- the vinyl siding is really old & has holes in a few places, hence our pipes freeze in the winter….

    I have a very handy husband, so all these things he’s done himself or with help from his family, so that’s saved a LOT of money, but the weekly trips to Lowes are still a reality.

  15. As far as heating bills, how the house is heated has a lot to do with it. Back in PA we had an forced air oil furnace and was much cheaper to heat than out friend’s house. They had steam radiant heating system that is so inefficient. They spent tons of $$ heating their old home. So, type of heating system house has is surely something important to consider.

    Mercedes

    PS. sorry about typos in earlier post.

  16. I am so jealous! A condo in Eastern PA where I live starts at $140k! And then you have to factor in HOA cost. My husband and I would love to purchase a home, but we have to kick our debt to curb first.

  17. Hi Kacie,

    It sounds like you and your husband are really taking the time to plan this major life change. Kudos to you!

    We live in a 109 year old farmhouse and our home owner’s insurance comes at $58 per month. A lot of the cost is because we live out in the country away from any fire hydrants. The insurance comapany is counting on a total loss if we ever have a fire — it will take too long for a pumper truck to get here.

    Some ideas for your home maintenance budget —

    My husband has a home maintenance and repair business and he deals with repair issues all the time. Most older (and many newer) homes have a lot of what you would call “defered maintenance issues”. This mean stuff that should’ve been fixed years ago is allowed to go on decaying and causing problems (think of an eternally leaking sink). Most older homes, unless they have been very well maintained and updated need a LOT more than $1,200 worth of maintenance each year.

    Don’t let that scare you, though. Just be really aware of the mechanicals and structure of the houses you are looking at.

    Take Care,

    Trixie

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Hey! I'm Kacie, wife to Shane and mother to Jonathan (5), Vivienne (3) and Amelia (born September 2013) . I write about my family's finance: how we save money, improve our spending, and plan for the future.

I hope I can inspire and encourage you to improve your situation. See disclosure.

I'm adopting a much slower-paced posting schedule, and treating this as a hobby blog now.

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