How Much Should You Borrow Based on What You Want to Pay Monthly

So you hear a lot about relative cost to rent versus cost to buy, but really, you're thinking... What can I afford?  Or, more likely, how much can I borrow but still pay the same amount in mortgage as in rent?  Today I want to show you a quick and dirty way to figure that out.

First, take your monthly amount of rent. Let's say $3000 for a round number.

Then, you need to subtract something to represent the maintenance (for a coop), or common charges + property taxes (for a condo) that you might be paying. This amount varies a great deal based on the size of the property that you are looking at. Common amounts are $500-$800 for a one bedroom or $800 - $1000 for a two bedroom, and go up from there. 

Let's say we're looking at a one-bedroom and want to be conservative, so we'll take $800 as the number. $3000-$800=$2200.  Notice we didn't include insurance. This is because homeowners policies are not a very big jump from renters insurance policies, so we'll assume that cost remains the same. (If you don't have a renter's insurance policy, you should seriously consider getting one up - your belongings are not covered by the landlord's insurance policy if they are stolen or destroyed).

So we have a principal and interest payment of $2200. Now, we look at the current interest rates. Your bank's website can provide those to you. Keep in mind two things: 1) interest rates change daily and 2) when the economy is good, interest rates tend to move up.  So if you are doing this exercise for a future purchase six months from now, you might want to add .25%-.5% just to be safe. (of course you can always buy the interest rate back down if you have the cash and the desire).

At the moment I am writing this, I just clicked over to the Bankrate.com website. Bankrate is an independent web site that publishes information about mortgage rates across many banks and regions of the US. Keep in mind that New York rates may be different from the national average. Coop loan rates are usually higher, as are condo loans, though somewhat less so.  Indeed, Bankrate gives me a range of 3.97%-4.89%, while the national average is listed as 4.29%.

Let's again be conservative and use 4.75% as our rate. Now, we flip over to http://www.realestate-calc.com/Mortgage_Calculators/Mortgage_Amortization.asp, where we find a nicely laid out table of the cost per $1000 borrowed. Scroll down to 4.75 in the first column, then slide your finger over to the 30-year column (all the way to the right). The number is $5.22. That means for every $1000 you borrow at 4.75% interest rate, your monthly payment is $5.22 for a 30 year self-amortizing loan (meaning when you hit the last payment of the 30 year loan, you have paid off the loan).

Ok, so now we take your monthly rent payment less allowance for monthly maintenance fees (remember that? $3000-$800=$2200), and we divide $2200 by $5.22. So in other words, we are seeing how many thousands of dollars we can service with the $2200 we already pay.  The answer? 421.456. Just multiply that by $1000 (or  move the decimal over 3 places) and you'll get $421,456, which is the amount of mortgage you can carry, plus maintenance charges and (if condo) property taxes.  

Now let's take that one step further. You generally need a 20% down payment to get a mortgage. Most coops require that at least 20% be put down. Condos might only require 10% (some coops do as well, but banks have become more stringent since 2008 and it's harder to get a 90% mortgage on a coop than it once was).

The amount of mortgage that we figured, $421,456, represents 80% of the total cost of the property that you can purchase. This is the maximum loan to value ratio (or LTV) that most loans allow. Dividing that number by four tells us what 20% of the total price must be. Answer: $105,364.

To get 100% of potential purchase price, we multiply that number by five. (because 5 x 20% = 100%). So $105,364 x 5 = $526,820.

So, the total purchase price that you can likely afford while still keeping  a similar housing payment to what you pay in rent is $526,820. This assumes a down payment of $105,364 (the 20% number we calculated earlier).

In the hottest parts of Manhattan, this will get you a studio or a small one bedroom. In northern Manhattan, this will get you even a two bedroom. Even in Brooklyn, you can score a very nicely sized one bedroom or even two bedroom depending on area (though probably not in Williamsburg, alas).  So if you feel you can't afford to buy, think again. You can afford to buy if you can afford to rent at Manhattan's prices.

Homes Priced Too Low??

While the real estate markets across the country appear to be stagnant, two articles have highlighted the fact that in New York, and certain other local markets across the country, the markets are doing quite well.

The first article appears today in the New York Times on the front page. It's titled "Can't Sell Your Home? Maybe It's Priced Too Low". When I saw the headling on the print edition of the paper, I thought it was going to be some kind of critique on various pricing strategies. Instead, it turned out to be a broadly-focused (if that's possible) article on how highly-priced homes are selling very well, and still selling above asking prices in some cases, in New York, San Francisco, Seattle, and other areas where there are high concentrations of affluent people. It notably excepted Washington DC and San Diego from this trend (much to my mother's dismay - she's a real estate agent in Washington DC).

The article offers little explanation for this trend except that people who were already doing well for themselves seem to be doing better. I'm not sure if this is true, but I can't think of a better explanation. It stands to reason that someone who had enough money to have a lot of investments is probably going to be doing pretty well right now. In addition, the article mentions foreigners coming in and buying homes in areas where they may travel or work often, such as New York or San Francisco. It's hard to believe that a $3 million condo would look like a bargain, but if you make allowances for the exchange rates, taxes in their native countries, and the fact that certain countries put restrictions on foreign ownership of property, it starts to make more sense.

The second article appears in this month's edition of The Real Deal, the New York City real estate trade publication, titled "Residential Market Weak In the Middle", discusses the same trend in Manhattan. It appears that in addition to the typical high-end buying that continues to push average and median prices up in New York, lots of first-timers are jumping in feet first as well. So, you have lots of activity under $600,000, and lots over $5 million. What's in the middle? Most of the new construction condo price points. The larger choice there seems to be causing a little slack in the sales prices and timelines, but one look at another article "New Condo Filings Fall Off" suggests that in a year, this might not be the case. Apparently, attorney general applications for new offering plans have fallen by 50% (2800 units as opposed to nearly 5000 a year ago). What does this mean? It means that there is not as much competition coming online for the condo units that are currently on the market, or about to come on the market. In market-speak, Manhattan will be able to "absorb" the current units, and that may put us back where we were in terms of low inventory two or three years ago. Co-op units are already extraordinarily low - people who are not in the market for new construction have been facing bidding situations for several months now, since the beginning of the year.

Now, this doesn't mean we will get back to the hot hot market of 2004-2005. That was insane. For one thing, a lot of purchasing power rides on the interest rates and the economy. Interest rates popped up a bit a couple weeks ago (affecting a couple of my buyers in the $400K range), and that can affect the monthly payments buyers can afford. But overall, the New York market seems cautiously optimistic that values will hold for the near future, and that gives buyers enough confidence to go ahead with their life plans.

As always, please email me to discuss!