How much cash do I need…

This page is also geared more toward first time buyers, and by necessity, contains some math…

When buyers ask the question, “How much cash do I need…”  I’m never sure if they intend to determine if they have enough cash to make the initial purchase, or if they have sufficient cash flow to live comfortably in the home.

By living comfortably I mean paying for the house, the upkeep on the house, all the utilities, other non-optional expenses (such as childcare, medicine, vehicle expenses, food, etc), and still having funding left over for savings, entertainment, and vacations.  You know…  life after the purchase of a home.

Being “house poor” is not fun.  You have a house, but not much of a life outside of it.  The bank may say you can afford a $240,000 mortgage, but you have to remind yourself that the bank is not deducting from your income and assets funding for retirement, a vacation to the beach, or replacement of a totaled car.  Again, because this is very important to understand, when the bank approves you for a mortgage, they are only taking into account your ability to repay that mortgage out of your reported income.  They are prioritizing payment of that loan.  They are not making deductions for life’s other important things.  This, again, is why I recommend not maxing out the bank’s offer (read more here)…

I only get paid if you buy a home, but sometimes the best decision is to strategically delay that decision.  Now I’ll take off my wise old uncle hat and get down to numbers (afterall, I am a C.P.A….)

Again… how much cash do I need…  Well honestly, it depends…

  1. It depends on the purchase price of the home.
  2. It depends on the percentage of down payment you intend to put down.
  3. It depends on how many inspectors you intend to hire.
  4. It depends on how much your attorney charges you.
  5. It depends on if your loan has “points” or “origination fees,” and,
  6. It depends on when you buy your home.

Here are two examples of a $200,000 purchase (you may have to zoom in).

  • Option 1:  Conventional financing with 20% down payment, no PMI, and 3% 30 year loan.
  • Option 2:   FHA loan with 10% down, PMI, and 3.25% 30 year loan.

Estimate of Funds to Purchase Comparison

 

 

Option 1 requires $20,080 more upfront cash.  Not a small chuck of change.  But it shows that depending on the choices made, the upfront amount you need to purchase a home can vary greatly.

But this answers only half of the “How much cash do I need…” question.  The other half is “once I buy the house, how much will my monthly payment be…”

In this example, monthly payment includes mortgage principal and interest, PMI, and an escrow for taxes and insurance.  The assumption for taxes is $200 per month, and insurance is estimated at $750 per year.  These numbers can easily be changed in the underlying spreadsheets to meet your specific circumstances.

The difference in monthly payment for each of these options is as follows:

Comparitive Monthly Payment Calculator.numbersOr $206 per month (or $2,472 per year, or $74,160 over the life of the loan).

The choice is yours…  save more now and pay less later, or pay less now, and pay more later…  There is no “right” answer.  Only a right for you answer… it’s easy for me to run all sorts of numbers to help you decide which is the right path for you.  However there are some universally agreed to advantages to putting down at least 20% including the following:

  • If you have to sell the property, most likely you will not owe more than you will realize from the sale (called being “upside down“),
  • 20% down is the threshold at which Private Mortgage Insurance is not required,
  • lenders tend to offer lower interest rates for higher down payments (saving you money over the life of the loan), and
  • as shown in the illustrations, your monthly payment will be lower.

I can change the figures on these spreadsheets, and others, to help answer any question you may have.  To ask me specific questions, or just to pick my brain, either call or text on 413-564-9468, or email me at ejeffreyklotz@gmail.com.