Thursday, February 3, 2011

My Mortgage Goal

OK, finally got that second assignment out of the way! What a relief. So many formulas swimming around in my head and I'm feeling slightly nervous about the fast approaching final exam. So calculating my mortgage plan seems like a break in comparison.

Looking at the difference between a $315,000 town home and a $350,000 town home, I couldn't really see that much of a difference. So I've decided to modify the goal a little bit and shoot for $315,000 in 2 years instead of $350,000. The goal should be much more easily attainable. Even if I could afford the $350,000 place, I'd prefer to still buy the $315,000 place and have that much smaller of a mortgage.

Currently I have a 20 year amortization with a variable rate and I'm making approximately $800 in monthly payments. For these calculations, I'm going to assume that the variable rate will remain unchanged. I realize that is unrealistic, but I have no idea when the rates will increase and by how much, so I need to make some simplifying calculations in order to come up with some reasonable estimates. I'm also going to assume a 3% increase in value per year, in both the home I have and the one I want to buy. Finally, I'm going to assume about $10,000 in realtor fees based on some guidelines found on the web.

Given the above assumptions, the current home will be worth approximately $220,000 and the desired home will be worth about $334,000 at the end of year 2.

If I was to leave the payments as they are, at the end of two years, I should have approximately $143,000 remaining on the mortgage. Leaving a difference of $69,000 (less realtor fees) as the down payment for a new home. Which would be a 20% down payment on a $295,000 home ($59,000/20%). So, that doesn't quite get me to my goal.

I think I can comfortably afford to increase the monthly payments to $1,350. So, let's see how that changes things.

The mortgage at the end of 2 years now becomes approximately $129,000. That leaves $73,000 for a down payment after realtor fees. Assuming that is 20% of the purchase price, the price of the new home is $365,000. That leaves a bit of a cushion for rate increases and possibly renovations of the new home.

This may look pretty straightforward now, but I had to do a lot of re-working on this article to come to this conclusion. I'm definitely seeing the need to have a plan in place to get to where I want to go. I struggled with several aspects of this, but I'm now pretty happy with the result. According to conventional wisdom I should be able to afford $2500 a month on the mortgage, but I'd have to change things drastically to make that happen.

OK, another goal set in motion and the payments are already increased. Onto the next goal.

Love to hear your thoughts and stories.

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