I have a new book called Making Money Work: A Christian Guide For Personal Finance (www.MakingMoneyWork.us) which explains the “Rule of 72” and many other financial concepts.
It includes a CD ROM so you can easily calculate compound interest and lots of other complicated financial formulas.
MAKING MONEY WORK
Do You Know How Much House You Can Afford?
By Bill G. Page
Low mortgage rates over the past five years have helped to push home sales to five consecutive years of annual sales records and record sales prices. Median home values in the United States increased 32 percent from 2000 to 2005. During the same period, household incomes dropped 2.8 percent. While the housing boom in America peaked during the middle of 2005, something had to give. The National Association of Realtors projects a 7.5% decline in home sales during 2006.
The inventory of existing and new homes for sale has reached record levels. There is around a 7.5-month supply of existing homes for sale—the most since 1993. Supply and demand dictates a shift to the buyer in home sale negotiations. That puts pressure on the home seller to provide other perks to entice buyers such as paying closing costs, including extra amenities or incentives, or lowering the price of their home. Many buyers are waiting on the sidelines to see just how far home prices will fall. Local real estate competition dictates home prices and market conditions, so things can vary significantly from one market to another. According to Moody’s www.Economy.com—a private research firm—the median sales price for an existing home will decline by 3.6 percent in 2007. If that happens, it will be the first time since the Great Depression that home sale prices have declined over the period of an entire year. The Moody report projected that 133 of the nation’s 379 metropolitan areas would endure price declines. 72 areas were forecast to hit their low point by the end of 2006. Others are predicted to hit their low point in 2007, 2008, or 2009. Will that projection come true? Time will tell if the forecast is accurate.
What does all this mean for the individual homebuyer? Homes have appreciated 4.8%/year on average from 1955 through 2005 according to Freddie Mac. Even though housing prices might decline in the short term, the purchase of a home can be a very vital part of your investment portfolio.
Housing costs should be less than 30 percent of your income. Housing costs include mortgage payments, taxes, insurance, and utilities. Nationally, around 34.5 percent of homeowners with a mortgage in 2005 had costs higher than 30 percent of their incomes. Assuming too much mortgage can be one of the worst financial mistakes you can make. It can create a financial hardship you struggle with month in and month out for years in the future. By staying below the 30 percent of your income guideline, you insure financial freedom to do other things as opposed to being yoked to a mortgage burden.
The “Estimated Maximum Amount Of Mortgage Loan” or loan amount formula is:
LA = MP * (1 – (1 + i)^-N) / i
LA = Loan Amount
MP = Monthly Payment
i = Interest Rate divided by 12 (12 monthly payments per year)
N = Total # Of Monthly Payments (e.g. 12 monthly payments for 30 years is 12 x 30 = 360).
I have a book titled Making Money Work: A Christian Guide For Personal Finance (order online at www.MakingMoneyWork.us). The book comes with a CD ROM that has over 90 financial calculators. One of the calculators helps you to quickly and easily determine how much money you can comfortably afford to borrow on a mortgage loan. You input a few numbers and the calculator computes difficult formulas like the one listed above for loan amount. The book and CD ROM helps you analyze, plan and achieve your financial goals.
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