Deciding Between Rent And A Mortgage- How Much House Can You Afford?

Christian: [0:03] Welcome to another episode of the Awesome in Seattle podcast. This is your host Christian Awesome with the Awesome and Awesome group, and I am joined today by the lovely Joanna Beecher-

Joanna: [0:12] Hi … Speaker: of the Awesome and Awesome group as well She is my cohost and a real estate agent, real estate broker, I should say, with me on the Awesome Nossum Group. So Joanna, thank you for joining me. It's my pleasure.

Christian: [0:24] Today, we are doing an episode for you homebuyers that have never bought before and are unsure what you can actually afford. So we're gonna run over some of these numbers based on what people can pay for rent and what that equates to purchase price. So we got a few different scenarios. Some are lower end, some are higher end. Obviously, this is gonna be more than some people are comfortable affording, and that's just the way it is with rates being this high. It is what it is, so bear with us, but we're gonna give you the real numbers as of, you know, mid-June, which is when we're recording this. So the main questions we're gonna answer are, can I afford to buy a house right now, and what kind of property can I afford? So let's work backwards-

Joanna: [1:11] Okay … Speaker: and go through this. Nice. Okay. Well, I'm excited to jump in and go over this because it is such a common question that we run into, and just most people don't realize they can actually afford to buy a house.

Christian: [1:24] Mm-hmm.

Joanna: [1:25] You know? That

Christian: [1:25] is the biggest fear and, I guess, myth. Most people f- assume they can't.

Joanna: [1:31] Yeah.

Christian: [1:31] And I think the biggest thing that most people don't realize, and this is what we talk about at every single Beers and Home Buying class every month, is that the biggest myth in real estate is that you have to have a 20% down payment. It just ain't true.

Joanna: [1:44] It's not true. Yeah. It's not true, and in fact, it's between 5 and 7%,

Christian: [1:49] you know? That's the most common. So 68% of homebuyers, all homebuyers, not just first-time buyers- Not just first time … all homebuyers have a 5 to 7% down payment.

Joanna: [1:58] Yep.

Christian: [1:58] In the Seattle metro area. Like, we're not talking nationwide. We're talking about the Seattle metro area.

Joanna: [2:03] Seattle metro area, the hot area that everybody's terrified of. Thinks

Christian: [2:08] that

Joanna: [2:08] they

Christian: [2:08] can't afford. Don't be

Joanna: [2:09] terrified.

Christian: [2:10] Yeah, you don't need to be. That's why we're here- Yes … to help. All right- So- … so let's go over this. Let's start.

Joanna: [2:13] So you've got benefits to buying, right? Mm-hmm. Let's go over some of what those benefits are because I think monthly payment and down payment aren't the only financial aspects of this that we're- That's very true … gonna talk about. That's very true. So we've got tax savings, you guys. Mm. This is a benefit. Buying gives you a ton of savings. Some people calculate that savings and put it towards a higher monthly payment.

Christian: [2:37] Yeah, because when you calculate the tax savings that you're getting from your mortgage payment- Mm-hmm … which you can deduct as of, again, June 2024, you can deduct your interest payment, the interest portion of your payment, and potentially PMI if you have PMI, which is private mortgage insurance. If you have less than a 20% down payment, you're gonna have some of that. Yep. Generally around 150 to $250 a month. But like we talk about in the class, it's often well worth paying that versus trying to save up for that big 20% down payment to- Just keep running- … eliminate that private mortgage … Joanna: and try to catch up. Yeah. And it's, you know- Which most people just never buy because of that, so

Joanna: [3:15] Yeah, don't get into that trap.

Christian: [3:17] Um- What

Joanna: [3:17] other,

Christian: [3:17] what other benefits are there?

Joanna: [3:18] Well, you've got overall wealth building as well. That's a big one. Homeowner wealth is 40 times, 40 times-

Christian: [3:24] Four

Joanna: [3:24] zero … I just wanna say that, four zero times higher than renters.

Christian: [3:28] Yep.

Joanna: [3:29] Ouch.

Christian: [3:30] It's, it's massive. That's- I know-

Joanna: [3:31] Yeah … Speaker: when I bought my first house, and then all I did was live in it for, you know, two, three years, and then I was like, "Well, I'm gonna go buy a different one," and I looked at what my house was worth at that point, and I literally did nothing other than live there and do the basic maintenance of it. I was like, "How did I just increase my net worth by $200,000 by doing nothing other than living here?" Yeah. I mean-

Christian: [3:55] That's the beauty of real estate … Joanna: it seems kind of just the smartest thing you can do, to be honest. It really is. Another benefit, I mean, if those two weren't just- Good enough … Joanna: the best, you lock in your payment going forward, right? Mm-hmm. So when you rent, you have to anticipate, you know, what your monthly payment will increase to every year- Mm-hmm … or if you move to a different place. Mm-hmm. And that usually always increases over time. Yep. But when you buy, you lock in that payment rate. Yeah.

Joanna: [4:24] Right? Yep. And you avoid those increases. It helps you plan better. Yep. There's so many benefits to just having that knowledge in place for you, your peace of mind, and yeah, future planning for your budget- Yep … and your money.

Christian: [4:38] And that's why you love to get a 30-year fixed mortgage- Mm-hmm … because you're locking in that payment. The part that can change, it's not gonna be a lot, and it's not gonna be enough to change your whole outlook on if you can afford the house, but the two variables that can change each year are homeowners insurance and property taxes, and they do tend to go up. Property taxes are weird, and they're often delayed. Yeah. Sometimes they actually go down. Like this year, couple of my properties, I got the little postcard in the mail that says, "Property taxes for this year are," and they went down. So I'm like, "Sweet, my payment actually went down this time."

Joanna: [5:11] Amazing.

Christian: [5:12] Yeah. So that's, uh, those are the two variables that you do need to pay attention to. So let's look into numbers and sharing what you can actually afford to buy, and the process of figuring this out- Whether it's feasible or not for you starts with asking two main questions. How much can I afford to pay each month? And often your- what you're paying in rent is a good indicator, but sometimes there pe- people are comfortable paying a little bit more than rent because they no longer have to set aside savings for that down payment. So that's question number one, how much do you want to afford or can you afford each month? And two, how much cash do you have for a down payment? Like we said, 20%, that's the biggest myth in real estate. That was a myth that basically our parents, a lot of parents, passed along to their kids, 'cause that's the way it was, and that was the only way it was.

Joanna: [6:05] And there's a big reason for that.

Christian: [6:07] Mm-hmm.

Joanna: [6:07] Home prices were not nearly what they are these days- Exactly … in comparison to what you bring home for pay.

Christian: [6:13] Yep.

Joanna: [6:14] So you c- like, if you're thinking you have to find 20%, but it just hasn't The housing prices aren't the same-

Christian: [6:22] Mm-hmm … Joanna: as they were. Yep. So- Exactly … Joanna: it's almost unrealistic for most people. Yep. Now, we keep saying 5% as the down payment. That doesn't mean you have to put 5%. No. There are plenty of first-time home buyer l- programs out there to help you get into a loan. There are 3% down loan programs. There are 3.5% down loan programs. There's 5%. There's 10%. There's 15%. And there's literally b- between 5 and 20%, you could have any-

Joanna: [6:52] Anything

Christian: [6:53] percentage that you want. So if you're like, "I have $100,000," and it equates to 11.6% down, totally fine. You can do that. So that's, that's the two big things. And again, I wanna reiterate, it's not what you can afford, it's how much do you want to afford each month. And this is where we love to work with some specific lenders that help you work backwards. So they'll take these two que- or these two questions, "How much do I wanna spend each month," and, "What's my down payment?" And they help you figure it out by working backwards how much you can actually afford. Mm-hmm. Because we see this a lot, where people come to us, they haven't been to the class yet, usually, 'cause they would learn this at the class, the Beers and Home Buying Class. It's totally free, beersandhomebuying.com (opens in a new tab).

Joanna: [7:38] Super fun.

Christian: [7:40] Where they go, "Hey, I went on Rocket Mortgage or something online, and it said I'm already pre-approved," or, "I talked to my bank, Chase or BECU or whatever, and they said I'm approved for $900,000." And I'm like, "Great. That doesn't mean very much to me." And they're like, "What? What do you mean? They said I'm approved." Well, there's a lot more that goes into it than just adding some quick numbers into a spreadsheet and spitting out what you can af- afford. So this is why working backwards is so much more important. We have lots of podcasts that go into this much more in-depth, and we can shoot that over, or you can just search for them.

Joanna: [8:19] But let's- And you can also schedule a strategy session with us.

Christian: [8:21] Yes. That is where- … scheduling a strategy session with us really does come into play because we will help you figure out what you can afford, not what you should afford or what the, what the bank says you can afford. Right. So let's go into a case study. So let's pretend that you can, uh, or you want to buy a $500,000 house, and you're paying around 3,000 to $3,500 a month in rent currently. Now, if you move that over to a mortgage payment instead, you could actually buy a $500,000 house with 5% down. 5% of $500,000 is only $25,000. It's not a ton. Now, it's a big chunk, obviously, but it's not as much as most people think. So, the nice thing is you can actually have that down payment as gift from family or friends, it could be cash that you have, it could be paying or selling some stock or RSU bonus or whatever in order to get that. So, on top of that down payment, you do have closing costs. A lot of that closing cost is pre-paying for property taxes and insurance for numerous months, but the rest of that is for paying for the loan. You're not usually paying us as your buyer's agent in that situation. I say usually, because sometimes, most of the time, the seller's the one paying us, and we can go over that in a different episode, which we have already.

Joanna: [9:45] Yes, we already have.

Christian: [9:46] Which… Yeah. I think that's called Buyer Brokerage Service- Agreement Agreement and What You Need to Know or something like that.

Joanna: [9:51] Yeah.

Christian: [9:51] So closing costs, again, are about 2%-ish, usually around 6 to $8,000, give or take, for that. That's on top of your down payment. So in reality, if you're doing 5% down on a $500,000 purchase, you'll need around 31 to $33,000 for your total out-of-pocket cash. If you have a larger down payment, that can increase, and that will decrease how much you pay every single month. But what kind of property could you even get for 500 grand? Well, that equates to, in the Seattle area, a condo and maybe a townhouse, depending on which neighborhood you're in. Mm-hmm. You're probably gonna be more, in the Seattle specific area, you're probably gonna be more in South Seattle for the townhomes. And depending on how big of a condo, you could really be anywhere in Seattle. Yeah. There are some condos under $500,000.

Joanna: [10:42] There are, yeah.

Christian: [10:43] This could also be, you know, a smaller house- Yeah … outside the city. Yeah. Yeah. Yeah. Depending on where. Obviously, east side's gonna be more expensive, but if you go more in the suburbs further out, you might be able to afford something more.

Joanna: [10:54] North, south, west.

Christian: [10:55] Mm-hmm.

Joanna: [10:56] Mm-hmm.

Christian: [10:56] East.

Joanna: [10:57] I meant islands.

Christian: [10:58] Yeah. Yeah. Well, that's true. Yeah. Yeah,

Joanna: [11:01] cool … east would be Far East.

Christian: [11:03] Far East. The Far East.

Joanna: [11:05] Right. Spokane. No. Yeah. Um, no, that's- I don't know Spokane, so-

Christian: [11:11] No, no we

Joanna: [11:11] do … I'm not even gonna say that I do. So the next case study that we're gonna talk about is a $750,000 house bracket. So let's say you pay 5,000 or $5,500 for your rent currently. Mm-hmm. If you paid that amount to a mortgage instead, you could afford a $750,000 house, town home, whatever. 5% down on that is $37,000 cash or gift, like we talked about, and your closing costs are gonna be about 2%, around $15,000-ish, right? Mm-hmm. So again, if you have a larger down payment, this can increase your price of home that you can afford, or it can also bring down your payments per month. So what type of property can you get around $750,000 in the Seattle area? And that's gonna be, like I just said, like a town home in the city, and potentially a smaller single-family home, or maybe a new construction DADU, which is the- Mm-hmm atta- sorry, detached additional dwelling unit. And sometimes you can take your choice between the two, 'cause a lot of- Yep … times the- there's piece of property that's been bought with an older home on the front that has been split, so there's a DADU on the back and the- Mm-hmm … front home is also for sale.

Christian: [12:30] Yep.

Joanna: [12:30] Take your choice. What's your-

Christian: [12:32] Yeah … Joanna: what's your flavor? Yeah. And it, it can, actually, you can get a pretty nice house for $750,000 in the Seattle area, um, depending on which neighborhood you're looking for. Yeah. Now, it might not be- Depending on your

Joanna: [12:42] neighborhood,

Christian: [12:42] yeah … it might not be huge, but I have seen DADUs that are three bed, two bath with a garage, brand new construction- Mm-hmm for around that $750,000. So there are some really nice options out there for you. Yes. And again, that's with 5% down, plus your 2% closing cost. So you're at about $52,000, give or take a little- Yep … to buy a $750,000 house at around 5 to $5,500 a month.

Joanna: [13:09] Yep.

Christian: [13:10] Not a bad deal. All right, moving up. Let's go to the million dollar price point. So that would be if you're paying or you're willing to pay around 7 to $7,500 per month, uh, in rent. If you instead switch that over to a mortgage payment, you could buy with 5% down or around $50,000, you could buy about a million dollar house. You add a $20,000 closing cost, which really, once you get to over $750,000, the closing cost amount decreases. It's gonna be more like 10 to $12,000, not a full 2%. So instead of 20, I'd say it's more like $12,000 for closing costs. So for around $62,000 out of pocket, give or take, you could potentially buy a million dollar house- Paying around 7 to $7,500 a month That's really realistically what you can get.

Joanna: [14:04] Mm-hmm.

Christian: [14:05] What you can actually aff- or what you can actually purchase with that is gonna be quite a lot. There's a lot of homes in the greater Seattle area- Yeah … at or below a million dollars. Some are gorgeous. A lot of them are in fantastic neighborhoods. Obviously, the bigger the house, the further out you're gonna need to be, or maybe the, the less desirable neighborhood you're gonna need to buy in. But if, it just depends on what's more important to you. Is it neighborhood and a smaller house in that great neighborhood? Or is it you want a bigger house, and you're willing to have a little bit longer commute? What's more important to you? And that's what we help you figure out in strategy sessions.

Joanna: [14:41] It is so nice to be able to lay all this out, and hopefully it was helpful to those of you tuning in who are considering buying a home- Mm-hmm … or moving up to your next home. Remember, if you currently own a home and are planning to sell it, those proceeds will create a large down payment-

Christian: [14:57] Mm-hmm … Joanna: opening up your options. Yeah. Yeah, we have so many past clients that we've helped that, you know, they bought whatever they could with their first home, and it was not their dream home, and it usually never is the first time. No. But they have moved up, some of them three, four times in the last 20 years, and their net worth has increased exponentially, and they are in a much better house now in a better neighborhood, and now a lot of them have kids going to school in the neighborhood they really wanted. So they kinda planned ahead, and this is what we do with people. We help them plan ahead-

Joanna: [15:32] Yes … Speaker: to what their end goal is. If they have a specific school area or school district or school zone that they want to be in for kids, and they don't have any kids yet, we can help you get there even though you might not be able to afford it right now. We can help you plan that out. Exactly.

Christian: [15:49] Or anything, for that matter. Doesn't have to be school. It could be offices. It could be you wanna live on the lake. It could be you want a view. Whatever your thing is, we can help with that. The best way to get started if you are a buyer and you're like, "Huh, this is peaking my interest. I didn't realize all of this. This might be doable for me," so there's two things you can do. You can either schedule a strategy session with us right online, totally free, on Zoom, a half-hour one-on-one phone or Zoom call with us, AwesomeNossumGroup.com/schedule, or you can go to one of our free Beers and Home Buying classes. It's every single month. Go to beersandhomebuying.com (opens in a new tab). That's beers with an S, the drink, beer. Beers with an S and homebuying.com. You'll see where our next class is. They're totally free. They're only about an hour long. There's free beer. Some venues, we have food, depending on the venue, and it just gives you the basics of home buying and gives you that understanding and gives you a little more confidence in understanding if this even makes sense for you. So that's it for this week's episode of the Awesome in Seattle podcast. I hope you got a ton out of it. I hope you now understand that there is a glimmer of hope for you, pat- Potentially. And if there is, take one of those two steps, move your knowledge along. We are never gonna pressure you to do anything. We're just here to give the, give you the information so that you can make an informed decision. If you like this, please give us a big like, subscribe to the podcast, and we'll see you next time on the Awesome in Seattle podcast.

Joanna: [17:21] Thanks for tuning in.

Christian: [17:22] See ya.