FREE Is your mortgage too big?
If you are looking for real estate in Prescott (Arizona), you have come to the right place. Welcome to NRS Real Estate, your real estate road map for the Prescott tri-city area:
Team NRS is composed of Prescott's finest real estate agents, all experienced specialists in the Prescott area. If you are looking for information about real estate in Prescott, start with some of our free resources:
- Prescott, Arizona on Wikipedia. Includes history, population, sister cities, and climate info.
Prescott, Arizona is known for many things:
- The friendly and warm spirit that makes it both "everybody's hometown" and, during the holidays, "Arizona's Christmas City."
- An outstanding range of beautiful natural environments to experience, from stunning forest panoramas in the Prescott National Forest to the gentle lake shores in the Granite Dells. Plus, four full seasons to see them in!
- A wide variety of traditions and activities to enjoy, including the World's Oldest Rodeo and the Whiskey Row Boot Race in the summer, boutique shopping downtown and a full-size mall, and much more.
Would you like to make Prescott your hometown too? NRS Real Estate has what we call our "real estate road map" to guide you directly to the perfect home for you and your family. Our experienced real estate agents are not just Prescott locals - they are veterans in the Prescott real estate market, each with specialties that make Team NRS the full-featured market leader here in Prescott.
Call us today to get started buying a home or commercial property in Prescott right away!
How Big Should Your Mortgage Be?
"You should generally assume that the amount the bank or mortgage company is willing to loan you is more than you should borrow." - David Bach, The Automatic Millionaire Homeowner
With U.S. home foreclosure rates at their highest levels in decades, there is a lot of buzz going around about "safe" mortgages. Responsible Americans, from young couples considering their first home purchase to veteran homeowners, are re-assessing their mortgage situations - in this age of predatory lending, they want to know if they are safe. So what is a safe mortgage, anyway?
A safe mortgage is a mortgage you can pay for not just when times are good, but when times are tough as well. Ask yourself: If my best-case financial scenario didn't work out and I had to fall back on Plan B, could I still realistically make my mortgage payments?
You know you are in a safe mortgage when:
- In a two-income household, you could make the payments even after losing one income.
- You don't have to skimp on food, toiletries, or other essentials just to make your payments.
- You aren't relying on a promotion or your Christmas bonus to get your payments "back on track."
Part 1: Debt-To-Income Ratio
So how do you determine how safe you are? The most important measure is your Debt-To-Income ratio, or DTI. This ratio simply measures your expenses as compared with your pre-tax income. The smaller your DTI, the healthier your finances are (a small DTI means low expenses, high income, or both). Today most mortgage lenders use a two-part DTI, where the "front end" is limited to housing-related expenses, and the "back end" is your true DTI.
From the Great Depression until the 1970s, the maximum allowable DTI was widely recognized as 25%
(in today's terminology, a back-end of 25%). Anything higher than that was considered dangerous for both the consumer and the lender. Since the banking deregulation that began in the 1980s, that standard has increased significantly (and so have the number of bankruptcies). Even the most conservative lenders claim that it is only the housing-related front-end that should be limited to 25%, not back-end total DTI. For example, conservative lender Fannie Mae suggested in 2004 that, "housing expenses should not represent more than 25 to 28 percent of gross monthly income." Today, back-end DTI as high as 41% is often considered acceptable by lenders - an increase of 164% over the traditional American DTI limit of 25%. But just because a lender will let you do something doesn't mean it's a good idea - in fact, the opposite is true.
The Progression of Maximum Accepted DTI
- 1970s: NA/25 (Before deregulation of Depression-era restrictions)
- 1980s: 22/28
- 1990s: 28/36
- 2000s: 33/41
Currently, millions of Americans are exceeding safe DTI limits even by today's inflated standards, and it is often because they have been encouraged to do so by profit-hungry lenders. After all, the longer you are in debt and the more you owe, the greater your lender's profits will be. Don't allow your lender to push your DTI ratio into dangerous territory just so it can make an extra buck. You should walk into any mortgage discussion armed with the knowledge of what constitutes a reasonable DTI for your own household. The old DTI limit of 25% is a good rule to live by, but the safest and most precise method is to work down to the right mortgage size from the top of your complete financial plan. That doesn't have to be as complicated as it might sound.
Part 2: The Big Picture - Your Financial Plan
In All Your Worth. Harvard Law professor Elizabeth Warren and Wharton MBA graduate Amelia Tyagi describe a financial planning method that is incredibly useful for both its strength and simplicity. They propose a straightforward 50/30/20 split of your after-tax income:
- 50% for "Must-Haves" - Rent/mortgage, utilities, insurance, medical care, transportation, student loans, etc. (50% is a maximum)
- 30% for "Wants" - Vacations, dining out, new clothes, new TV, etc.
- 20% for "Savings" - Savings accounts, equities and other investments, and early repayment of debts.
Your current split is easy to determine. Figure out what you are spending on Must-Haves and Savings each month, and what's left is what you spend on Wants. If you are spending 50%-65% on Must-Haves, you are in danger. More than 65% and you are headed for financial disaster. As long as you keep your Must-Haves within the 50% boundary, you are safe because you have a buffer - there's room for a Plan B if you lose your job or you don't receive that usual Christmas bonus.
You are now equipped with two simple but effective tools to determine if your mortgage is safe. Before you sign your name on the dotted line for a mortgage, or any other serious financial commitment, be sure:
- Your "back-end" DTI will not be pushed above 25% of your pre-tax income
- Your "Must-Haves" will not exceed 50% of your after-tax income
Have questions? Want advice? Talk to a friendly Team NRS expert today. There is absolutely no cost - we're here to help!