Buying a Home Takes Careful Planning

September 28, 2023

Home ownership is an elusive goal for many living on the Monterey Peninsula. Recent economic developments have made that goal even more difficult to achieve. At the risk of depressing readers working toward buying a home, here are some challenging facts.

According to Zillow, the average price of a home in Monterey is now $1,140,551. Assuming you put 20 percent down and finance your balance with a 30-year mortgage at today’s average rate (7 percent), your monthly principal and interest payment will be $6,070. If you had purchased that same house at the same price two years ago, but at 2021 mortgage rates (3 percent), your payment would have only been $3,847. In other words, the monthly cost of home ownership is now 58 percent higher than it was two years ago. Talk about inflation!

Earnings have also increased. According to the Bureau of Labor Statistics, average hourly earnings are 9.3 percent higher than two years ago. That’s a healthy gain—among the best we’ve seen in a long time—but it doesn’t come close to making home ownership more affordable.

As a financial planner, these facts lead me to two conclusions:

  1. A large mortgage payment is a fact of life for most who buy a home on the Monterey Peninsula. According to a survey by Rocket Mortgage, Californians have the highest average outstanding mortgage balance in the country, while a study by credit rating agency Experian shows California’s average mortgage balance is second only to Washington, D.C.
  2. If you plan to buy a house, you really need to plan.

Mortgage advice can be tricky. A mortgage banker will describe their lending limits, but they lack insight into your personal financial situation, so they can’t tell you what your borrowing limit should be. In fact, if you borrow as much as a mortgage lender will offer, I can almost guarantee you won’t have enough money for your other goals.

Mortgage underwriting relies heavily on a metric called the Debt-to-Income ratio, or DTI. DTI is calculated by adding up monthly payments required to service all your debt (mortgages, student loans, car payments, credit cards, and property taxes, home owner’s insurance, and HOA fees), and dividing that amount by your gross income. Generally, mortgage lenders like to see DTIs under 43%. However, if you borrow up to that 43% DTI limit, your finances will be stretched very thin.

Suppose your household annual income is $100,000. If you have good credit and no other debt, you can probably qualify for a $420,000 mortgage. Assuming a 30-year fixed-rate mortgage at 7% interest, your monthly payment (including property tax and insurance) will be close to $3,600. After state and federal taxes, that leaves you with $2,300 each month to pay for your other expenses—not much, when considering the cost of food, clothing, utilities, medical care, home maintenance, and transportation.    

A better way to plan your mortgage is to first decide how much of a house payment you can afford while supporting your other financial priorities. Once you have that number, you can work backward, calculating how much house your payment will buy. Going the other way (i.e., finding the house you like and scrambling to find ways to pay for it) often leads to overspending.

When you overspend on your mortgage, your long-term goals often suffer. You won’t have enough resources left over to properly save for retirement, or your children’s education. You can prevent that mistake by including long-term goals in your cash flow planning for your mortgage.

Finally, build some cushion into your mortgage payment. If your budgeting process shows you can afford a $2,500 monthly mortgage payment, settle instead for $2,000. That extra cushion will give you added resilience when confronting the inevitable challenges of life.


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Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey.   He welcomes questions you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to smerrell@montereypw.com.