It's been a while since I've gone and done some real math for you guys. Let's fix that. It's easy to look at the sale price of a home and have that be the deciding factor on what sort of house you buy. However, your monthly payment is what will dictate if you can stay in that house once its yours. Today we're going to calculate the average affordable monthly payment for a Chicago homeowner, and look at six different types of homes they could afford with wildly different purchase prices.
Step 1: Establish the monthly payment.
We've used the American Housing Survey (AHS) data from 2009 before. It's a little dated at this point but it's the only trustworthy survey that has numbers for the City of Chicago. Within that survey we discover that the median income for a Chicago Homeowner's Household was $56,200 per month. Divide that by twelve months and you get a monthly income of $4683.
Many lenders use 33% as the percentage of your income that should go towards housing costs. For today, we'll consider those housing costs to include your mortgage, your property taxes, your homeowner's insurance, assessments, and utility bills. 33 percent of $4683 is just over $1545, which is the number we'll shoot for.
Step 2: Determine some scenarios.
For this exercise I wanted six different scenarios, all for the same monthly payment. I chose three single family home options and three condo/co-op options.
- A 5 bedroom single family home in Austin
- A 3 bedroom single family home in Lakeview
- A 3 bedroom LEED-certified single family home in North Center
- A 1 bedroom condo in a high rise building with doorman & pool in the Gold Coast
- A 2 bedroom condo in a vintage courtyard building in Lincoln Park
- A 2 bedroom condo in a small co-op in Lakeview
Step 3: Source some utility, insurance and property tax rates.
For utility rates I went back to the same AHS data. I discovered that on the low end a homeowner would pay about $115. The median was about $350 and the high end would be way up around $700 per month for a big drafty house with a deluxe cable package and super fat internet bandwidth.
For the monthly insurance I used a ballpark figure that insurance would be the sale price divided by 3500.
Property tax numbers were sourced from actual listed 2011 taxes for properties similar to the ones I'm describing that have sold within the past four months in Chicago.
For all purchases I'm assuming an interest rate of 3.5% (the current national average on BankRate.com) except for the co-op, as those tend to be tougher to fund. For the co-op I'm using an interest rate of 3.625%. I'm also assuming a down payment of 20% of the purchase price. If you'd like to play with the interest rate, down payment and other financing aspects, you can check out the mortgage scenario calculator I wrote a few months ago.
Step 4: I do math for you.
The first scenario is the big single family home in Austin. This area has low property taxes but high insurance rates. Since it's a big, old house the utility usage is about as high as it can possibly get.
|Monthly Property Tax Escrow||$125.00|
|Monthly Homeowner's Insurance Premium||$80.87|
|Monthly Utilities (Heat, Power, Stove, Water, Cable)||$700.00|
|Monthly Mortgage Principal & Interest||$636.29|
|Total Monthly Payment||$1,542.16|
|Initial Loan Balance||$139,521.58|
|Maximum Home Price||$174,401.98|
The next scenario is for a smaller single family home in Lakeview. Property taxes are much higher here than they are out in Austin, as are list prices. However, the insurance premiums would be a little lower here and for the smaller house it would cost much less in terms of utility bills.
|Monthly Property Tax Escrow||$750.00|
|Monthly Homeowner's Insurance Premium||$32.88|
|Monthly Utilities (Heat, Power, Stove, Water, Cable)||$350.00|
|Monthly Mortgage Principal & Interest||$405.00|
|Total Monthly Payment||$1537.88|
|Initial Loan Balance||$90,191.47|
|Maximum Home Price||$112,739.34|
So, moving in from Austin to Lakeview means you can afford $61,000 less house if you want to keep your monthly payment consistent. Now, what if we scaled back our neighborhood choice to something nice but not outrageous in terms of property tax, and cut back those utility bills with a LEED-certified Green home?
|Monthly Property Tax Escrow||$350.00|
|Monthly Homeowner's Insurance Premium||$80.57|
|Monthly Utilities (Heat, Power, Stove, Water, Cable)||$115.00|
|Monthly Mortgage Principal & Interest||$992.43|
|Total Monthly Payment||$1538.00|
|Initial Loan Balance||$220,982.46|
|Maximum Home Price||$276,228.08|
So moving just a few blocks north from Lakeview to NorthCenter and focusing your search on green homes can more than double how far your monthly budget will stretch for the same size house. Pretty cool.
Now what about condos and co-ops? Our first condo is a little one bedroom in a building full of amenities. Let's figure that the building has a full-time doorman, an exercise room, party room, roof deck, elevators, business center, receiving room and a dry-cleaners on site. These buildings tend to include most of your utilities, and the insurance premiums are really low. The assessments, however can be quite pricey. The number I've chosen for assessments in this case is far from the lowest in the Gold Coast area, but leaves at least a little room for a mortgage payment on top.
|Monthly Property Tax Escrow||$183.33|
|Monthly Homeowner's Insurance Premium||$25.78|
|Monthly Utilities (Power, Cable)||$115.00|
|Monthly Condo Assessment||$900.00|
|Monthly Mortgage Principal & Interest||$320.89|
|Total Monthly Payment||$1,541.61|
|Initial Loan Balance||$70,705.66|
|Maximum Home Price||$88,382.08|
Wow. What a difference those assessments made. But not all condo buildings have ridiculously expensive monthly dues. In fact, the median condo assessment in Chicago according to the AHS was $325. A big condo in a smaller development will have higher property taxes, but much lower condo fees.
|Monthly Property Tax Escrow||$487.38|
|Monthly Homeowner's Insurance Premium||$41.33|
|Monthly Utilities (Heat, Power, Stove, Cable)||$350.00|
|Monthly Condo Assessment||$150.00|
|Monthly Mortgage Principal & Interest||$517.03|
|Total Monthly Payment||$1545.75|
|Initial Loan Balance||$113,371.02|
|Maximum Home Price||$141,713.78|
So. Suddenly another $50k to spend. Kinda neat, don't you think?
Now, I've been neglecting co-ops and one of my clients yelled at me for doing so lately, so I'm going to make a point to include them more. So, our last option is a co-op. Because the co-op pays taxes as a single entity, your property taxes in this case would be rolled into your monthly payment. However, since many major lenders won't finance purchases in co-ops you'd have to settle for a higher interest rate than normal on your loan. Your insurance premiums would also be higher, as many insurers avoid writing policies on co-ops. In this case I've chosen a real co-op that includes heat, water and cable in the monthly membership fee. I should note though that the listed amount of $548.80 is on the lower end for a co-op monthly payment.
|Monthly Property Tax Escrow||$0.00|
|Monthly Homeowner's Insurance Premium||$80.57|
|Monthly Utilities (Power, Stove Gas)||$115.00|
|Monthly Co-op Membership, Incl. Taxes & Remaining Utilities||$548.80|
|Monthly Mortgage Principal & Interest||$781.00|
|Total Monthly Payment||$1527.47|
|Initial Loan Balance||$171,252.66|
|Maximum Home Price||$214,065.83|
So Why Do We Focus on Price?
So with six wildly different prices all leading to the same monthly payment, why do we talk about price at all? Well, while there's a massive gap between the low end and the high end of buying power outlined above, we do need to consider what's realistic in the areas I specified. While the last two condo prices are within range of a short sale, the other four are pretty much non-existent in the neighborhoods I chose unless you're a cash buyer working the foreclosure market. You can muck about with the assorted components of the monthly payment all you like, but if you can't afford to purchase the property in the first place it's all academic.
The point of all of this isn't to say that the price should be totally neglected. Rather, it hopefully will serve to give you an understanding of how lifestyle choices can affect your buying power. After all, if you knew that your choice to live in a high rise was going to knock $125.6k off of your price point, would you still want all of those amenities? If going for a new, green home could more than double the amount of house you can afford, would you still want that lovely old Victorian?
On the other hand, if you're comparing the monthly cost of owning a home with the cost of renting, it is worthwhile to consider the whole scenario. The monthly rent for most of these properties would be between $1800 and $2400 per month and you'd still have to pay utilities on top.
This Friday we'll have a guest post for the landlords. I'll see you guys Monday.