Buy what you can afford

Brandon Scott is a Sherwood Park & Edmonton based mortgage consultant and the author of a weekly column entitled Real Estate Solutions in the Sherwood Park News. This article was originally published on April 19, 2013

Steve Martin is well known actor and comedian with appearances on The Tonight Show, HBO’s On Location, and several movies including the memorable Planes, Trains and Automobiles and Three Amigos. Comedy can in many ways help us look at a situation with a new perspective or showcase sometimes how ludicrous our human behavior can be.  One such occurrence appeared several years ago on NBC’s Saturday Night Live called “Don’t buy stuff you cannot afford.” It was an infomercial type skit that pitched a new book designed to help a couple get out of debt by simply saying no to purchases if they did not have the money saved.  This is a stark contrast to buying something first and then hoping you can pay for it later. The idea of only spending what you can afford makes sense for day-to-day living items but when it comes to purchasing a home that may not be a reality for many would be home buyers. Here’s where mortgage financing becomes available, but that does not mean you should purchase at the top of what the bank says you can afford. Let me explain. When you obtain a pre-approval most lenders will tell you based on your documented income and your current liabilities the maximum amount of a home you would qualify to purchase. If you are approved to buy a home that costs $400,000 at today’s low 5 year fixed interest rate you may be very happy with the payment. But you should also realize that the payment is only good for that term of five years and planning for future rate increases is key to avoiding payment shock. What was once a manageable payment could be hundreds of dollars higher when the mortgage comes up for renewal and rates are not as low as they were when you purchased the house. To avoid a situation of being strapped month-to-month with a higher payment make sure you purchase a home where the mortgage payment would be still comfortable when a rate increase does occur or begin a savings strategy during the first term that will account for that payment adjustment. These types of debt situations play funny on t.v. but may lose their comedic allure if it becomes your reality. Download the current e-edition of the Sherwood Park News