Okay. So now we’ve recovered (somewhat) from our sticker shock on our beautiful house in Scottsdale. The next questions we have is: What can I do to get myself into this house using the Payment + Interest + Taxes + Insurance formula?

Well, there’s good news and bad news here.

The good news is that there are a couple of factors we actually can control to help swing things our way.

The bad news is that there are a couple of factors that we have little or no control over.

Let’s talk about the bad news first:

1. Taxes. You have absolutely no control over this number. Property taxes are based on assessments performed by state or local government assessors. Bluntly: It is what it is.
2. Insurance: Although you can have some effect on this number, as you will see, you won’t get enough mileage out of it to make it worth your while to try.

Now, the good news.

The remaining two items, Payment and Interest, are the ones that we can control and the ones that will give us the maximum amount of movement for our effort. So, let’s review where we started:

We are looking at a 30 year fixed rate mortgage at 5.33% interest and no money up front for a down payment. The amount we are asking the bank to finance is $539,900. To lower our P + I, we can do one or more of the following:

1. Negotiate the price of the house down from $539,900.
2. Find a lower interest rate on our mortgage (remember, for the time being, we are only looking at a 30 year fixed rate mortgage).
3. Make a down payment on the house.

This is where we begin to play the “What if?” game. I will go through one example here to show you how the game works.

What if:

1. We negotiate the price of the house down from $539,900 to $530,000, and
2. Get an interest rate of 5.27% on our mortgage loan, and
3. Make a down payment of 20% on that $530,000?

For our efforts, we get the following result:

1. Leaving everything else the same, negotiating the price of the house down from $539,900 to $530,00 will make our P+ I payment = $3,003 per month, and
2. Getting an interest rate of 5.27% on top of our reduced price for the house makes our P + I = $2,983 per month, and
3. Make a down payment of 20% on our reduced price for the house (0.20 X $530,000 = $106,000), and our P + I becomes $2,346 per month.

Not bad. Not bad at all.

Unless we can only afford $840 per month in house payment.

Now, there are a couple of things to notice here besides the fact that our house is still not within our $840 per month payment limit:

1. The two biggest, safest and most conservative ways to dramatically cut our payments are to either negotiate the price of the house down or to put more money down in a down payment.
2. With a nice, conservative, 30 year fixed rate mortgage, you do get some benefit from lowering your interest rate, but not enough to make a huge difference if you haven’t already made a big move in either the house price, the down payment, or a combination of the two.

As you begin playing the “What if?” game on your own, and I encourage you to do so, you are bound to play with the interest rate number to see what happens when you lower it to a certain level. And, you are bound to have that brainstorm that we all have had at one point that, “Gee. If I could just find a loan with a low enough interest rate, I could get us into that house…”

And this is where a LOT of people get into trouble!

Think of the down payment, and negotiating a lower asking price on the house, as your coarse adjustment tools to get you close to the finish line. Think of finding the lower interest rate as the fine adjustment tool that can get you across the finish line in a pinch. Where many of the people went over the cliff was by not being able to negotiate the price of the house down and not having enough of a down payment to substantially effect the mortgage payment. That left them with manipulating the interest rate, and these people were so desperate to own a home that they went shopping for bargain interest rates and got burned in a really big way.

The difference between those of us who have been successful in buying and keeping our houses and those who are on the street is that those of us who have been successful ignored this urge to use the interest rate as a coarse adjustment tool. Or, putting it another way, We bit the bullet and faced up to the fact that we just couldn’t afford our beautiful house in Scottsdale and walked away.

But, for the time being, we will assume that we are still determined to get into our beautiful house in Scottsdale. This brings us to mortgages different from our safe, 30 year fixed rate mortgage.

I will discuss some of the different types of mortgage loans in my next post, but for the time being let’s just say that not all mortgages are created equal, and some are really, really bad deals for the borrower–which is you.

As always, I would like to hear from you. Please leave me a comment and let me know what you think.

© 2009, Mac Williams. All rights reserved.

• Tips for First Time Home Buyers – Part #2
• Tips for First Time Home Buyers – Part #1