The Imaginary Mortgage - Fake It Til You Make It

by Erica Barry 2. May 2012

Imaginary MortgageHave you ever bitten off more than you could chew or found yourself asking the question, “How did I get myself into this?” In today’s housing market, thousands of homeowners are asking themselves this very question.

Let’s back track a few years to 2006 – a time when young people applying for mortgages were getting approved for three to four times the amount of what they could actually afford.  But hey…spend it if you got it, right? Wrong.

I can guarantee you that the vast majority of the homeowners who are either a) facing foreclosure or b) have already had their home foreclosed upon are saying to themselves, “If I only knew then, what I know now.”  What if I told you that they technically could have “known then what they know now”?  Sound outrageous?  Not really.

Before you roll your eyes or click away, hear me out.  I promise it’s really not that crazy of an idea.  In fact, it’s actually just a dash of common sense seasoned with a little bit of planning (there’s a novel idea).  For the past three to four years, I’ve been “looking” to buying my first house in Canton.  Like many 28-year-olds, I would be a first time home buyer as this would be my first go-round as a homeowner, and more importantly, my very first monthly mortgage.  I’ve gone through the motions of getting pre-qualified for a loan, and with the help of my real estate agent and lender, I have a pretty good idea of how much house I can afford (keywords “pretty good idea”).  But wouldn’t it be nice to test drive my mortgage payment before I drive it off the lot?

Ladies and gentlemen, I present to you the imaginary mortgage…kind of.

So how does it work? Let’s discuss…

Do the Math

Talk with your lender to see how much you can afford. Once you find the mortgage payment amount that you think you are comfortable with, work out the numbers to figure out the amount that your mortgage payment would be if you actually went through with a purchase. Don’t forget to factor in property taxes, insurance, interest rates and other monthly mortgage-related payments such as mortgage insurance and homeowner association fees (it may also make sense to kick in a few extra bucks for maintenance and home improvement projects for we all know if it can break, it will).

What is a mortgage? For example, here is a high level look at a 200K monthly mortgage budget for a rowhome in Canton. (These are not exact numbers and don't reflect actual mortgage rates)

Purchase Price: $200,000 

Mortgage: $930.00
Home Owners Insurance: $60.00
Mortgage Insurance Premium: $185.00 (if applicable)
Taxes: $300.00
Total Mortgage Payment: $1475.00

Utilities: $250.00
Cable & Internet: $120.00
Maintenance & Home Improvement Fund: $100.00
Total: $470.00

Total Imaginary Mortgage Payment: $1945.00

“Pay” Your Mortgage Payment

That’s right, actually start paying your hypothetical/imaginary mortgage. Set up an account at your local bank and start depositing your mortgage payment amount into that account on a monthly basis.  (If you are currently renting, pay the amount that your mortgage payment exceeds your rental payment.)

Don’t Cheat

Pay your mortgage and forget about it. Though you technically have access to your “mortgage” funds, that doesn’t mean you should touch it. You wouldn’t be able to use that money if you had a real mortgage, so you shouldn’t think – or more importantly, act – otherwise in this scenario.

Put Yourself to the Test

Really challenge yourself to stick to your new budget and make your mortgage payments on time. If you find that you just can’t survive without tapping into your imaginary mortgage or that you’re making “late mortgage payments” on a normal basis, chances are that you’ve probably bitten off more than you can chew. Sign up for a personal financial management tool to help you find out where your money is actually going. You might find that you could afford to cut back on your trips to Starbucks and save a buck or two.  On the other hand, if you can easily go about your normal everyday life without being drastically impacted by the dent in your wallet, you’ve now not only proven to yourself that you can handle the mortgage payment, but you’ve also gotten used to living within your “new” means and saved up a nice chunk of change to use as a down payment.

That’s it!  Pretty simple, huh?  Nothing but a little bit of planning, discipline and budgeting – the same factors that you’ll need when you finally take the plunge and buy your first home (or second home for that matter). Only now, you’ll sign those papers with the confidence and comfort of knowing that you can easily afford your new home.

If you found this article helpful, be sure to check out these related articles:

Has Anyone Seen My $200 Million?

Tricks to Throwing a Budget-friendly Barbeque

How to Decide: Home Equity Loan or Line of Credit



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