- The Washington Times - Friday, June 30, 2000

Monthly installments on any purchase allow us to live above our means without breaking the bank account. It's so easy, don't you think?

The sign at the electronics store, so enticing, assures us we can buy the $1,299, 250-watt receiver/stereo system with 60-programmable stations, five surround-sound speakers, five-CD changer, DVD player and auxiliary jacks to serve any amount of entertainment peripherals you could want. Just $49 per month.

So you ring it up on the store card (which charges 21 percent interest per year on this purchase, that's about $35 per month) and walk out with it now. No problem, you can pay it off later.

Little by little, such deals eat away at a buyer's purchasing power. Here's how it happens.

The traditional qualifying ratios for a home mortgage stand at 28/36. This means 28 percent of your income can be used to pay for your monthly mortgage payment (including principal, interest, taxes and insurance). The 36 percent is your monthly payment combined with all other monthly installment debt credit cards, student loans, car payment, etc. Other debt does not include utilities, groceries and other household expenses.

Here's what that means in real numbers. If you have a gross household income of $50,000 ($4,166 per month), the most you can pay out for your mortgage payment would be $1,166. This payment would allow you a mortgage amount of about $125,631 with a 30-year loan and fixed rate of 8.5 percent. This, of course, is just the mortgage amount, assuming you made a down payment of between 3 percent and 10 percent.

In addition, you can hold no more than $334 in additional monthly debt (if you want to max out on how much home you can buy). Looking at the above $49 payment for the stereo, you can now have only $285 in extra debt. Do you have a car payment? If so, you probably just ate up the rest of your 36 percent ratio. But don't worry, it doesn't mean you can't buy a house, just not the higher-priced house you could have bought before the stereo made it into your den.

Let's say your car payment sends your extra debt to $375 per month. You just lost buying power. Since the bank will only allow your back ratio to be 36 percent, $375 makes up 9 percent of that. Your front end can now only be 27 percent you just lost $42 in buying power. Is that a lot?

Without that extra $40 per month (about what you paid for the 250-watt receiver), you can now only afford a loan of $120,429 a loss of $5,000 in buying power. Is that receiver really worth it? You tell me.

M. Anthony Carr has covered real estate issues for 11 years. He can be reached at macarr@nvar.com. He is based in the D.C. area.

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