In my first post, I wrote about figuring out the reason why you would want to buy a house. In this post, I’ll write about how to figure out if you can really afford the house.

So let’s say you have convinced yourself that you really need a house. The next question then becomes: can you afford one? Whether or not you can afford one really depends on two factors: the price of the house, and how much you can spend. As long as how much you can spend is more than the price of the house, then you should be all set. The rational thing to do then, is first figure out how much you can spend, before you can even start looking at houses.

How do you do this? In its most basic form, it’s just Income minus Expenses. The Income part should be fairly straight-forward; this is basically your net paycheck. Figuring out the Expenses part will require a little more effort. This will include everything that you spend on right now, whether on a regular basis or not. This will mostly be comprised of your bills (electricity, gas, water, auto insurance, phone, cable, internet, etc.), groceries, clothing, and other occasional stuff like books, electronics, dvds and dining out. Expenses that are specifically related to renting, such as rent and renter’s insurance, can be left out because you won’t be spending them if you buy a house. Make sure you list all your expenses, even minor ones such as your morning coffee.

Next, you sum up all of your expenses. When you sum them up, get the total for the whole year. This way you get a better scope of all your expenses and you avoid missing any seasonal expenses that you may have. Compute for your annual net pay, then subtract from this your total annual expenses. Divide the resulting amount by 12, and you now have the monthly mortgage that you can theoretically afford.

Why theoretical? Because, even though this number represents the money that you can use to pay for a mortgage loan, there are many other expenses that you should also anticipate. At this point it might be useful to talk to some of your friends who already own houses and ask them what they routinely spend for maintaining the house. If you have mostly lived your adult life in an apartment or you used to live in a place where the the climate or seasons are drastically different, then your knowledge about what things you need to consider might be limited.

Some things you can probably determine with a little research, like taxes (yes, you will now have to pay school, property and county taxes), water, sewage and garbage disposal. Remember when you didn’t have to pay for these? Well now you have to. (Still wanna buy a house? Read on then)

Some stuff though you just have to get from a homeowner. Things like what equipment to buy (lawnmower, snowblower) and how much would you typically spend for house upkeep. And even with your best efforts you may still miss some. In our case, we didn’t realize we needed a water softener. The effect, in addition to the expense of having it installed, is that we now have an additional regular expense: water softener salt.

Put all of these together, pad it a little (maybe 20-30%), and you have a decent estimate of your anticipated additional expenses. Subtract this from your theoretical budget above, and you now have a realistic budget for buying a house. Now you can start shopping

I guess I should clarify the title first. We didn’t exactly build a house, as in bought the materials and constructed the house ourselves. Rather, we bought the house from the builder who was constructing it. But I wanted to make the distinction between buying a pre-existing house versus buying a house that has yet to exist.

Why buy a house? This was the first question we asked ourselves. Not having any kids at that point, with spare income every month and with a growing number of our friends buying houses, it was easy to get swayed by the house-buying bandwagon. Add to that the lowest mortgage rates in decades and you can imagine how tempting it was to make the plunge.

But we realized it was a very big decision, one that we will be living with for 30 years. So my wife and I sat down and asked ourselves this question: “Why buy a house?”. We came up with a list of reasons why we would want to buy a house. In retrospect, I would say this was a very important step in the house-buying process, one that I would highly recommend to anyone contemplating on buying a house. Even before thinking of whether you can afford it or not, really your first question is, “why?” If you live in an apartment, what is there about living in an apartment that you don’t like? And are you sure that once you are living in your own house, that thing that you dislike will disappear?

There was a very good article we read during that time that I think enabled us to make a more informed decision. What we learned from reading that article was that, even though the rent you pay doesn’t give you ownership of the apartment (as opposed to paying your mortgage, which builds up equity), it does pay for benefits that you may take for granted. It pays for snow removal, garbage disposal and home maintenance to name a few. In some cases you rent even includes heating and electricity. Remember that you have to pay for these things separately when you live in your own house. So the though that your rent doesn’t go anywhere is really not true–it goes to providing you with services, other than lodging, that you otherwise will have to provide for yourself.

Last weekend while hanging out with my son in the family room, I happened to tune in to PBS where they were showing that “Ask This Old House” program. For those who are not familiar, “Ask This Old House” is a spin-off from a popular PBS program titled “This Old House“, which features a crew of handymen who find an old house (or barn) and renovate it. Most specially for people like me who have always imagined themselves to be very apt around the house but never really get beyond being a couch potato, I find it really fascinating to see something old given a new lease on life. Whenever they combine the old with the new–old, rugged exterior (think barn or log cabin) mixed in with state-of-the-art home theater system–it gives a unique identity to the house.

So this “Ask This Old House” features basically the same crew, but instead of finding some close-to-be-demolished building, they take questions from viewers and provide answers to everyday home maintenance concerns. For instance, last weekend the theme of their episode was being green; so they enumerated some ways on how to save energy and be more environment-friendly around the house. They gave tips like setting your water heater temperature a little lower and using a programmable thermostat to save on cooling and heating costs. They also advised to insulate your water pipes in the basement, so they don’t waste heat. Don’t you hate it when you turn on the hot faucet and it takes forever to get some? And it isn’t so much the waiting as the amount of water that gets wasted! If only there was a way to recycle that water and put it back in the pipes…

But what I found rather enlightening was when they asked the landscaping expert on what you can do around your yard to minimize maintenance costs. Turns out, you can use nature’s own cycles to work for you. If you plant a tree towards the northern part of your yard, during the summer when the tree has leaves, it will block the sun from your house and help make it a little cooler. During the winter when the tree doesn’t have any leaves, it will allow the sun’s rays to reach your house and help make it a little warmer.

Just another proof that it’s always best to work with nature rather than come up with high-tech solutions