When you buy a home, you buy neighbors, amenities, a lifestyle…and a commute. If you're about to commit to a home purchase, apply the brakes until you understand the implications of the home's location, location, location.
A commute can drive you crazy
In the movie "Falling Down," Michael Douglas is stuck in his usual C02-ridden, crawling, hand-gesturing, honking commute when he snaps--beginning a downward spiral of threatening fast food workers, firing a rocket launcher and taking out a gang.
Yes, that's just a movie, but real-life road rage is no laughing matter. If jacking up your blood pressure twice a day doesn't appeal to you, it's time to think again about living too far from your workplace.
Commuting as an extreme sport?
According to the U.S. Census Bureau, 3.2 million Americans have commutes classified as "extreme," that is, more than 90 minutes each way, and 10.4 million spend at least an hour getting to work and another getting home.
Alan Pisarski, a transportation expert from Falls Church, Va., tells The Wall Street Journal that it's only going to get worse. High unemployment has forced many job seekers to look ever farther from home, and the high cost of housing in many metropolitan areas pushes families well beyond the city limits.
Housing prices versus commuting time: the tradeoff
While today's mortgage rates are still very low, today's gas prices are not.
The National Association of Realtors (NAR) urges its members to understand the commuting conditions in their areas and to make sure that buyers are cognizant of them before committing to a home. Often, the savings realized by living on the outskirts is eaten up by higher commuting costs.
A study by the Urban Land Institute found that when transportation costs were added on top of housing, those in the suburbs paid more than those living closer in, even though their housing costs were lower.
"What we have too frequently thought is that you can get an affordable house if you drive until you qualify, but if you then overlay the costs of transportation, they get very high," said Henry Cisneros, an Urban Land Institute board member and former Secretary of Housing and Urban Development.
Commuting costs and your mortgage
If the reason you want to move an hour from your workplace is to qualify for a bigger home, keep in mind that you'll need to factor in the added commuting costs--extra gas, vehicle maintenance, even insurance--and that mortgage lenders don't generally include these when making their underwriting decisions.
"Your annual mileage is one factor in what you pay for auto insurance," said Amy Danise, Editorial Director of Insure.com. "That's because the more you drive, the greater your chance for an accident and an insurance claim. Therefore, insurance companies charge more to drivers who commute long distances."
Most home loan approvals are loosely based on maximum housing expenses of about one-third of your income (this can be higher or lower depending on your other expenses, your credit score and your assets). However, lenders do not include your commuting costs when calculating your total debt-to-income ratios and approving your mortgage. You could find yourself in a home with a very expensive commute that you can't realistically afford.
Consider that the above-mentioned study also found that, while 30 percent is a reasonable housing-expense-to-income ratio, a distant commute plus housing can double the size of the bite out of your income. In fact, a quarter of the communities in the study area had a combined housing and transportation cost exceeding 58 percent of their median household income, which the Institute considered "extremely burdensome."
Tweak your mortgage
One way of affording the home that's closer to the office is to choose a hybrid adjustable rate mortgage. Rates on these loans run about 1 percent lower than rates on a 30-year fixed rate mortgage, and your rate is fixed for 3, 5 or 7 years (choose according to how long you expect to keep your home). That 1 percent difference means you'd pay about the same financing a $300,000 loan with a hybrid ARM at 3.25 percent as you would a $275,000 fixed rate mortgage at 4.25 percent.
How many gallons of gas can this ARM buy you?
A $300,000 loan at 4.25 percent gives you a monthly payment of $1,475.82. At 3.25 percent, the monthly payment equals $1305.62. If divide the difference ($170.20/mo) by the price of gas (say, $3.65/gal), that's 46.63 gallons of gas. Let's say your vehicle gets 22 mpg, that's 1,026 miles each month you could pay for by choosing an ARM at 3.25 percent--about 12,312 miles per year.
Quantifying the cost of a commute
Sometime between shopping for the lowest mortgage rates and making an offer on a home, give your prospective commute a dry run during normal commute times. If you're trying to choose between two locations, you'll need to assign a commuting cost to each and add them to the housing expense to see which one is the better deal.
You may also want to assign some value to your time--extreme commuters burn up at least 15 hours a week getting to and from work; that time clearly has value. You may also want to determine ahead of time--before you begin your house hunt--what constitutes an unacceptable commute so you don't even look in those areas.
Finally, consider the intangibles--can you truly put a price on your sanity?
Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte. She graduated with High Distinction from the University of Nevada with a BS in Financial Management.