How Our New Mortgage Will Affect Our Budget

by Erika Torres

So now that I’ve talked about the cost of buying a home in Southern California, it’s time we talk about the real important stuff, like how this new jumbo mortgage payment is going to affect our budget.

Before I give you some financials, I want to present to you some numbers about salaries in Orange County, CA and the cost of housing–because let’s face it. You can’t compare the cost of living in southern California to the cost of living in the mid-west.

And before I start getting all those comments about how we should just move to Kansas–it’s not happening. People choose to live where they live for a variety of reasons. For some, cost may be the most important factor. For us? It’s family. And ALL our extended family on both my side and Eric’s side live in southern California and we are not moving. And that’s that : )

Here are some numbers though that I recently found out about from a discussion on affordable housing that I attended through my job:

  • The median salary in Orange County, CA is $87,000+ for a family of four
  • Rent for a one-bedroom apartment in the city that Eric and I used to live in was $2205
  • Rent for a two-bedroom was $2805

Two things to note as we take a look at our budget:

  • Eric and I had a very good deal on our two-bedroom townhome. We were paying several hundred dollars less than the average on a one-bedroom apartment. This was great for us because it allowed us to save a lot of money, but it was not realistic of the rental prices in Orange County
  • Eric and I make a lot more than the median Orange County salary

2014 Base Budget

Below is our monthly base budget for 2014. Our base budget includes only our after-tax salaries (and after-401k contributions). This means that my side hustle income is not included.

2014 Base Budget

Another thing to note is that our base salary does not include any overtime we earned. To give you an idea of how often we actually make our base salary, only once this past year did we only make our base salary. All other times we made more than our base through overtime from either Eric or me–and that still didn’t include my freelance income.

Technically, we put all my freelance income and Eric’s overtime pay into savings, which is why it doesn’t really sway our finances one way or the other, but sometimes we do use it for other things, like travelling.

Our New Budget with Our New Mortgage

After talking with our financial adviser, we settled on a number that we felt we could realistically afford. Because of the tax benefit of being homeowners, we could automatically afford several hundred dollars more in mortgage than we could as renters, due to the tax breaks we’ll receive from being homeowners. We are essentially only paying $300 more in a mortgage payment than as a renter. (*this sentence was edited to reflect information in the comments below)

However, there is a pesky little thing called property taxes and homeowners’ insurance that drives up our total monthly payment. This is what our new base budget will be in 2015 with our new mortgage.

BUT, these numbers do not include the raises that Eric and I are both set to get at the end of the year. 5% for me, and I’m not sure how much for Eric, but probably around the same. However, we are not counting on that as you can see.

2015 Base Budget

 Holy Guacamole that’s a really big jump in Rent and Utilities!! (Now that I look at it, I guess it should say mortgage, right? Yeesh, that’s so grown-up)

The above would be a very, very conservative budget for us. Like I said, the only time we ever met our base budget in 2014 was once, and that still didn’t include my freelance income for the month. At the suggestion of our adviser, we will be treating my freelance income as part of our normal budget in 2015, rather than as a separate entity. This will help to really show how much total income we’re bringing in and how much total we’re spending and saving.

Because my freelance income and Eric’s overtime income fluctuates from month to month, we still chose to go with our most conservative budget when you add those in. And this is what we expect our 2015 monthly budget to look like:

2015 Realistic Budget

While still on the high side, I am much more comfortable with our mortgage and utilities around 36%. Our total needs seem to hover around 45%, which is a bit high. Luckily, we have low wants because we try and limit our free spending while still feeling free to spend on the things we prefer.

As for savings, there are a lot of different goals we plan on saving for:

  • Max out Eric’s Roth IRA for 2014 (we have until April to save for this)
  • Save for a down payment on a car
  • Save for the master suite upgrade in 2018
  • Rebuild our Emergency Fund
  • Vacation fund (can’t live without that..)
  • Christmas fund ($50 per paycheck)
  • Car Insurance & Expenses: Every month we set aside money to pay for our car insurance, registration, oil changes, and repairs. This way it doesn’t hurt so much when that bill pops up in the mail every six months

Experts recommend the 50-30-20 rule: 50% of your income should go toward needs, 30% toward wants, and 20% toward savings.

I feel this is a little bit off, but it’s a good starting point to strive for. I think I would feel the most confident with a 40-30-30 rule.

2020 UPDATE: 

Eric and I are now 7 years into our mortgage and now considering refinancing into a federally-insured HECM – Home Equity Conversion Mortgage. With a reverse mortgage in place, we will be able to save the entire monthly payment by deferring interest to the balance to increase cashflow. The additional cashflow will now be moved to our IRA / brokerage accounts. Our hope is to generate a much larger retirement fund by leveraging some of our home equity.

If you are interested in this approach you can get some calculations without providing any personal information at


What financial rule do you try and follow?


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efinancialclub January 3, 2015 - 9:38 pm

congratulations on purchase of new home. on an average you save 2 months worth of mortgage towards your taxes and it would be a fantastic savings

Alex @ The Happy Homeowner December 27, 2014 - 1:31 pm

Planning is key! It sounds like you guys have a great foundation and plan for moving forward. Enjoy the new house; very exciting stuff!

(I’m part of the new Happy Homeowner team. It’s now me, Mark, and Noah at the reigns. Stop by and read our post from the other day where we introduced ourselves!)

Mathieu Lebrun December 24, 2014 - 11:47 pm

Thank you for sharing the article. It’s very cool. Hope to hear more from you.

Suburban Finance December 24, 2014 - 5:56 am

Congrats on buying a new house! The big jump looks high, but no wonder since you live in southern Cali, and we all know that housing there is expensive. I’m sure it will be worth it in the end since you like the place and you’re going to be close to family.

Mrs. Frugalwods December 21, 2014 - 9:18 am

We live in a super high COL area and are fine with our large mortgage. It’s just a fact of life in expensive cities. It looks like you have a good plan mapped out for your budget and I’m sure it’ll all shake out fine for you. Congrats again on buying a place!

Reply December 19, 2014 - 12:10 pm

Thanks for indulging our desire for financial voyeurism!

It’s so interesting and great that you’ve been working with a financial advisor to get you through this process.

I’m not sure which way is better, to include ‘side hustle’ income in your budget or treat it as bonus. It probably depends on your personality and financial goals at the time. I’m sure yours is quite well-established and reliable at this point. Was it considered by your lender to be part of your income?

newlywedsonabudget December 22, 2014 - 9:03 am

My side hustle income was not included as part of our income for our loan. Only our paychecks from our day jobs.
The reason to include our side hustle income for next year’s budget has nothing to do with the loan, and is more about proper budgeting and accounting purposes. Since we use a large portion of side hustle income for travel expenses, we’re currently not really allocating how much we’re spending on travel annually. By adding the side hustle to our monthly income, we’ll be able to see exactly where we’re spending that money, rather than simply treating it as a free-for-all.

Melanie @ Dear Debt December 18, 2014 - 3:44 pm

I totally get it! I’m from Long Beach and spent my young adult life in LA. It’s a great place to be and I never questioned paying for it. That’s awesome you guys are getting so many bonuses and extra work. Woo hoo!

femmefrugality December 18, 2014 - 5:38 am

Echoing what others have said, paying more, but at least it’s towards your own future and not $2k/month making someone else wealthy! We live in a weird area where it’s cheaper to own than to rent. We also won’t move because of family, but economically there’s no reason to anyways. One of the most affordable cities in the country.We really want to get in on that owning for less thing, but we’re finding saving for a down payment hard as rents in the area keep inching up. Our income is below the median. Working on fixing that. But we’re really trying! Maybe we’ll join you as homeowners in a couple years if all of our plans go right!

newlywedsonabudget December 18, 2014 - 8:47 am

Saving for a down payment is HARD!!! The only reason we were able to save as quickly as we did, was because my husband’s income pretty much tripled instantly, and we kept living off our old budget, so we were able to save 2/3s of his paycheck, plus my freelance income.

Brittany @ Fun on a Budget December 18, 2014 - 5:35 am

It’s a big responsibility but also such a big, exciting accomplishment 🙂 it will be fun to see where you are in a year! I have a feeling you’ll be doing even better than you planned 🙂

Reply December 18, 2014 - 5:19 am

You will get used to your new mortgage! Plus, you’ll also be building equity which will likely be a great feeling. I think you’ll do great =)

newlywedsonabudget December 18, 2014 - 8:45 am

Thank you! We plan on paying bi-weekly, and are already a month ahead so we’re feeling pretty good.

Kait December 17, 2014 - 9:21 pm

Such an exciting time for you two! My bf and I are also southern California residents (for very similar reasons as you two are) and it’s absolutely true that the housing market here is just insane. You truly can’t find a safe, liveable home in a decent neighborhood for much less than 500k. It’s been fun reading about your journey in home ownership and living vicariously through your posts while we save up!

newlywedsonabudget December 18, 2014 - 8:45 am

It is VERY true about the price of housing, which is why it is very hard when people compare our cost of living to those that live in cheaper areas. There are trade offs with everything.

Lindsay @ The Newlywed Notebook December 17, 2014 - 5:56 pm

This is a very interesting post! My husband and I have really hunkered down with our finances lately, so it’s been really interesting to me to see how other people’s budgets breakdown. You guys are so good at this whole “finance” thing. 😉

Kassandra December 17, 2014 - 5:00 pm

You happen to live in my favourite US state, specifically in O.C. I have traveled there for work many times over the last ten years and I always complain about leaving when I have to head back home. As you said, the home prices there are high but it comes with the territory. Living close to family is a major reason why we live in NYC since my mom is in Montreal (1 hour plane ride) and the MIL also lives in NYC.

Petrish @ Debt Free Martini December 17, 2014 - 3:31 pm

Due to being in the military I am very familiar with southern California and its so beautiful there. It can ve a little expensive but with all that sunshine, who cares. I wish you good luck with your new home and reaching your financial goals.

newlywedsonabudget December 17, 2014 - 3:39 pm

Thank you very much!

Reply December 17, 2014 - 11:01 am

Congrats for your home, I am sure you’ll do a great work on financial and savings side!!!

Mark@BareBudgetGuy December 17, 2014 - 10:22 am

I think most financial rules don’t apply to southern california. That place is crazy! We lived the the south bay area for a summer with two kids in a 1 bedroom apartment, and I am impressed with the progress you guys are making down there.

mrs. pancakes December 17, 2014 - 9:24 am

i always love how they develop rules but putting it into practice always presents some tweaks and challenges! glad everything worked out with the new mortgage payments. we definitely need to come up with some financial goals for next year!!

mysti December 17, 2014 - 6:38 am

Did you consider increasing the size of your mortgage and borrowing extra to fund the master bedroom? Not saying this is a right or wrong answer…just a thought.

newlywedsonabudget December 17, 2014 - 9:31 am

We wouldn’t feel comfortable paying any more for our mortgage. I had mentioned ina previous post that three bedrooms are available int his neighborhood, but they’re selling for about $50K-$100K more than our house sold for (depending on how updated the house is). If we had a higher mortgage for a three-bedroom house, we’d really be straining our budget. However, since there is no need for a three-bedroom house right now, we both felt it was more financially responsible to have more freedom in our budget, to be able to save $1K a month and pay for the master suite addition in cash. When we finally do the addition, our house will be valued for way more, but our mortgage will be a lot less, and we will have $1K a month to do with as we wish (aka save for more house improvements!)

Jordann December 17, 2014 - 6:05 am

I’ve been totally lurking your whole home buying process but I’ll chime in here: I recently wrote a similar post about how my new apartment is going to affect my finances and they changed almost exactly the way yours did. I think you’ve got a good handle on how you’re going to deal with this added expense, so congrats on the new house and good luck getting those raises/extra freelance income. 🙂

newlywedsonabudget December 17, 2014 - 9:28 am

Thank you Jordann! I actually already received my 5% raise this month, and Eric should be getting his in January. Plus I based our freelance income on the lowest amount of freelance and overtime money that we received this past year. So essentially, we’re not counting on making more money–it’s always bad to count your chickens before they hatch, but we’re actually basing our savings on the lowest amount of monthly income we brought in this past year (regular paycheck income, overtime, and freelance all included).

Mrs PoP December 17, 2014 - 3:59 am

“Because of the tax benefit of being homeowners, you can automatically afford several hundred dollars more in mortgage than you could as a renter, due to the tax breaks. ”

While I’m glad you guys got a place that you can afford, please don’t perpetuate this myth. The ugly truth about the mortgage interest deduction is that less than a third of homeowners qualify for it due to the high bar of the standard deduction (itemized deductions only being counted for the part they are over that amount). It very disproportionately benefits those with JUMBO mortgages. Folks that buy homes that are much closer to the median home value (or even cheaper like we did) across the country are going to have a tougher time benefitting from the mortgage interest deduction and if people keep perpetuating this myth that they can overextend because they’ll get these “great tax benefits”, they can seriously be in trouble down the line.

Okay, I’ll get off my soapbox… in case it isn’t obvious this is one of my pet issues. =)

newlywedsonabudget December 17, 2014 - 9:22 am

Ah, good to know! I had no idea simply because almost everyone (except investors obv) in Southern California pretty much has a jumbo loan due to the high cost of housing here. I didn’t realize it didn’t work like that everywhere else. For us, we definitely will get a big tax break, as we have run all the numbers with our financial adviser, and also because our income is high so we are in a high tax bracket.

TJ January 17, 2015 - 8:38 pm

Well..I live in Southern California and my mortgage interest totals less than half of the standard deduction. I bought in 2010 when housing was cheap (I would never be buying at today’s values – and in fact I think about selling so that I can invest in something more diversified) – and I refinanced to a 15 year loan 1.5 years into it. I’ve already paid down 18% of the original loan value and there was a neglible amount of ‘extra payments”. You’d be surprised how little goes towards interest each subsequent year when you have a 15 year loan vs a 30 year loan.

I don’t live in Orange County, but I live close enough to it. Your housing costs seem somewhat reasonable since you say that you make many times the median, It’s all about lifestyle choice I suppose.

In response to Mrs PoP, the Newlyweds here are probably already over the standard deduction with their state taxes liability alone. The rules really do apply differently to the wealthy in SoCal compared to most places.


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