Do the Math — A Mortgage You Can Afford
This is the third article in our series called, Buying a Home 101: Everything You Didn’t Know You Needed to Know Before You Buy Your First Home. This step-by-step series will take you through the entire home-buying process — from finding a buyer’s agent to settlement day, and even to maintaining your home after you’re all moved in. Make sure to tune in every week!
One of the biggest mistakes many homebuyers make is not knowing how much they can REALLY afford when purchasing a home. The next mistake is thinking too “big picture” when it comes to price range or purchase price. Stop right there before you make the same mistakes!
We’re going to show you the correct way to do the math so that you get a mortgage you can afford and, ultimately, a home you absolutely love on your budget. You won’t be “house poor” and you won’t shortchange yourself either.
Think monthly payments first and foremost.
Here at Dwell Residential, we don’t want you to focus solely on the purchase price, but rather first start with your desired monthly payment for your home. This monthly payment should factor in your home’s potential taxes and insurance.
We call this our Mortgage Rule of Thumb. It may seem backwards but it’s the one and only way to make sure you get the house you want for the price you want.
Even if the purchase price is exactly the same, your monthly payment could be very different between two properties.
For example, the monthly payments for a $500,000 condo will be completely different than for a $500,000 single-family home. There are different costs you’d need to consider for each option, such as condo fees. That’s why we tell our clients to NOT focus first on the purchase price since monthly payments can vary depending on where and what you buy.
So never begin your search with a blanket statement, “I want to spend $500,000” and not even know whether that amount will truly fit your monthly budget.
Don’t just accept what lenders say you can afford.
Unfortunately, many buyers start with that blanket statement of price because their lender pre-approved that amount for them. Don’t think you’ve hit the jackpot, since many lenders will approve a mortgage for you that could be way more than what you’re comfortable spending per month.
We have clients all the time who say, “I’ve been approved for $500,000 by my lender,” but when we dig a little deeper, these clients actually want to spend a lot less in order to get the payments they truly want to commit to each month.
Lenders will approve you for the highest purchase price possible based on several “big picture” financial factors, but it doesn’t really keep in mind what YOU want to pay per month on a home.
Work backward to determine the “correct” purchase price for you.
First, you need to figure out how much you want to pay per month, and then you’ll need to work backwards to determine a purchase price that works with this monthly budget.
Yes, it does seem backwards at first, but we actually think the traditional way of doing things is the backwards way!
Once you know how much you want your monthly housing payments to be per month, you can then take into account your down payment and any homebuyer assistance programs and factor them in. You’ll also need to include other potential costs of owning a home – taxes, insurance, condo fees – that will affect your monthly budget. With all of these factors in mind, we can then help you figure out the correct price range to shop in.
Remember, every $10,000 in purchase price only adds an additional $50 to your monthly payment.
Keep in mind this rule of thumb when you’re calculating. It will make it easier to find that perfect balance between the funds required for purchasing a home and your monthly payment.
Take a look at your budget to determine what you want to pay per month.
So now that you know to work backwards, how do you determine what you want to spend per month when you own a home? It’s time to make a budget!
Making a budget is an important step, so be honest about what you spend your money on each month now and in the future.
•List all the costs of homeownership — property taxes, insurance, maintenance, utilities, and condo fees, if applicable. We can help you with some of these numbers and provide estimates.
•List all other costs you expect to continue — such as day care payments, car loans, gas or commuting fees, etc.
•Plan to spend or save about 1% of your home’s purchase price each year for maintenance or future maintenance costs. If you save 1% per year, you’ll have the funds for when you do need to complete any home repairs and maintenance.
Both your income and your expenses are the two big factors that come into play when determining what mortgage amount (and monthly payment!) you can afford.
However, remember what you can afford today can change next year and after that. Yes, your salary will increase but you’ll have new costs, such as kids or a new car. Factor in all of this when doing your calculations.
As you can see, there are several ways to determine how much mortgage you can afford. However, using our Mortgage Rule of Thumb and focusing on your monthly payment is the best way to ensure you’ll buy a home you can afford and love.