How Much House Can You Buy?
When trying to determine the price range of homes you should consider, you must first take into account your Desired Monthly Payment. Only after you have identified a comfortable monthly payment that is within your reach can you determine an acceptable purchase price. This is a step which really should be completed before you begin to look at homes.
The best and easiest way to find out your eligibility to purchase a particular price home is to use one of the literally hundreds of Mortgage Calculators available on the internet, such as Mortgage101.Com. If you have already figured your maximum monthly house payment then it is pretty easy to “back into” the Purchase Price. The variable factor of course is the interest rate which prevails at the time you are ready to purchase.
For example, if you had a 3.75% loan on a $250,000 home, your principal and interest payment would be $1,158.00 a month. At 4.25% interest, the payment would be $1,230.00 a month, and at 4.75% it would be $1,304.00 a month, and so on. So as you can see, the interest rate is the key to determining how much house you can afford with the purchase price going up and down as the interest rate rises and falls.
Remember that the amount allowed in the qualification process for housing (29% of your monthly gross income) includes escrowed amounts for insurance and property taxes. You can guess what the taxes might be by adding about 1.5 percent more for taxes and typically less than about 1 percent for hazard insurance to the price of the home.
On a $250,000 home, the taxes will be about $3,750.00 and the insurance will be about $1,500 to $2,500.00. Divide those amounts by 12 to see the monthly amount which will be added to the principal and interest to make up your total monthly house payment. The amounts may be a little high but it is better to allow too much than too little.
The bottom line is this … to really find out how much you can afford, you will need to talk to a mortgage lender about the different loan plans that may suit your needs. You may find that with a different type of loan such as an adjustable rate mortgage, you may be able to afford more house for temporarily lower payments. This can be a particular good thing if you don’t think you will be in a home for a long time.
Right now, interest rates are still so low that you may prefer a fixed rate mortgage, but an adjustable rate is not likely to rise significantly over the next few years. You can, however, count on a rate change virtually every year, and most likely it will be higher.
After you have figured out how much you can spend, whether it is $50,000 or $5,000,000, and after you have a Lenders commitment letter in place, then and only then are you ready to get serious about finding a new home.