Do the Math – Calculate A Monthly Mortgage Payment You Can Afford

Determine How Much House You Can Afford Before You Start Shopping

One of the biggest mistakes you can make as a homebuyer is not knowing how much you can comfortably afford when purchasing a home. The next mistake is thinking “too big” when it comes to price range or purchase price.

Stop right here before you make these mistakes!

It’s important to learn the correct way to do the math so that you get a mortgage you can afford and, ultimately, a home you absolutely love that’s within your budget. You won’t be “house poor” and you won’t shortchange yourself either.

Here’s how:

Think monthly payments first and foremost.

To start, you don’t want to focus solely on the purchase price, but with your desired monthly payment for your home. This monthly payment should factor in your taxes and insurance (but not utilities and general monthly maintenance).

We call this the Mortgage Rule of Thumb. It may seem backwards but it’s the critical starting point to make sure you get the house you want for the price you want.

Here’s why.

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 landscaping costs at a home versus HOA fees at a condo or tax rates in different counties of the Louisville area.  That’s why you should NOT focus on the purchase price first 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 people start with that blanket statement of price because their lender has pre-approved that amount for them. Don’t think you’ve hit the jackpot, though, since many lenders will approve a mortgage for you that could be significantly more than you are comfortable spending per month.

Many buyers will say, “I’ve been approved for $500,000 by my lender,” but when you dig a little deeper, they actually want (or need) to spend a lot less in order to have affordable monthly payments.

Lenders may approve you for the highest purchase price possible based on several of your financial factors (salary, net-to-debt ratio, credit score), but that number may not accurately reflect 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 backward to determine a purchase price that works with this monthly budget.

Yes, it does seem backward at first, but it works!

Once you have calculated a comfortable monthly housing payment, you can factor in your down payment amount and any homebuyer assistance programs that you may qualify for.

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 these factors in mind, you can figure out the correct price range for house-hunting.

Keep in mind, every $10,000 in purchase price adds approximately $50 to your monthly payment.  Similarly, the same goes for your down payment; for every additional $10K you put down, you’ll save about $50 per month on your mortgage.

So don’t feel you have to save for years for additional down-payment funds in order to afford a home.  And remember that there are some great options to help with your down payment. If you’re one of my physician clients (MD or DO, including residents and fellows), for example, I can connect you to lenders who offer $0 down-payment with no PMI.

Take a look at your budget to determine what you want to pay per month.

So now that you know to work backward, 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, what you’re willing to forgo, and what you expect to earn or what you want to do in the future.

Here’s what to include and consider when determining your budget:

• List all the costs of homeownership — property taxes, mortgage insurance, home insurance, maintenance, utilities, repairs or upgrades, lawn care, and HOA or condo fees. I can help with estimates!
• List all other expenses you expect to continue — such as gym memberships, day care payments, car loans, school loans, gas, personal care (haircuts), etc.
• Estimate yearly maintenance costs for a home. Plan to spend or save about 1% of your home’s purchase price each year. So, if you buy a $300,000 property, you should be putting about $3,000 per year into the home for maintenance or into a savings account for when you need to replace something in the future!
• Include any tax advantages you’ll get as a homeowner. You’ll have deductions or equity in your home and can expect a larger refund that could go toward your savings.
• Consider additional expenses, beyond your mortgage payment and maintenance costs. Decorating costs such as new furniture purchases can add up in the early years of homeownership.
• What expenses are “mandatory” for your life and general happiness?  Ask yourself some hard questions about your lifestyle now and for the future, and how that could impact your budget. For example, if you love to travel, then don’t buy a home that makes it impossible to save for a trip. You don’t want to be house poor.
• What expenses could you tighten-up on to get the home you want?  Could you drive a less expensive car, go to fewer concerts, or eat at home more often to cut some of your monthly expenses? The amount you save on these things could help you to afford that home you really want.
• Remember that how much you can afford today can change next year and the year after that. Yes, your salary will increase but you’ll probably also have new costs, such as a spouse, or children, or a new car.  This is when you’ll want a “crystal ball” to predict your life now and down the road but do take some time to think about how things might change.

Additional information for current renters.

Owning a home is about one-third more in cost than your current rent payment (without changing your lifestyle).

You can get a very rough estimate on what you can comfortably afford by using your current cost situation.

Multiply your current rent by 1.33 to arrive at a mortgage payment that won’t exceed your budget. This calculation takes into account the tax benefits of homeownership that can offset some of those additional homeownership costs.

For example, if you currently pay $1,500 per month in rent, you should be able to comfortably afford a $2,000 monthly mortgage payment after factoring in the tax benefits of homeownership.

I can help make it easier.

Don’t hesitate to contact me if you have any questions about calculating your monthly budget. I hope you’re convinced that it’s an important first step before you start looking at homes.

Once you know your monthly budget, everything else will neatly follow. You’ll be able to determine your price range and then be able to work with a lender on available mortgage products and down-payment options.

I have several fantastic lenders in the Louisville area that I can connect you with when you’re ready to get started. Let’s do this!