Back to the Fundamentals: I have my maximum payment. Now how much house can I buy?
If you have ever used Excel spreadsheet, which I do daily in calculating mortgage and investment solutions, the answer to the question in the title of this post requires a circular calculation.
Here’s what I mean. As you are solving for the amount of home that translates into the amount of payment you want to have, changes in one box, necessitates changes in another, which in turn changes the payment which requires a change in one or more of the inputs.
Excel does this for you, but you can do it too.
You take a simple mortgage calculator and plug in a few variables. Let’s say rates are 5%, you are choosing a 30-year fixed mortgage—so 30 years or 360 payments—then you put in an amount of the loan you will be borrowing, and you solve for the principle and interest payment.
Add a monthly amount for property taxes – Summer and winter amounts added together and divided by 12.
Add an amount for home insurance. For an estimate, take the sale price and multiply it by 0.0035 (or .35%). Divide that by 12. Then, if you have mortgage insurance (which you would for an FHA loan or a conventional loan with less than 20% down), you need to calculate and add that in. For most deals, you’ll get close enough (a little to the high side) if you use an amount that is 0.0075 (or .75%) time the loan amount. Divide that by twelve and add it in as well.
Once this is all added together, you can see where you’re at and start to move upward or downward in the price of the home (moving taxes, insurance, and mortgage insurance up or down as well).
Let’s say you are after a $1500 payment, and you want to put 10% down on a conventional loan. Without checking first, we start with a particular home that has a sale price of $200,000. You have $20,000 to put down, that’s 10%. The seller is going to pay all of your closing costs.
Your loan amount is $180,000. At 5%, 30-year fixed, the principle and interest payment is $966.28. Tuck that away.
The taxes on this particular home are listed to be $4260 per year. That makes $355 per month.
A good estimate for home insurance is 0.0035 times the sale price. $700, more or less – round up to $720 and you have $60 per month for this.
Mortgage insurance is next. Take the $180,000 loan amount and multiply by 0.0075. That comes to $1350. Divide that by 12 and you have $112.50
Your payment for this particular home would be $1493.78 per month, all included.
(If you are buying a condo, you can usually eliminate the home insurance and add in the association dues. The rest would be about the same.)
Not bad for your first try!