Setting a Home Buying Budget: Figure out the Downpayment and Purchase Price

When planning to purchase a home, it is crucial to establish your budget wisely and most importantly, be realistic about it. The last situation you want to get yourself into is buying a home you can barely afford and struggle to pay for, in other words, being "house poor." The steps outlined below will help you better understand what is an affordable price range for your future home.

Step 1: Search for the Best Mortgage Rates

Understanding the impact of mortgage rates on your affordability is essential. Begin by searching for the best mortgage rates available from banks, credit unions, mortgage brokers, etc, this can be easily done online these days. When you apply for a mortgage, the interest rate you actually are quoted can be higher or lower than advertised rates available, this is because the rates you're are based on your credit score and other relevant details. The actual mortgage rate you are quoted will enable you to make an informed decision when calculating your mortgage payments.

Step 2: Calculate Monthly Principal and Interest

Your ability to afford a loan amount is directly influenced by the monthly payments you can comfortably make. Take the following steps to determine your affordable monthly principal and interest:

  • Assess your total monthly home payment, including various homeownership costs. Make sure you differentiate between the principal and interest payment, which is the portion used to repay your loan. To get an estimate, browse for-sale listings or consult with local real estate agents, friends, or family.
  • Deduct the projected monthly expenses for property taxes and homeowner's insurance from your target total monthly home payment. The remaining amount represents what you can afford to allocate to your principal and interest.
  • Step 3: Calculate Your Affordable Loan Amount

    Numerous online mortgage calculators are available to assist you in this process. You can utilize our simple calculator or search for "mortgage calculator" online. The method you use to calculate your affordable loan amount will depend on the type of calculator you choose:

  • Most mortgage calculators require you to input the loan amount, loan term (in years), and mortgage rate to determine your monthly principal and interest payment. Begin with a rough estimate for the loan amount and adjust it until the resulting payment aligns with your affordable range.
  • Certain mortgage calculators allow you to input the mortgage rate and the desired principal and interest payment amount directly. These calculators can calculate the maximum loan amount that corresponds to your affordability.
  • Considering Down Payment Impact

    It's important to note that your down payment amount has a significant influence on your affordability. If your down payment is less than 20% of your target home price, you will likely be required to pay for mortgage insurance, which adds to your monthly expenses. Adjust your target home price accordingly if you plan to put down less than 20 percent. Explore different loan options in the next phase to understand how your down payment and loan choices affect your affordability.

    Exploring Loan Choices

    In the initial stages, most mortgage calculators present standard 30-year fixed-rate loans. While this is suitable for estimating your home price, it's essential to explore various loan options in the next phase. This exploration will provide insights into different loan types, terms, and interest rates, empowering you to secure the best possible deal.

    Four Key Factors Affecting Home Affordability

    Understanding the following four factors will allow you to adjust your budget and potentially afford a more or less expensive home:

  • Monthly payment capacity
  • Down payment amount
  • Loan type (e.g., 30-year fixed, 30-year adjustable, 15-year fixed)
  • Loan interest rate and terms
  • These four factors can be changed to figure out what mortgage term and type will help you get into the house you want. A mortgage broker can also work with you to figure out what mortgage is best suited for you.

    One last point to make, right now 30-year mortgage rates are around 6.00 percent, that's the highest rates in over a dozen years. Over the next couple of years, mortgage rates are expected to decline, rates might be back down in the 3.00 percent range for a 30-year mortgage. That being said, if you buy a home now keep and eye on rates, because you will be able to lower your monthly mortgage payments by refinancing, you can also save a ton of money in interest payments.

    Author: Brian McKay
    June 9th, 2023

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