Working The Numbers Backward
Congratulations on making the decision to buy a home! Now it’s time to figure out how much you can spend and how much you can afford. Buying a home is an emotional decision, and sometimes emotional decisions can lead to bad decisions. Knowing how much you can afford each month will make your decision of buying that home much more comfortable when you’re looking at houses.
The first place that we need to start is breaking down every cost that is associated with homeownership every month. My advice is to work the numbers backward to come up with a monthly payment that you are comfortable with and a sales price that fits that amount.
Your Monthly Payment
Your main monthly payment is made up of four items. Known as your PITI payment, this consists of your principal, interest, taxes, and insurance. The largest portion of your housing payment is the one that you’re going to make to the bank.
This consists of your principal and interest payment and will likely be a fixed amount, depending on which loan type you have taken out. A portion of this will get applied to paying back the loan itself, while the other portion of it will get applied towards interest on the loan.
The next part of your mortgage payment is your property taxes. Here, you’re going to take the annual bill and divide it by 12. That amount is going to be in addition to the principal and interest part of your payment. The last part of the PITI is your homeowner’s insurance. It’s the same thing as your property taxes: you’re going to take your annual bill, divide by 12, and add it to your principal, interest, and tax amount. That’s going to round out your PITI payment.
Private Mortgage Insurance (PMI)
Unfortunately for many people, the PITI payment doesn’t stop there; two more possible additional items could go into your monthly mortgage. The first additional expense that you could have on top of your PITI payment is what’s known as PMI, or private mortgage insurance.
PMI is for people who do not put down a full 20% when they purchase their home. It’s basically additional insurance for the lender in case you don’t make your mortgage payments. If that happens, the PMI companies are going to step in and pay a portion of the loss of the loan back to the lender if your loan was to go into foreclosure.
The good thing is that on a veteran’s loan, veterans do not have any monthly mortgage insurance. This means they don’t have to worry about paying PMI.
HOA Fees
The second additional fee that you could have in addition to your PITI would be a homeowner’s association fee. You’ll know if you have this depending on the place that you are buying the property. It could be a development or condo association; the property might have landscaping, common areas, insurance, pools, clubhouses, and extra features that you get for living in that property.
All of those extras need to be maintained and taken care of. Because of that, you’re going to pay a monthly fee. It’s important to note that you will pay it monthly; while we do have to count it against you and your debt to income ratio, that actual monthly fee will not be paid to the mortgage company. Rather, it will be paid to the homeowner’s association.
Finding A Home In Your Budget
Now that you have a good idea of what your housing payment entails, we can back into a sales price that you’re comfortable with. Keep in mind, you’re going to have other additional bills associated with owning a home—such as utilities—that you’re not going to want to forget about paying.
I hope this helps you determine a price range to look for when searching for your new home. (f you need help backing into that, please reach out to the Rebecca Foote Mortgage Team. We are here to help and make this home buying process as smooth and stress-free as possible. Make sure you also subscribe to the channel, and stay tuned to see what we feature next!