When someone decides to buy a house, one of the first tasks is to talk to a lender and determine the maximum loan they can get. The max loan will determine the cap on real estate prices for the buyer. There's lots of calculators out there that will help determine this. But what if you want to have a certain payment per month and you want to know what the max house price would be for that payment? For example, you are renting at $800 per month right now, and you could deal with a couple hundred more per month to be able to have ownership. So, you want to know what the house price would be equal to paying $1000 per month; in other words, you want to cap how much you spend each month on your home, not pay as much as a lender allows. Well, you still take into consideration a lot of familiar items: 1) Your down payment, which is how much cash you will put down on the real estate up front. The rest of the sales price will be the loan amount. The more cash you put down, the smaller the loan you will have to finance, and hence, the smaller the monthly payments. 2) The number of years the loan will be amortized over. The more years, the less you pay each month. 3) The interest rate for the loan, which can drastically change your mortgage interest payment each month. The higher the rate, the more your payment. 4) The property taxes of the area where your property is located. Again, the higher the tax rate and higher the appraisal values, the more dollar amount you will pay each month. 5) The insurance rate. Once more, the higher the rate, the more you will pay. This is affected mostly houses that are in special insurance areas that need more coverage, like flood zones. So, all those items go into the calculation of getting to that $1000 monthly payment you want to spend. Setting your monthly limit first rather than your price maximum puts your home purchase in perspective with your daily life. You know you spend a certain amount on rent, so it's a good starting point to figure out what price of house you could own by investing the rent you are paying someone else. If houses in your area are more expensive than what your rent allows, you can work your way up figuring out how much more you can spare per month to raise your house price. There are of course benefits to home ownership like deductions, appreciation as well as the simple enjoyment of the home. Mortgage interest and property taxes can be taken as a deduction on your federal taxes. Plus, you can guess what appreciation your home might get, given the past performance. These numbers are positives in the calculation but get a little more complex to figure in, so for now, get started thinking about what payments you can comfortably pay per month with the five components mentioned above.
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