FIGURING OUT YOUR HOME BUYING POWER
If you’re in the market for a new home or investment property, one of the first questions you’ll probably ask is, “What can we afford?” Many buyers become so caught up in how much they can afford that they don’t realize their total buying power—that is, the total amount of purchasing potential they actually have.
BUYING POWER DEFINED
Your buying power is comprised of the total amount of money you have available each month for a mortgage payment. This means the money you have each month after fixed bills and expenses. Any money you’ve saved for a down payment, the proceeds from the sale of your current home, if applicable, and the amount of money you’re qualified to borrow all impact your buying power as well. When you take all of this into account, you may find you are able to purchase a larger home than you thought or you might realize you should be looking for homes in a lower price range.
WHY BUYING POWER MATTERS
A common misunderstanding is that a home’s list price determines whether or not you can purchase it. Although it’s important to look at the price tag, it’s essential to consider what your monthly payment will be if you own the home. After all, the purchase price doesn’t include the housing-related expenses, such as annual property taxes, homeowner insurance, associated monthly fees and any maintenance or repairs. Figuring out the payment will prevent you from overestimating or underestimating your buying power. Remember, you’ll live with your monthly payment, not the sales price.
Once you have clarity on your buying power, you’ll be able to buy the home you want, instead of settling for a home because you feel it’s the only one you can afford. It will also prevent you from becoming “house poor,” a common term for someone who’s put all their money toward the down payment, leaving them nothing left over for fees outside of their monthly house payment. Both scenarios can negatively impact the lifestyle you want to live. Understanding your buying power can help you get the home you want without sacrificing the lifestyle you desire.
CALCULATING YOUR BUYING POWER
You might be wondering, “How do I know what my buying power is?” Buying power is calculated by adding the money you’ve saved for a down payment and/or the money you made from selling your home (minus fees and mortgage payoff) to all of your sources of income and investments that could be used to make your monthly payment. Make sure to include your monthly pay, commissions or tips, dividends from investments, payments from rental properties or other monthly income you receive as well as the loan amount you’re willing to finance and can qualify for.
Most lenders advise buyers to spend no more than 35 to 45 percent of their pretax income on housing, meaning all your income and sources of revenue prior to paying taxes. Make sure you factor in not only your mortgage payment, but also property tax and home insurance to the cost of housing. However, other financial experts advise spending no more than a very conservative 25 percent of your after-tax income. Whether you plan to spend the average, play it conservative or split the difference is up to you. While it’s tempting to take out a large loan in order to purchase the home of your dreams, keep in mind the less money you have to borrow, the stronger your buying power may be.
DON’T FORGET TO FACTOR IN PROPERTY TAXES AND INSURANCE
These are often added to your principal and interest of your mortgage payment—the money used to pay down the balance of your loan and the charge for borrowing the money. Since these numbers vary, contact your county assessor’s office for the current property tax rate and your insurer for a home insurance quote. Once you have these figures, divide each by 12 to estimate how much they’ll add to your monthly payment.
What’s your buying potential ? Fill out this worksheet to get an estimate.
| Housing Expense Ratio: | ||
| 1. | Monthly income before taxes. | $ |
| 2. | Multiply line 1 by 0.28 | x 0.28 |
| 3. | Monthly mortgage payment PITI (Principle,Interest,Taxes and Insurance) should not exceed this amount | = $ |
| 4. | Monthly income before taxes | $ |
| 5. | Multiply line 4 by 0.36 | x 0.36 |
| 6. | Total monthly payments on all debts (including mortgage) should not exceed this amount | = $ |
| 7. | Subtract the total monthly payments on all outstanding debts (e.g., car loans, credit cards, student loans, etc.) | -$ |
| 8. | The monthly mortgage payment should not exceed this amount | $ | |
| 9. | Look at line 3 and line 8. The lower figure is an estimate of the maximum mortgage payment in consideration of your income and debts. | $ | |
| 10. | Multiply line 9 by 0.80 | x 0.80 | |
| 11. | This equals portion of your mortgage payment that is the principal and interest only | $ | |
| 12. | Use the table below to see the size of the loan you may be able to obtain with this monthly mortgage payment. | ||
| Note: Loan payments below do not include Taxes, Insurance and HOA (if applicable). |
| Monthly Payment on 30-Year Fixed Rate Mortgage (Rounded to nearest whole dollar) | |||||||
| Loan amount | 3% | 3.5% | 4% | 4.5% | 5% | 5.5% | 6% |
| $150,000 | 632 | 674 | 716 | 759 | 804 | 852 | 900 |
| $175,000 | 738 | 786 | 835 | 887 | 939 | 994 | 1049 |
| $200,000 | 843 | 898 | 955 | 1013 | 1074 | 1136 | 1199 |
| $250,000 | 1054 | 1123 | 1194 | 1267 | 1342 | 1419 | 1499 |
| $300,000 | 1265 | 1347 | 1432 | 1520 | 1610 | 1703 | 1799 |
| $400,000 | 1686 | 1796 | 1910 | 1027 | 2147 | 2271 | 2398 |
| $500,000 | 2108 | 2245 | 2387 | 2533 | 2684 | 2839 | 2998 |
Orlando Homes For Sale– Todd Mowry Realtor. Specializing in Real Estate in Orlando, Winter Park, Maitland, Waterford Lakes and surrounding
communities. I have over 10 years of experience in advising buyers and sellers on how to make the most well informed decisions for themselves. I act as a guide to help make the transaction as easy as can be and to get them everything and every dollar possible. Call or text me at 407-435-5220 even if you just need to ask a question from an experienced and dependable Realtor.