How Much House Can You Really Afford?

How Much House Can You Really Afford?

Prospective buyers should consider their financial circumstances and types of mortgages to understand their ideal homebuying budget.

Buying a new home is an exciting step in anyone’s life. Before you start looking at housing listings, however, you should know just how much house you can really afford.

Proper financial planning and mortgage research can help you avoid surprises or disappointments along your house-buying journey. Here are some important factors prospective buyers should consider when determining their budget for a new home, as well as some options for financing this important purchase.

What Is Included In A Mortgage Payment?

Many first-time homebuyers think of a mortgage payment as the total sale price minus the down payment divided by the loan term. In reality, there are multiple components of a mortgage loan payment — and at the beginning of your loan term, very little of your monthly payment actually goes toward the principal.

That’s why, when considering how much you can afford to spend on a home, it’s important to know exactly how your monthly payment breaks down, according to the FDIC (Federal Deposit Insurance Corp.):

• Principal: The amount applied to the balance of the mortgage loan.
• Interest: The percentage-based fee paid to the lender for borrowing the money.
• Property taxes: Your estimated annual real estate or property taxes, divided by 12.
• Insurance: Your annual premium for homeowners insurance, divided by 12. This component of your mortgage payment may also include flood insurance and private mortgage insurance (PMI), if applicable. Generally, you will only need to pay for PMI if you put down less than 20 percent of the home’s sale price.

You can use Newrez’s handy online mortgage payment calculator to determine what your potential payment breakdown might be based on your intended down payment.

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