Making the decision to buy a house is exciting, and your emotions will be running high as you embark on this new journey.  But before you get carried away searching online for properties, you’ll need to answer an important question: how much should I spend on a house?  

Determining a price range you’re comfortable with is the most important part of the home buying process—and should be the deciding factor in the types of properties you search for.  You’ll be committing to a monthly payment, so you need to decide what you can comfortably afford based on a monthly housing budget.  A loan preapproval shouldn’t dictate the intended purchase price of your new home, since the preapproval letter doesn’t break down what you’re recurring payments will be.

How much you’re able to spend on a house should be based solely on the number of total housing expenses you can afford per month.   Your monthly mortgage payment will not be the only cost.  You’ll need to factor in closing costs and additional housing expenses when determining the price point parameters you’re comfortable searching in.  If you’re house-rich but cash-poor, life will be difficult and the enjoyment of owning your own home will be lost.  Establishing a comfortable monthly payment will allow you to make the wisest decision, and should be one of the first conversations you have with any realtor you hire.

By working the numbers backward—considering all the costs and determining your monthly payment—you can then decide on a purchase price that will fit your budget.  Let’s break these expenses down one by one.

4 Expenses That Determine How Much You Should Spend On A House

1.       Principle And Interest.  The largest monthly housing expense you’ll have is the one you’ll make to the bank: your mortgage payment.  Depending on the amount of the loan you’ve taken out, a portion of the payment will go towards the principle and some towards interest.  At the beginning of your loan, the majority of your mortgage payment will go towards the interest; this will reverse in time as your loan matures, with more money going towards your principal.  Regardless, the monthly payment should never change.  You’ll also want to consider how long you plan on living in the house, as this affects the type of loan you should take out.  A home buyer can choose from a 30-year fixed mortgage, 15-year fixed mortgage, or an ARM (adjustable rate mortgage).  Knowing how much you feel comfortable paying per month on your mortgage will help you calculate your total housing budget.

2.       Annual Property Taxes.  Once you own real estate, you’ll also own a tax bill.  This is a huge factor in deciding how much to spend on a house, and you’ll need to include it in your total monthly housing budget.  Each county’s property tax rate is different, but there are many reliable property tax calculators available online to give you an idea of what you’d be paying per year.  Most people choose to escrow their taxes, which means the total annual amount is divided up and paid monthly which each mortgage payment.  If you’ve put down more than 20% on your home, you also have the option of paying in two lump sums each year.  For budgetary ease, however, it’s best to simply make it part of your monthly payment.

3.       Monthly Homeowners Association (HOA) Dues.  Not every property will have an HOA attached to it, but it’s important to consider when searching for your home.  Condos and townhomes will typically have monthly HOA dues to pay, which typically cover things like maintenance, landscaping, pools, building staff, common area expenses, water, and other utilities.  HOA fees should be considered as part of your monthly payment: if you don’t pay them, expect the association to take possession of your unit.  This bill will also need to be paid on time to avoid late fees.  Figuring out how much to spend on a house can be determined by whether your property has an HOA attached to it or not, since higher dues may limit the amount you can spend on your total purchase price.  On the other hand, a home with no HOA fees will allow you to increase the price you’re able to spend on a home while still staying within your monthly budget.

4.       PMI – Private Mortgage Insurance.  Any time less than 20% down has been put on a house, a buyer will need to pay private mortgage insurance.  The amount of PMI is based on the total loan amount, credit score, and the loan-to-value ratio of your property.  While there are situations where PMI can be avoided, you’ll want to discuss your options with your lender and make sure you have an idea of what your monthly costs will be.

Once you have an idea of a payment that will comfortably match your total monthly housing budget, you can then find a property that will work with that amount.  Reverse engineering this number to find the right price point will ensure that you don’t waste time searching for properties you can’t afford.

If you need help in this process or just want more information on how to determine your monthly housing payment, feel free to contact me and I'd be happy to help!