Mortgage:  What’s Your Home Buying Power?

Whats Your Buying Power Image flpalmbeach.com Martin Group Real Estate Team ImageIf you’re in the market for a new home or investment property, one of the first questions you’ll probably ask is, “What can I 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 that buyers 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 or a home in a more desirable neighborhood, or you might realize you should be looking for homes in a lower price range.

What About Housing Affordability?
Housing affordability is a metric used by real estate experts to assess whether or not the average family earning an average wage could qualify for a mortgage on the average home.

What may be considered affordable to you based on your income and other factors may be different than what’s affordable to the average buyer.

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.

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. After all, 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. 

If you haven’t sold your current home yet, a Comparative Market Assessment (CMA) will give you a general idea of how much you may get for your home based on what other homes have sold for in your area. Contact our team for a FREE CMA… Text or Call 561-339-1779!

How to Calculate My 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 qualify for.

Most lenders advised 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.2

However, other financial experts advise spending no more than a very conservative 25 percent of your after-tax income on your housing expenses.2  Whether you plan to spend the average, play it conservative or split the difference is up to you.

You don’t have to spend all of your savings and available monthly income on a mortgage payment. It’s important to set money aside for regular home maintenance, unexpected repairs and monthly fees, such as a condominium or homeowners association fee. Keep in mind the less money you have to borrow, the stronger your buying power may be.

4 Things That Impact Your Buying Power

  1. Credit score
  2. Debt-to-income ratio
  3. Assets
  4. Down payment

How to Save for a Down Payment
If you’re thinking of buying a home one day, one of the first steps to take is to start saving for a down payment. Here are some tips to make saving easier.

First-time buyers:

  1. Set a savings goal
  2. Cut back on expenses
  3. Look for ways to boost your income
  4. Check out home-buying programs
  5. Ask your family

Repeat buyers:

  1. Rent out a room. 
  2. Make your money work for you
  3. Tap into your 401(k)

If you want to buy an investment property:

  1. Tap into your equity
  2. Get a partner

Use the table below to estimate your monthly payment (principal and interest) per $1,000 of your loan. To figure out an estimated loan payment, multiply the factor by the number of thousands in the amount of your mortgage.

For example, if you intend to borrow $400,000, with a loan term of 30 years at 4% interest, multiply 4.77x 400 = $1908 per month.

Interest Rate 15-Year Term 30-Year Term
  Monthly Payment Monthly Payment
    3% 6.90 4.21
    3.5% 7.14 4.49
    4% 7.39 4.77
    4.5% 7.64 5.06
    5% 7.90 5.36
    5.5% 8.18 5.68
    6% 8.44 6.00

Source: HSH.com  

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 the above payment amounts.

Work Out Your Buying Potential
What’s your buying potential? Fill out the worksheet to get your estimate in the Full Article: Mortgage Information: Your Home Buying Power

Do you want a clearer picture of your buying power? Would you like to see what kind of homes you can get with your buying power? Text us or give Doug Martin a call at 561-339-3299!