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3.06.2008

The Right Question: "How Much Do I Want To Spend On Housing Each Month?"

One of the most popular questions that home buyers ask real estate and mortgage professionals is "How much home can I afford?"

It's a normal question to ask, but it's not the most effective way to plan your finances.

Banks will almost always approve you for a home loan in excess of your household budget.

The more appropriate question is: "How much do I want to spend on housing each month?"

By focusing on a home's payment instead of its list price, home buyers exert more control over their short- and long-term financial goals. List price is only one piece of the monthly payment puzzle.

The cost of owning a home month-after-month is the sum of multiple expenses:

  1. The mortgage payment
  2. The real estate taxes on the property
  3. The condo/management fees to an association (if applicable)
  4. The cost of homeowner's insurance
  5. The cost of mortgage insurance (if applicable)

In other words, because monthly payments are a combination of costs, buying a home based on its list price does very little to help plan a budget. A home selling for $300,000, for example, may cost a homeowner anywhere from $1,800 to $3,000 monthly.

This is why "How much do I want to spend on housing each month?" is a better starting point than "How much home can I afford?".

Home affordability comes from more than just the list price.