Real Estate
June 1, 2020
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Cash to payment formula when buying a home

By: Scott Sheldon
May 3, 2019

Buying a house is a large financial investment. People when seeking a mortgage generally are looking to keep their payments as low as possible in relation to their income and fixed costs. Here’s what you should look for when deciding how much cash you want to put in your home buying project…

The general rule of thumb for purchasing a property is that for every $100,000 of spending power that’s about $625 a month of payment with today’s mortgage rates in the mid four percent range. This means that the opposite holds if you’re purchasing a property and you’re putting down five percent just because you’re trying to purchase a house and keep your cash as liquid as possible, one way to offset the amount of cash in relationship to payment is to look at multiple scenarios.

If you have the cash to put down an extra hundred thousand dollars based on your financial means you should look at the overall cost-benefit. What’s the cost of taking the extra money and using it for a down payment?

What’s your return on that additional down payment cash? If your return is greater to keep that money in the bank liquid, then do that; however, with today’s overall low rates it’s probably almost nine times out of 10 more beneficial to put the extra $100,000 down on your payment increasing your return on that down payment capital.

An experienced and competent lender can run that math for you to show what that would look like in relationship to a housing payment. So, $100,000 extra down payment is going to lower your monthly mortgage payment to the tune of about $625 per month.

This relationship from payment to cash also relates to other monthly expenses. Let’s say for example that you have a car payment at $600 per month- that car payment at $600 a month is $100,000 of spending power in relationship to income. Put another way, the BMW that you’re financing at $600 a month might prevent you from being able to purchase a $600,000 house, pigeonholing you into a $500,000 house. Any realtor will tell you $100,000 in spending power can dramatically change the scope of the neighborhood that you’re looking to purchase, the area, the location, property size, bedroom size, bathroom size, etc. $100,000 in a real estate transaction is almost always night and day difference between one property versus another. In other words, it’s big.

So, for every $100,000 it’s about $625 a month payment, that also means that for every $50,000 of cash or spending power that’s going to relate to $312.50 per month of payment. The same logic and relationship applies. A consumer debt at $300 a month is $50,000 of spending power and so on.

The question you need to ask yourself when deciding to purchase a house and trying to manipulate your borrowing power is: can I get rid of consumer debt to increase my borrowing power? Same thing, conversely, if you’re at a certain monthly mortgage payment based on your monthly income, can you change your income and or get a co-signer? Those are ways to increase your borrowing power. For most families when they’re buying a home, paying off a consumer debt will yield them a payment allowing them to do more with their individual finances. That may mean looking at bigger priced homes, lowering payment if they take that extra cash or paying off debt or paying down that principal balance freeing up payment and spending power.

Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.