One of the questions home buyers have when house hunting is the relationship between their monthly mortgage payment and how much purchase price they are looking to take on. Here’s what you can use as a guide when you’re house hunting to help determine how to bridge thegap… In most instances, for every $100,000 of purchasing power with your total principal, interest, taxes and insurance, payment changes by $600 per month. Simply put for every $100,000 of house it translates to $600 per month in payment. That means a house for $300,000 would be around $1900 in total monthly mortgage payment. This is particularly important because it can shape how much you decide to offer on a home. The relationship in price to payment can also be broken down in increments of $50,000 and $25,000 as well. For example, $50,000 in purchasing power translates to $300 per month in PITI payment.
The above scenario is assuming a 20 percent down type loan structure. The relationship between the down payment percentage and the monthly buying power percentage can change based on less than 20 percent down to the tune of $600 per month more in PITI on average. Put another way, buying a home with less than 20 percent down could mean a payment difference of $600 per month. Buying a home with say 10 percent down could mean $100,000 difference in spending power.
This $600 variance changes based on product type e.g. conventional vs. FHA. For example, putting down 10 percent would contain a slightly higher interest-rate, monthly mortgage insurance and slightly bigger loan amount which drives the payment approximately $600 per month for less cash down.
Looking at a house for $600,000 the total mortgage payment would be approximately $3,000 per month with 20 percent down. That same scenario would be approximately $3,600 per month with a 4.375 interest rate with 10 percent down and having monthly mortgage insurance.
The difference between 10 percent down and 20 percent down can mean buying a home with more spending power. When you purchase a house with less than 20 percent down you don’t have as much velocity in borrowing power in the relationship to payment that you do with 20 percent down. That is just a byproduct of having monthly PMI and having a slightly higher interest rate for having less than 20 percent down. If your goal is to maximize your borrowing power, buy as much house as you can with the lowest possible payment, just put down 20 percent.
Hopefully, because of reading this you will be able to interpret a different purchase price and what that will mean in terms of monthly payments so you can get a broader sense of what your purchase price to payment will look like when deciding to go house hunting.
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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.