There are 2 items that go into knowing the right property value range you should focus on for your household:
- The down payment needed to avoid PMI and secure a reasonable monthly payment
- The monthly payment you will have to pay.
You can see that they are related. Your mortgage broker may say you are approved to borrow up to a high number, but that is RARELY the right amount to borrow, because it rarely makes sense both from a down payment and monthly payment perspective.
Let’s do an example. Say you find your dream house and it’s worth $500k. Your mortgage broker says you are approved for a mortgage up to $450k and you have $50k of savings. That all seems to work, but you have to do the full math to make sure as shown below:
|Buying a Property||Amount|
|Mortgage (5% for 30 yrs)||$450,000|
|Principal & Interest||$2,415|
|All in Total Housing||$3,075|
You can afford the down payment and you’ve been approved for the mortgage, but a housing payment of $3,075/month is too much for your cash flow. What if you can only handle a $2,600/month housing payment? You would need to wait, and save more to be able to put down 20% ($100k in this case) and avoid PMI. With a larger down payment, your monthly payment would also be significantly less ($2,147 vs $2,415).
Here you can see that you need to balance down payments AND monthly payments to make sure you do not jeopardize your household financial well-being by being “house poor” and not being able to do anything else all month because you have to pay the mortgage. Remember, when you buy a property you need to balance both.
If you are considering buying a property, you can learn more about the process and what to watch out for in our house-buying guide!