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Buying a new home, whether as a first-time buyer or as one who frequents that market, can be a wonderful experience, but it can also impact debt and hold a great deal of potential financial harm if not approached from the right state of mind.  There are several monetary-related factors that should be considered before one even speaks to a real estate agent or walks through a first property.

For a rough estimate of what one can afford as a monthly payment, assume that the mortgage payment, plus the taxes and the insurance for the month, equals approximately one-quarter of the monthly gross income of the household.  That is to say that a household making $60,000 before taxes per year, would gross $5,000 per month and, therefore, could afford to spend up to $1,250 on mortgage, taxes, and insurance per month. There are many factors that will determine what kind of house that will buy.  For instance, the money used as a down payment will make a substantial difference on the monthly payments.  Someone who puts twenty percent down will not only face smaller monthly payments because of a reduced principal (amount of loan), but also because he who places less than twenty percent down on a house of the same value would most likely be subjected to PMI- private mortgage insurance, which provides some assurance for the lending institution and increases the monthly payment.  Also, the interest rate will vastly affect the monthly payment amounts.

In order to determine what one’s principle and interest payment per month will be, he can use a function in Excel. In Excel 2007, under the “formulas” tab, there is a button labeled “insert function.” Pressing this will open a new screen and search bar.  Search for “PMT,” select it from the list, press “ok,” and you will see a new screen open. This is the screen that can be used to determine your payment (less taxes and insurance). In the “rate” line, you will enter the interest rate per month.  For instance, a six percent rate would be entered at 6%/12 (six percent per year divided by twelve months).  Next, enter the number of payments in the “Nper” line.  This is the number of months that payments will be made, so a typical thirty-year loan would be entered as 360 (30 years x 12 months).  Finally, enter the present value of the loan (“PV”- the amount to be borrowed).  Recall that this value may be less than the amount paid for the house if a down payment is made, or more than the amount paid for the house if closing costs or home improvement expenses are combined.  So, if one intends to buy a $250,000 and put 20% down, then the PV would be 200000 ($250,000 house value-$50,000 down payment).  When all figures are entered, press “ok” and the answer will be shown in the cell selected (as a negative number because it is cash being spent).  In this case, the resulting payment would be $1199.10. Remember, however, that this is not the final payment, because most banking institutions require that taxes be escrowed, which means that a sum is paid monthly toward the estimated yearly property taxes.  Also, the individual will be responsible for obtaining and maintaining a homeowner’s insurance policy which will represent a small monthly sum. These numbers should also figure toward the 25% of gross monthly income.

Taking the time to understand the costs associated with buying a home and what falls within one’s budget will make him a smarter buyer and far less likely to encounter financial troubles related to mortgage payments down the road.

If you need to eliminate debt before proceeding with your home purchase, learn about debt settlement, debt consolidation, debt relief, and more at Impact Debt Settlement.

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