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 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.