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Looking at the House Payment

Now that you have established your monthly payment, what does this monthly payment pay for?

Principal, Interest, Taxes, and Insurance. (PITI)

Therefore the amount of the house payment alone, cannot be used to determine the total amount you can afford to borrow.

PRINCIPLE, INTEREST, TAXES, INSURANCE. (PITI)
Principal is the loan balance; each payment will include a component for paying off the loan principal.

Interest is the cost of the loan, each payment will pay the interest accrued during that payment period.

Taxes are property taxes. Insurance is hazard insurance, and possibly may also include mortgage insurance.

ESCROW ACCOUNT
Your lender will most likely create an escrow account for payment of your property taxes and insurance. Your payment will then include an amount paid into the escrow account to cover that period's property taxes and insurance premiums. The lender pays your taxes and insurance premiums on your behalf from the escrow account.

CALCULATE TAXES & INSURANCE
Knowing this, you need to estimate how much the property taxes and insurance will be on homes like the one you would like to own.

As taxes are public record, a call to the County Treasurer's office, with the addresses of some properties you admire, will fetch their property taxes so you can gauge property taxes in general.

A call to your insurance agent should yield enough information to allow you to estimate property taxes.

"Plug in" about 50 dollars for mortgage insurance, just to be safe.

Finally, the Sunday edition of most major newspapers will list local mortgage note rates. This information will allow you to estimate interest rates.

CALCULATE PRINCIPLE & INTEREST
Subtracting estimated monthly property taxes, and estimated hazard and mortgage insurance premiums from the maximum monthly payment calculated earlier, will allow you to estimate how much you can pay toward principal and interest each month.

For Example:

NEXT: Determining How Much House You Can Afford (the loan amount)