The Own vs. Rent discussion has been heavily debated for many decades.
There are several meaningful ways to evaluate the ‘own vs. rent comparison’ for any particular circumstance. However, most people (and this narrative) focus on comparing the cost of renting a home, to that of owning one.
First, Compare Apples to Apples.
A comparison is only legitimate if it compares two similar factors. In this instance, the two factors selected to be compared are-
- The Cost of Rent — which covers a tenant’s housing payment.
- The Cost to Own (i.e. the cost to borrow money) — it is important to recognize that the cost of borrowing is determined independently of one’s real estate taxes and homeowner’s insurance premiums. Therefore, for this analysis, relevant taxes and insurance have been purposefully omitted.
How to Calculate the Maximum Mortgage Based on Proposed Monthly Payments.
Monthly mortgage payments are derived from a mathematical calculation based on three factors-
- The cost of the money — i.e. the interest rate.
- The term of the mortgage — how many years does a mortgagor have to repay the debt?
- The mortgage amount.
While computers perform most calculations regarding mortgage transactions these days, old-time mortgage professionals used to rely on the mortgage factor — the monthly cost/factor per thousand dollars of a mortgage. To determine the correct mortgage factor, one needs to know the interest rate and the term of the loan.
For this example, the interest rate is 4% for a 30-year mortgage. The mortgage factor for these financing details would be — .00477415. Mortgage factors are available for varying rates and terms online.
As such, a $100,000 mortgage at 4% for 30 years would have a monthly Principal and Interest (P&I) payment of $477.42; calculated as follows — $100,000 × .00477415 rounded appropriately.
How Much Home Can You Purchase?
Using the mortgage factor noted above, one can easily ‘back into’ the maximum mortgage amount for different proposed P&I monthly payments.
This is done by dividing the projected monthly P&I payment by the mortgage factor (.00477415) — for those loans financed for 30 years at 4% –
- A $1,500 monthly P&I payment would translate to a maximum mortgage as follows –
- $1,500/.00477415 = $314,192.
- A $2,000 monthly P&I payment would translate to a maximum mortgage as follows –
- $2,000/.00477415 = $418,922.
- A $3,000 monthly P&I payment would translate to a maximum mortgage as follows –
- $3,000/.00477415 = $628,384.
- A $5,000 monthly P&I payment would translate to a maximum mortgage as follows –
- $5,000/.00477415 = $1,047,306.
It is noted that mortgage rates would likely rise (maybe an eighth of a point) when loan amounts exceed conventional loan limits and become jumbo mortgages.
Word of advice: Don’t forget to add the monthly expense for taxes and insurance for mortgage qualification purposes!