How to budget for your monthly mortgage payment

Getting pre-approved for a mortgage is a great step in understanding how much home you can afford. However, pre-approval is based on what your finances allow, and it doesn’t necessarily take into account how much your lifestyle will allow. If you love travel, fine dining, spoiling your children (or cats), then you’ll need to factor that into your affordability. One of the best ways to understand how much you can truly afford is to compare your potential monthly mortgage payment to your monthly budget.

Break down your monthly mortgage payment

Your monthly mortgage payment is more than what you owe your lender. It consists of your principal, interest, taxes, and insurance. This is commonly referred to as your PITI.

• Principal: This is money going toward the actual balance of your loan.

• Interest: This is money going toward paying interest on your loan.

• Taxes: Property or real estate taxes are determined locally, and vary from area to area. Tax rates can be quite high in certain areas, so it’s a good idea to research rates in advance as they can add significantly to your monthly payment.

• Insurance: This includes homeowners insurance and title insurance (two types of insurances needed to close on your home), and could also include mortgage and flood insurance, depending on your location and financing.

Some properties, especially condos, may also require homeowners association fees (HOA fees). These fees can be several hundred dollars per month, so you’ll want to keep that in mind when searching for homes and assessing your budget.

When you ask for a Loan Estimate from your lender, you’ll be able to see your projected monthly payment, but that may not include every line item in your PITI. Be sure to ask your lender for your PITI to have a good grasp of what you’ll be required to pay every month.

Examining your monthly budget

Creating a monthly budget isn't just good financial practice; it’s a great way to figure out how much more you can take on financially. If you’ve never created a detailed budget, we have some tips.

• First, determine your net monthly income. This is the amount of money that goes into your bank account each month—including your monthly salary, benefits, alimony, or child support.
• Next, identify your fixed expenses. These are the expenses that occur every month, such as your monthly rent, utilities, debt payments, child care, gym membership, and other monthly subscriptions.
• Then factor in irregular expenses. These are expenses that don’t occur monthly, like haircuts, holiday shopping, gifts, travel, semi-annual insurance payments, and annual subscriptions or dues. To account for these in your monthly budget, estimate the yearly total and divide by twelve.
• Finally, account for your savings and discretionary spending. How much extra cash do you sock away each month? How much do you spend on groceries, travel, house plants, art supplies, and clothes? Make sure to include your passions into your budget because these are the items that need to be balanced when you’re taking on new financial responsibilities.

Assessing what you can afford

Now that you have a handle on your personal finances, you can see how far you can comfortably stretch them. Try to imagine the new expenses of owning a home within the limits of your current budget and savings. Ask yourself some tough questions, like: Will you have enough cash savings to tackle emergency repairs after your down payment? Can you cover condo or HOA fees? If you’re moving into a bigger space, consider what your new electricity and heating bill will be. If your water bill was covered by your landlord before, you’ll have to include that in your budget now. If your budget is beginning to look tight, are there things you can cut? Are you willing to give up six types of premium streaming content and season tickets to the opera?

If your discretionary spending keeps you happy, don’t sweat it. You may just need to reevaluate the types of properties you’d like to buy.

Practice your payment

Running the numbers is one thing; having a mortgage bill come in every month is another. One experiment you can try is “practicing” your mortgage payment to get a true sense of how buying a home will affect your monthly budget. If your estimated mortgage payment is more than your current rent, start putting aside the extra amount every month to simulate making mortgage payments. Does your budget still feel comfortable? If not, you may want to rethink what type of home you’re looking for and where it’s located.

Most importantly, know that you don’t have to crunch the numbers on your own. We have tools that can help. See how much home you can afford with our affordability calculator.

Ready to buy a home? Our free guide will take you all the way from house hunting to popping the champagne. Get the guide.