Maximum Purchase Price Calculation – What Can You Afford To Pay?

It is always helpful to know the maximum price you can afford to pay when you decide to purchase real estate because it filters the search and saves you the time of looking at properties that you aren’t going to purchase.

In this article, we’ll look at the maximum purchase price calculation you can use to do just that.

To make the maximum purchase price calculation we’ll use three criteria: the amount of your cash down payment, your desired monthly mortgage payment, and the interest rate and terms for the mortgage you most likely can obtain.

Criteria

• Cash Down Payment How much cash do you have to invest as a down payment toward the purchase of the property? This is straightforward because it represents the amount of cash you have readily available to make the investment.
• Desired Monthly Payment Your desired monthly payment simply denotes the amount of principal and interest you are willing (or can afford) to pay each month for the loan you will borrow to subsidize your purchase of the property.
• Mortgage Terms This is the loan amount you will borrow, the interest rate you will have to pay for the loan and the number of years that the bank will amortize the loan (i.e., number of payments required to pay back the loan in full; or nper).

Calculation

1. Calculate the maximum loan amount you can obtain at the specified rate and terms based upon your desired monthly payment. PV(rate, nper, -payment, fv)
2. Add your cash down payment to the maximum loan amount to determine the maximum purchase price. Maximum Purchase Price = Maximum Loan + Cash Down Payment

Example

Let’s say you have $50,000 cash to put down toward a property, desire a monthly loan payment of $800, and based upon your research you are fully confident that you can borrow all the money you need to make the investment at an interest rate of 5% fully amortized for 30 years.

There are, of course, several ways you can make this calculation such as with MS Excel. However, for our purposes, we will illustrate it using a much easier solution called iCalculator. (Click image to enlarge).

Source: iCalculator by ProAPOD

Result

Based upon your cash down payment and desired monthly mortgage payment and terms, you’ve narrowed your search to look at properties priced no higher than $199,025.