Start with the monthly number, end with a price range
Starting from the budget, not the maximum
The short version
Decide what you are willing to spend on housing each month before you look at listings or a preapproval amount. Take that figure, subtract taxes, insurance and dues, and the remainder is what the loan itself can use. That gives a price range you chose, rather than one handed to you.
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The formula for buying a house, the budget way
- Write down take-home pay for a normal month, not your best month.
- List the fixed costs you already carry: debts, childcare, insurance, transport.
- Pick a housing number that still leaves room for savings and the unexpected.
- Subtract property tax, homeowners insurance, HOA dues and any mortgage insurance.
- Use what is left, with the rate from your own quote, to find a loan amount.
- Add the cash you can put in after closing costs and reserves. That is your price range.
Why a maximum feels different from a comfortable number
A maximum answers whether a loan can be approved. A comfortable number answers whether you will still sleep well after the first property tax bill. The two can be far apart, and only you know where your comfortable number sits.
Second homes and bigger houses
The same steps apply to a second home, with one change: count the full monthly cost of the home you already own as a fixed cost first. A larger house also tends to raise utilities, maintenance and furnishing costs, so put those in the non-mortgage budget before deciding it is worth it.
You asked, we answered
What is the formula for buying a house?
Start from a monthly housing budget, subtract taxes, insurance, dues and mortgage insurance, turn what remains into a loan amount using your quoted rate and term, then add the cash you will bring after closing costs and reserves.
How much of a second home can I afford?
Treat everything you pay for your current home as a fixed cost, then run the same budget-first steps for the second home. Lenders also look at both homes together, so ask for a Loan Estimate before you shop seriously.
Is it worth getting a big house?
Only if the larger running costs still fit your monthly number. Add higher utilities, upkeep and furnishing to your non-mortgage budget before you decide.