Making the right offer is one of the most important part of the home buying process. Experts advise all homebuyers to find out home prices in an area and set their own reservation price, or the maximum price they are willing to pay for a home. A reservation price actually helps homebuyers in negotiating with the seller and stay within their budget when making an offer.

Barron states that buyers typically reduce or discount their offer price to create some allowance for negotiations. How much the discount is will largely depend on market conditions and the homebuyer’s desire to acquire the home.

Here is a basic process for calculating your reservation price so you can negotiate the best price for your dream home:

- Write down the amount you can afford to pay each month. This may be close to what you are paying now, or what you are comfortably willing to spend per month on housing costs.

- Calculate your loan term and interest rate. Record your loan term and interest rate in years. Use the loan payment tables to locate the payment applicable to each loan term and interest rate.

- Calculate your tax and insurance expense. Use the following suggestions from Barron’s ‘Smart Consumer Guide to Home Buying’ when calculating your tax and insurance costs. Use a rate of .68 for areas with relatively high tax and insurance. If an area has relatively cheap tax and insurance rates, use a factor of .85. Lastly, you can just use the standard .75 to do a rough estimate. Multiply the rate applicable to your area by the amount in the first step to arrive at your affordable loan principal and interest payment.

- Compute for your total loan amount. This information can also be found in the loan payment table or you can just ask your mortgage lender for the total amount.

- Add your cash on hand for the down payment. This will give you a final calculation of the total amount available to you for purchasing a home.

You then have to compare the calculations you made on Step 1 with the amount on Step 5. The difference between the two will give you your negotiating range when making an offer. If the amount in Step 1 is larger than the amount in Step 5, you can offer a higher price for a home to secure the bid. If the reverse is true then you need to negotiate to bring down the final price into the range that you can afford.

Figuring out your reservation price will help you in identifying your negotiation options to obtain best possible deal. Use the above calculations for each home you consider buying so that you can negotiate with the confidence that you are dealing within your budget.