Buyers are borrowing more and more money to finance their home purchases.
It is a difficult time when looking to buy a home. Not only are inventories extremely tight, but home prices have skyrocketed over the past year as low mortgage rates have pushed up buyer demand.
In fact, the average mortgage signed in May was $ 384,000, according to the Mortgage Bankers Association. This is a significant increase from the average home loan amount of $ 377,434 in April, and it is also the fourth consecutive month that mortgage values have increased.
How Much Mortgage Payment Can You Afford?
You will often hear that it is a good idea to keep your housing costs at 30% or less of your take home pay. There are exceptions, of course. In some parts of the country, this 30% threshold may not be possible due to perpetually inflated house prices. And in some cities, not needing a car can allow more room to maneuver in housing.
But for the most part, you should aim to keep your housing costs at no more than 30% of your salary. And to be clear, that doesn’t mean your mortgage payment alone can eat up 30% of your paycheck.
Your mortgage payment, which is made up of the principal and interest on your loan, is only a portion of what you’ll spend each month on owning a home. You will also need to cover the costs of:
- Property taxes
- Home insurance
- Private mortgage insurance, if you don’t make a 20% down payment and have a conventional loan
- Homeowners Association Fee (HOA), if you buy from an HOA that charges dues
As such, when you think about that 30% threshold, make sure you factor in all of the above as well as your loan’s principal and interest.
Plan ahead and spend wisely
Now back to the real estate market today. Because home values are so inflated, you might find that a neighborhood that you would normally be able to afford is now a huge financial strain. And if so, you may need to be prepared to buy a home elsewhere, or put your home search on hold until more listings hit the market.
If you spend too much money on housing, you risk falling behind not only on your mortgage itself, but also on your bills in general. If this happens, you could end up ruining your credit and racking up a big pile of debt.
To make sure you don’t break the bank on housing costs, use a mortgage calculator to see what your monthly payments will look like based on the homes you are considering and the funds you have available for a down payment. And then make sure you stick to that 30% rule.
While mortgage debt is generally considered a healthy type of debt, since it eventually allows you to own an asset that can grow in value over time, too much mortgage debt is anything but healthy.
Across the country, borrowers are taking on higher and higher mortgages so they can buy homes in today’s market. But if you think a $ 384,000 mortgage, or whatever around it, is uncomfortable for you, you need to either change gears when it comes to your home search or put your buying plans into focus. wait until house prices go down.
A historic opportunity to potentially save thousands on your mortgage
There is a good chance that interest rates will not stay at multi-decade lows any longer. That’s why it’s crucial to act today, whether you want to refinance and lower your mortgage payments or are ready to pull the trigger to buy a new home.
Ascent’s in-house mortgage expert recommends this company for finding a low rate – and in fact, he’s used them for refi himself (twice!). Click here to find out more and see your price. While this does not influence our opinions on the products, we do receive compensation from partners whose offers appear here. We are by your side, always. See The Ascent’s full advertiser disclosure here.