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Home prices have been rising for months across the country, making it more difficult to buy a home. The low mortgage rates that have fueled buyer demand can help offset rising home prices, but only to a point. In fact, in November, the average mortgage loan taken to buy a new home was $ 357,554, according to the Mortgage Bankers Association. That’s against $ 355,684 in October. The question is, can you afford to borrow so much for a house?
How far can you stretch your budget?
As a general rule, your monthly housing costs should not exceed 30% of your take-home pay. These costs include:
- Principal and interest on your mortgage
- Property taxes
- Home insurance
- Private mortgage insurance, or PMI, which applies if you don’t make a 20% down payment on your home purchase
- HOA fees, which are monthly dues you will have to pay if your property is part of a homeowners association
Use this calculator to see what your monthly principal and interest payments will look like and if you could afford a mortgage of $ 357,554. Assuming you take out a 30-year fixed loan at 2.779%, which is the average rate at the time of writing, you would have monthly principal and interest charges of around $ 1,470. From there, you will need to determine what property taxes you will be liable for, which should be included in the list of properties. You will also need to obtain quotes for a home insurance policy and determine if a PMI or HOA fee applies.
Let’s say between the $ 1,470 that we just calculated and all of those other things, you’re looking at $ 2,000 a month in housing costs. This means that you will have to take home $ 6,667 per month to keep your housing costs below 30% of your salary. If your salary is not at least as high, you will need to proceed with caution before taking out a mortgage loan of $ 357,554.
If the mortgage on which you agree is too high, you risk falling behind. Initially, it could damage your credit score. Over time, this could put you at risk of foreclosure. Plus, extending your mortgage too much will open the door to a world of stress. So if you can’t afford the average mortgage amount today, don’t sign up.
You could try buying a lower cost home instead. Or put your search on hold for a while. If you stay seated, you can save more for a down payment and thus borrow less. Additionally, home prices could drop in 2021 as inventories open. If mortgage rates largely stay the same, delaying your home purchase could improve your financial situation.
Set a limit
When you’re anxious to buy a home and there aren’t many options, it can be tempting to stretch your budget. A better bet, however, is to set a mortgage limit and stick to it. It’s easy to let emotions get the best of you when looking at a house. You can find a place that looks perfect for your family, but if it’s out of your price range, that’s a bad idea. Setting an upper limit could help you stay on track and avoid making a big mistake.
In addition, you can to want take out a mortgage for $ 357,554 to buy a house, but that doesn’t mean a mortgage lender will accept that amount. It pays to get pre-approved for a mortgage so you can see what amount you qualify for. In this way, you will avoid any hiccups in your search for accommodation.