Home values are rising and buyers are borrowing more money to keep pace.
There is a reason why so many buyers find it difficult to buy a home today. Inventories are extremely tight and home prices have skyrocketed as a result. Unsurprisingly, buyers today are taking higher mortgages to reflect this.
Earlier this month, the average mortgage for buying a new home hit $ 411,400, the highest amount since February. But can you swing a mortgage of this size? And how much mortgage should you feel comfortable accepting? Here’s how to figure it out.
How many houses can you afford?
As a general rule, it’s a good idea to keep your monthly housing costs at 30% of your take-home pay or less. That way, you’ll leave yourself enough room in your budget to cover your remaining expenses.
This 30% threshold, however, is not intended to cover only a mortgage payment of principal and interest. Rather, that 30% should include any predictable monthly housing expenses you will incur. These include:
- Property taxes
- Home insurance premiums
- Private mortgage insurance (which applies if you don’t make a 20% down payment on a conventional mortgage)
- Owner association fees
To give yourself even more wiggle room in your budget, you may also want to place predictable home maintenance within this 30% threshold. Typically, home maintenance costs 1-4% of a home’s value each year, and the older your home, the more you’ll want to move towards the higher end of that range. For example, suppose you buy a century-old property that is not heavily renovated and is worth $ 400,000. In this case, you could easily spend up to 4% of that amount, or $ 16,000 per year, on maintaining your home. That’s a little over $ 1,300 a month.
On the other hand, if you buy a new home worth $ 400,000, your annual maintenance costs could be as low as $ 4,000, or $ 333 per month. It’s up to you to decide if you want to factor maintenance into your 30% calculation. If you do, you might be less stressed when your other bills go up.
Crunch the numbers
So now that you know that 30% goal, how can you figure out how much to take out on a mortgage? Just run a mortgage calculator and enter your down payment, the length of your repayment period, and the interest rate you think you qualify for. You can look at today’s mortgage rates to see where they stand nationally, keeping in mind that the stronger your credit score, the lower the rate you are likely to get.
Now let’s say you have $ 50,000 on hand for a down payment and you think you qualify for a mortgage rate of 3.17% on a 30 year fixed loan. This is the average rate for this loan term at the time of writing this article. If you are considering a $ 250,000 home, that means you will be borrowing $ 200,000, which leaves you with a monthly payment of $ 861 for both principal and interest on your loan. You can use this number to determine if a loan of $ 200,000 is working for you.
Of course, that’s just one example, and you’ll notice it’s way lower than the average mortgage of $ 411,400 that was signed last week. But one thing to keep in mind about this number is that there is a larger supply of higher priced homes on the market today than there are starter homes or low priced properties. This could skew the average mortgage loan amount upward.
In fact, you shouldn’t even think about forcing yourself to sign a mortgage for $ 411,400, or anything around it, if you know it’s out of your price range. Burning out while buying a home could land you in unhealthy debt if you fall behind on your other bills, and it could put you at risk of losing your home if you struggle to keep up. . You better run the numbers and land on an affordable home loan that works for you.
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.