This is the average of mortgage borrowers. Can you afford it?
Anyone who follows the residential real estate market knows that home values keep rising as limited inventory and low mortgage rates continue to drive up buyer demand. In July, home prices rose 19.7% from a year earlier, according to the S&P CoreLogic Case-Shiller Index. And unsurprisingly, borrowers are taking higher mortgages to keep pace.
Last week, the average mortgage stood at $ 410,000, according to the Mortgage Bankers Association. This is the highest average mortgage balance since May.
If you’re trying to buy a home today, you might be wondering if you can afford one given soaring property values. Here’s how to know if it’s financially possible to buy, or if it’s better to wait for home values to drop.
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Don’t spend too much on a house
One of the biggest financial mistakes you could make in your lifetime is spending too much money on a house. Taking on a mortgage that is too high could leave you strapped for cash, putting you at risk of falling behind on your various bills.
So how do you know if you can afford a home today? Just follow the 30% rule.
As a general rule, you should not spend more than 30% of your net salary on housing. There are now exceptions to this rule, such as if you live in a city where housing is expensive but your transportation costs are negligible because you don’t need a car. But for the most part, it’s best to stick to that 30% limit.
When we talk about housing, we are not just talking about a mortgage payment. Rather, that 30% should include all of your foreseeable homeownership expenses, such as:
You can use a mortgage calculator to determine what your monthly mortgage payment might look like based on the price of the house you buy, the amount of money you have for a down payment, and the interest rate you expect to get. . your mortgage. If that number, combined with the aforementioned expenses, is more than 30% of your take-home pay, it means you probably can’t afford to buy a home right now.
When will things get better?
Right now, home prices are so high because there isn’t a lot of inventory to choose from. Once more homes hit the market, we should see property values start to drop. It might not happen anytime soon, so if you can’t afford to buy a home today, you might still be in that boat by the end of 2021.
Things could improve next year, however. More homes may come on the market and property values may start to drop. And with mortgage rates likely to stay low for much of next year, you might find 2022 a better time to buy.
Taking too much home could ruin your finances for many years. While borrowers take higher mortgages to buy a home, that certainly doesn’t mean it’s a good idea for you to do the same.