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It’s really not a secret that home prices have been elevated on a national level for several years now. Those price hikes started up during the second half of 2020, when mortgage rates plunged to record lows and buyer demand started surging.
But while mortgage loans were affordable from an interest rate perspective in 2020 and 2021, this year, they’ve gotten almost unbelievably expensive. These days, the average 30-year mortgage will cost you around 7%. Compare that to the 3% rate you might’ve been looking at a year ago, and it’s easy to see why homeownership might seem out of reach.
Meanwhile, in October, the median existing home sale price was $379,100, according to data from the National Association of Realtors. That represents a 6.6% increase from Oct. 2021. And since it’s much more expensive to borrow via a mortgage now than it was in October 2021, you may have no choice but to bow out of the housing market until prices cool off and mortgage rates start to drop.
Or maybe not. Maybe you are able to afford a home based on today’s borrowing rates and prices. Here’s how to know.
How much house can you swing?
Just because the median U.S. home recently sold for $379,100 doesn’t mean that’s the price you’re looking at for a place of your own. It may be that home prices are much higher or lower in your neck of the woods.
More: Our picks for best FHA mortgage lenders
But either way, it’s important to know the formula for determining home affordability, no matter where you live. And that formula is simple — make sure your total housing costs don’t exceed 30% of your take-home pay.
So, let’s say you bring home $5,000 a month. That means you can afford to spend $1,500 a month on housing costs.
That doesn’t mean you can take on a mortgage with a $1,500 monthly payment, though. Rather, that $1,500 needs to cover additional recurring housing costs, like property taxes and homeowners insurance. And if you’re buying property in a homeowners association, that $1,500 will need to include HOA fees as well.
Should you wait to buy a home?
Right now, property prices are up and mortgage rates are expensive. So if you were to make the decision to pull out of the housing market and wait things out, that wouldn’t be a bad call.
But you’ll need to think about your financial picture and housing situation before arriving at a decision. If you have an affordable rental that’s comfortable, staying put could make sense. If you’re miserable in your apartment and your landlord keeps raising your rent, you may want to continue your search for a home to buy.
Similarly, if you’re unsure about your ability to afford a home, waiting may be your best bet. But if you have a lot of funds available to put down on a home and a steady job with a large paycheck, then you might manage to find a home that appeals to you and works within your budget.
Remember, mortgage rates may be high right now, but they’re unlikely to stay that way forever. We may not see 3% mortgages in the near future, but rates could drop down to the 5% range in a year or two. So if you sign a mortgage today, you might be able to refinance your loan not so long after the fact and lower your monthly payments — all the while getting to build equity in a place of your own.
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