Hint: It’s not a small number.
- In February, the median home price rose 15% from the previous year.
- That marks 120 months in a row of annual home price gains.
It’s no secret home prices have been soaring for well over a year. We can thank competitive mortgage rates and limited inventory for that (even though rates have been notably higher since the start of 2022).
In February, the median existing home sold for $357,300, reports the National Association of Realtors. That represents a 15% uptick from February 2021. It also marks 120 consecutive months of annual home price gains.
Of course, this puts today’s buyers in a tough spot. Last year, home prices were high, but mortgage rates were low enough to help offset them. Now, with mortgage rates on the rise, a lot of would-be buyers might seriously struggle to break into the housing market.
Can you afford a home at today’s prices?
Rising borrowing rates are making it more difficult for buyers to afford a home today. And to be clear, it’s important to not take on too much house if you’re looking to buy. Going overboard could result in a host of unsavory consequences, from credit score damage to the possibility of actually losing your home.
So how do you know if you can afford a home today? The most common rule of thumb is to follow the 30% rule. The rule dictates your total predictable housing costs should not exceed 30% of your take-home pay.
Now by predictable costs, we’re talking about everything from your actual mortgage payments to your property tax bill to your homeowners insurance premiums. But if you run those numbers and see they amount to 30% of your take-home earnings or less, you should be in pretty good shape to buy. If you exceed that 30% mark, you may need to rethink your plans and wait until home prices come down.
So, let’s say your paycheck gives you $6,000 a month after accounting for taxes and other deductions. That means you can generally afford to spend $1,800 a month on housing.
Now, let’s say the median home in your area costs $360,000, and you have $72,000, or 20%, available for a down payment. If you sign a 30-year mortgage at 4.5%, which is in line with today’s average rate for that loan term, then you’ll be looking at a monthly …….