There was a time when a $500,000 house would have appeared to be pricey. However, given the current state of the housing market, you might find yourself looking at properties in the $500,000 area to live in the kind of neighborhood and take advantage of the features you like.
Setting Limits on Your Mortgages Based on Your Income
According to the published article by Ascent, predictable housing expenditures should therefore be $3,000 or less if you make $10,000 a month. And when we refer to “predictable housing costs,” we mean things like your monthly mortgage payment, property taxes, homeowners insurance premiums, and any additional fixed costs like HOA dues that could apply.
Also, just to be clear, the average American may not earn $10,000 every month. However, someone looking at a $500,000 home might, whilst people with lower incomes will typically be looking at less expensive properties.
Your monthly mortgage payments will be lower the higher the down payment you can make on a home. It’s that easy. Similar to this, you’ll pay less each month for a mortgage the lower the interest rate you’re able to secure on a home loan.
Let’s run through a few alternative down payment scenarios based on a 30-year fixed-rate mortgage with a 6.81% interest rate with that in mind. According to Freddie Mac, it is the typical interest rate for the loan type as of the time of writing.
Keeping Low Mortgages
What does this mean for you, then? Going back to our example, if you make $10,000 per month, you can afford to pay $3,000 per month for accommodation. You are in that budget bracket if you can put down 25% on a $500,000 house and your property taxes and homeowner’s insurance only cost $550.
However, if you can only afford a 10% down payment, a $500,000 home is out of your reach because you’ll have spent the entire $3,000 you can afford on mortgage payments. In other words, it’s quite unlikely that you’ll pay only $62 a month for property taxes and homeowners’ insurance on a $500,000 house.
It could be alluring to borrow money to buy a house. However, be aware that paying more than 30% of your income for housing may result in real financial hardship. Therefore, you might need to look at homes in a lower price range or wait for mortgage rates to decrease if you can’t currently afford a $500,000 home, which may be the case even if you have a higher income. All of the aforementioned numbers will appear quite differently once the latter occurs.
For example, if you put 20% down on a $500,000 house when interest rates are typically 5%, your monthly payment will be just $2,148 as opposed to $2,612 at the average rate of today. That’s a significant difference, no doubt.
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