Here are some excerpts from an article by Ivana Pino from Fortune Recommends online. In this area the average home is trending above the $500,000 average. Especially in the highly sought after areas, such as Portsmouth. New Castle/Rye will also exceed that budget. As you head west of the Seacoast, affordability increases. For anyone considering home buying, the article gives you some starting math. And if it seems overly complicated, get in touch with us. We will steer you in the right direction for free!
How much you need to earn to afford a $500,000 home
The average U.S. home sales price hit $535,800 in 2022. We asked experts how much you need to earn to afford a home around that price point.
How much you need to make to afford a $500,000 home
There are several rules and guidelines you can use to determine how much you can comfortably afford to pay for a home.
“This can vary from lender to lender, but assuming you are getting a conforming loan, we are allowed to go up to a 50% debt-to-income ratio (for jumbo or portfolio lenders, that number is typically around 43%) in qualifying a borrower for financing,” says Alvarez. “Using 50% as the DTI for a conforming loan–if you make $120,000 a year–we divide that by 12 to arrive at the monthly income of $10k. From there, we can utilize 50% towards all liabilities and the costs for the new house.”
Using the parameters outlined above, your financial situation might look something like this:
- Purchase price: $500,000
- Down payment: $100,000 (20% of your home’s purchase price)
- Loan amount: $400,000
- Interest rate: 6.5% (national average for a 30 year fixed rate mortgage)
Your monthly mortgage payment would be about $2,529, giving you an additional $2,471 each month to cover other housing-related costs like your HOA fees, insurance, and more.
Of course, these figures are highly dependent on mortgage rates (which fluctuate regularly) and your down payment. A change in rates or a higher or lower down payment can significantly impact your monthly payment.
If you want to look for ways to free up some of your monthly income, Alvarez says there are ways to lower that cost—especially in a high-interest environment. One way: an adjustable rate mortgage.
An adjustable-rate mortgage begins with a lower initial introductory interest rate and after the promotional period ends, the rate adjusts either on a monthly or yearly basis depending on market fluctuations. The good news: when rates fall, so will your mortgage payment. But homeowners should know that the opposite is true, too.
“Think about taking an adjustable rate or interest-only mortgage, which will help keep monthly payments down prior to being able to refinance when rates come down again,” says Alvarez. “In many ways, higher rate environments can be beneficial for buyers as there is not the same hectic competitive atmosphere surrounding each listing, and you might even find some negotiability in price.”
The takeaway
There’s no hard and fast rule that will tell you exactly how much you can afford to pay for a home. Certain factors like mortgage interest rates, average home prices in your area, your debt balances, credit profile, and more, will all play a role in what your home’s purchase price actually looks like from month to month and whether it fits neatly into your budget or not.
If you’re not sure where to begin or how to set a budget for your home purchase, consider speaking with a mortgage professional who can review your income and your financial circumstances to help you determine how much you can comfortably afford.