What’s up everyone
You would have to live under a rock to not know how unaffordable housing has become in our country. Interest rates are near 8% and home prices are still super high in most areas.
So, the big question is- can you afford to buy a house in today’s market?
Today, we’re going to break it all down for you, the good, the bad and the ugly. What your Budget needs to be, how much money you need to be making, how much it really cost to buy a house and all of the rest so you can see if this is possible for you to do.
According to the Federal Reserve Bank of St. Louis, the median home sales price as of the second quarter of 2023 is $416,100.
So to make it easy, let’s round down to $400,000. Now, I know some of you live in places where you would be happy to have $400,000 be the median sales price for a single family home- take where I am for example. According to ATTOM, the current median home price in Montgomery County, MD, as of August 2023, is $797,000 which is way higher than the median home price for the whole country. And maybe we’ll do a video with that budget another time.
But for today, just hang with me as we go through the numbers to see if how much you need to really be able to afford a $400,000 home without selling off your children (I have a teenager if anyone is buying wink wink) or being so house poor that you have shelter but no money to live on and enjoy your life.
Let’s start with your mortgage. There are 4 or 5 components of a mortgage payment. Think of the acronym PITI. Principal, Interest, Taxes – in this case, property taxes, Insurance -and we’re not talking about your health, but rather homeowners or hazard insurance. There could possibly be a 5th component which is mortgage insurance or PMI, and that depends on how much you are putting down. Typically, borrowers making a down payment of less than 20 percent of the purchase price of the home will need to pay for mortgage insurance. Mortgage insurance also is typically required on FHA and USDA loans.
Out of these 5 components, if you get a fixed loan, your principal and interest will remain the same amount throughout the length of the loan. They vary between how much of the amount is principal and how much is interest but the total amount is the same number every month. As for your insurance and property taxes, these numbers can change from their original amount.
Your property tax is based on the assessed value of your house, so if your house goes up in value, which is what we all want, your property taxes will go up as well. Every state has a different property tax rate so check your state to get a more accurate number for your budget.
For our example of a $400,000 we will use 1 % of the purchase price which is the average property tax rate according to bankrate.com. So 4000/12= monthly payment
And your home insurance adjusts depending on inflation and other factors – such as severe weather. You can shop around for home insurance and a lot of people end up bundling their home insurance with their cars to get a better rate. A good tip to keep in mind.
According to insurance.com the average cost of home insurance for a $400,000 is $2942 a year so let’s round up to $3000. https://www.insurance.com/average-home-insurance-rates/how-much-is-homeowners-insurance-on-a-400k-house
So 3000/12 = our monthly payment.
Keep in mind, all states are not created equal when it comes to home insurance. Every state has different risks that impact insurance rates- According to bankrate.com the state with the lowest home insurance rate is Hawaii and the highest is Oklahoma so check with your state to see what the average cost is for your budget.
As for mortgage insurance, or PMI, this is generally required until your loan reaches 78% of the purchase price. So if you’re putting less than 20% down when you buy the house, you want to add in this number to your budget which will vary depending on the type of loan you get and how much you are putting down. According to Freddie Mac, for a $400,000 house, the PMI will range from $95/month for 15% down to $365/month for 5% down https://myhome.freddiemac.com/resources/calculators/mortgage-insurance For our example, let’s use $200/month and like I said, this will go away once you have the 20% equity in your home.
It will usually take around half the length of the loan, or 15 years before this goes away unless you allocate more money to the principal each month or make an additional payment towards principal each year to shorten the loan.
So to review, so far we have
$333 (property tax)
Now we need to calculate the principal and interest. We’re going to use the mortgage calculator from bankrate.com with a down payment of 5% for a 30 year fixed rate. https://www.bankrate.com/mortgages/mortgage-calculator/
** This is a good time to remind you I am not a lender or a financial advisor and interest rates can vary depending on your specific situation. This is purely for educational purposes only and I will put links to all of the sites that I’ve used to get these numbers in the description. To really know your specific numbers, you should contact a local lender who will quote you what is appropriate for you and your location.
For our example, lets go over what bank rate is showing us for today in October of 2023. https://www.bankrate.com/mortgages/mortgage-calculator/
Home price $400,000
Down payment: 5% $20,000
Interest rate: 7.78%
Principal and Interest: $2730
Lets add our other numbers
$333 (property tax)
And we get a total of $3513 a month.
Please keep in mind, these numbers are averages. Your property tax, homeowner’s insurance and PMI could all be different depending on where you live.
Let’s move on to your other living costs. For this example, we will use the 50-30-20 budget. The idea is to divide your income into three categories, spending 50% on needs, 30% on wants, and 20% on savings.
50% on needs such as housing, groceries, bills & utilities, health insurance, car payment
30% on wants such as travel, entertainment, restaurants, shopping, hobbies
20% on savings such as retirement, investing, debt
Let’s break it down.
These numbers are averages – only you know how much you spend on each.
$350 (health insurance)
$300 (car payment)
$100 (cell phone)
$120 (internet & tv)
$200 (Student loan)
This totals to $5983
Let’s round up to $6000. 6000 x 12= $72,000 which is what you need to net after taxes just to pay the expenses.
But remember, we don’t want to be house poor and we have not allocated any money towards an emergency fund which you should have 3 months of in case you need it.
So let’s go back to the mortgage because the rule of thumb to not be house poor is that your mortgage should not exceed 30% of your income. So to figure that out we divide 3513/.30 = $11,710
So in order to live comfortably and not be house poor, you would need to bring home $11,710 a month. Or $140,520 a year. Now this is what you are bringing home.
In order to calculate how much you would need to make (your gross income) we need to do a little more math. In order to figure your gross income, if we assume your net income is 75% of your gross income, we take the monthly net and divide it by .75
So 11,710/.75= 15,613. 15,613 x 12= $187,360 which is a LOT of money.
Now keep in mind, this is to live comfortably and not be house poor. So, I know this seems very overwhelming and my numbers are arbitrary so take them and adjust to your lifestyle.
And not to further depress you, but it does cost money to actually buy the house. You have your down payment, closing costs and inspections/appraisal. With a $400,000 price, it will be around 3% give or take for closing costs plus the 5% down and appraisal and inspection. so 20,000 DP + 12000+ 500 (appraisal) and 500 inspection = $33,000.
If I have totally depressed you, take a breath, go for a walk, have a drink, whatever you need to do to clear your head and then look again at the numbers and start to plug in what you think they are.
Then speak to a local lender to plug in the loan numbers.
I hope you found this helpful. Remember this is for educational purposes only, everyone’s situation is specific to them.