It’s been a while since 30-year mortgages were available at rates below 3%, but recently, there’s been a downward trend. As of October 10, the average 30-year mortgage rate stood at 6.32%, a significant decrease from 7.79% in February 2023.
In the second quarter of 2024, the median U.S. home sale price reached $412,300. However, in areas with higher home values, average prices may exceed $500,000.
To avoid financial strain, it’s crucial to keep your housing costs at or below 30% of your income. Whether you can afford a $500,000 home depends on your income, down payment capability, and other associated homeownership costs.
Don’t take on too much house
When we talk about keeping housing costs to 30% of your income, it’s important to consider more than just the mortgage. This guideline should include related expenses such as property taxes, homeowners association (HOA) fees, and homeowners insurance.
Assuming a 6.12% interest rate on a 30-year mortgage and a 20% down payment on a $500,000 home, your monthly payment for principal and interest would be about $2,481. This figure doesn’t include additional costs.
Using Zillow’s mortgage calculator, estimated property taxes would be around $654, and homeowners insurance could be about $105. Your actual property tax and insurance payments may vary based on your location.
When we add these costs together, the total comes to approximately $3,240 per month, or $38,880 per year, for housing expenses. To afford a $500,000 home, you would need an annual salary of at least $116,640.
According to the U.S. Bureau of Labor Statistics, the median weekly wage in the second quarter of 2024 was $1,143, which translates to a median annual wage of $59,436. This means you’d need nearly double that income to afford a $500,000 home at current mortgage rates with a 20% down payment.
You may have more options as rates continue to fall
Mortgage borrowing rates are expected to decline over the next year as the Federal Reserve reverses the interest rate hikes of 2022 and 2023.
Although the federal funds rate doesn’t directly dictate mortgage rates, it’s likely that mortgage rates will become more competitive in the next 12 months. If you can’t afford a $500,000 home today, you might find yourself in a better position if rates decrease further.
Waiting to purchase a home also allows you to save for a larger down payment. The more you put down at closing, the lower your monthly mortgage payments will likely be.
If your current income doesn’t allow you to buy a $500,000 property, it may be wiser to lower your home-buying budget rather than wait for mortgage rates to fall. Overspending on housing can, in extreme cases, risk your home. Even in less extreme situations, it may lead to falling behind on other bills and harming your credit.
In a less severe but still frustrating scenario, you might find yourself with little money left to enjoy life. Being “house poor” isn’t an ideal situation. So, consider carefully how much house you can afford, even as mortgage rates continue to drop.