by Maurie Backman | Feb. 3, 2021
Buyers are taking on larger home loans than ever to scoop up homes in today's market.
Low mortgage rates have fueled home buyer demand in recent months. And limited housing inventory has created a terrific situation for sellers -- they're able to command higher asking prices than ever. The result? Buyers have to borrow more money to cover their home purchases. In fact, the average purchase loan amount hit a recent record high of $395,200, according to the Mortgage Bankers Association. But that could mean some buyers are getting in over their heads.
It's easy to see how attractive mortgage rates might push buyers to borrow more than they'd normally be comfortable with. But if you take on too high a mortgage, you'll risk a host of dangerous consequences.
For one thing, you might struggle to pay your mortgage once you realize how much those monthly payments eat into your budget. And if you fall behind on your mortgage payments, you could eventually risk losing your home.
Even if things don't reach that extreme, if you take on too high a mortgage, you could fall behind on other bills. Once that happens, your credit score could take a serious beating, making it difficult for you to borrow money again.
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Finally, paying too much for a mortgage could cause you to fall short on other financial goals. Say you start spending so much on a mortgage that you can no longer afford to contribute to a retirement savings plan. You might manage to keep up with your home loan, but you could wind up putting yourself in a very bad spot later in life.
Given the way home prices have risen, many of today's buyers have to choose between taking on a higher mortgage than they'd like or walking away from a home purchase. If you're not sure what to do, use a mortgage calculator to run some numbers and see what monthly payments your home loan will amount to.
For example, say you take out a 30-year, $395,200 loan at 2.819%, which is the average rate as of this writing. That will leave you with a monthly payment of $1,627 in principal and interest. However, that doesn't include other expenses like homeowners insurance and property taxes. You might also face other monthly expenses when you buy a home, like private mortgage insurance, which applies if you don't make a 20% down payment, or homeowners association fees. Plus, you'll need to maintain your home and set aside funds for inevitable repairs.
Seeing what monthly payment your mortgage amount translates to could help you determine whether you can swing it or not. And if you can't afford a home in today's market, you're better off sitting tight and waiting for housing inventory to open up. Once it does, home prices are likely to come down -- and you shouldn't have to borrow as much in order to have a place to call your own.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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