This Is the Average Mortgage Borrowers Are Taking Out. Can You Afford It?

by Maurie Backman | Published on Sept. 30, 2021

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A couple meet with their realtor to look at a home.

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Home prices are on the rise. And now, so are mortgage balances.

Anyone who's been following the residential real estate market knows that home values keep climbing as limited inventory and low mortgage rates continue to drive buyer demand up. In July, home prices rose 19.7% from the previous year, as per the S&P CoreLogic Case-Shiller Index. And not surprisingly, borrowers are taking out higher mortgages to keep up.

Last week, the average mortgage came to $410,000, as per the Mortgage Bankers Association. That's the highest average home loan balance since May.

If you're attempting to buy a home today, you may be wondering whether you can afford one given how property values have soared. Here's how to know if it's financially feasible to buy or if you're better off waiting for home values to come down.

Don't overspend on a home

One of the biggest financial mistakes you might make in your lifetime is overspending on a home. Taking on too high a mortgage could leave you cash-strapped, thereby putting you at risk of falling behind on your various bills.

So how do you know if you can afford a home today? Just follow the 30% rule.

As a general rule, you should not spend more than 30% of your take-home pay on housing. Now there are exceptions to this rule, such as if you live in a city where housing costs a lot but your transportation costs are negligible because you don't need a car. But for the most part, it's best to stick to that 30% limit.

When we talk about housing, we're not just talking about a mortgage payment. Rather, that 30% should include all of your predictable expenses of home ownership, like:

You can use a mortgage calculator to figure out what your monthly mortgage payment might look like based on the price of the home you buy, the amount of money you have available for a down payment, and the interest rate you think you'll get on your mortgage. If that number, combined with the aforementioned expenses, represents more than 30% of your take-home pay, then it means you probably cannot afford to purchase a home right now.

When will things get better?

Right now, home prices are so high because there's not a lot of inventory to choose from. Once more homes hit the market, we should see property values start to decline. That may not happen anytime soon, though, so if you can't afford to buy a home today, you may still be in that boat by the time 2021 comes to an end.

Things could improve next year, though. More homes could hit the market and property values could start to drop. And since mortgage rates are likely to stay low well into next year, you may find that 2022 is a better time to buy.

Taking on too much house could wreck your finances for many years. While borrowers may be taking out higher mortgages to afford home purchases, that certainly doesn't mean it's a good idea for you to do the same.

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