Is it too late to buy a home?

With rising mortgage rates, some people may be wondering if it’s too late for them to buy a home. I believe that is the wrong question to ask.

You’ve doubtlessly noticed how everything is getting more expensive, whether it’s food, cars, or mortgages.

Average mortgage interest rates have been on a steep ascent this year, starting from a low of 3% and reaching, a high of almost 7%.

Source: FRED

This has real-world implications all over the place, but for those wanting to buy a home, especially for the first time, these high rates can cause a sinking feeling and a sense of hopelessness. It may feel like the homeownership train is leaving the station, without you on it.

But that’s not necessarily the truth.

What is the truth then? Can you afford to buy a home now? Or is the cost of a mortgage too much for you?

Let’s find out. Because knowing is so much better than worrying.

What does a percentage point mean?

We instinctively know that when a mortgage rate rises, that your monthly costs are going to go up. But by how much?

Well, it turns out that for every $100,000 in money borrowed, a 1% rise in interest rates leads to an extra monthly payment of roughly $60 in a 30 year mortgage (principal and interest only).

This isn’t an exact amount, but it’s a good estimation.

So for a $300,000 mortgage, the difference between a 5% mortgage rate and a 6% mortgage rate would be roughly $180 more per month.

(Officially, the monthly payment goes from $1610 to $1798, a difference of $188, so like I said, rough but accurate.)

I’m using calculations from this mortgage calculator on Bankrate

The difference a year makes

Last year, rates were hovering around 3%. Now, they are hovering around 7%. (If you’re reading this in the future, you could be laughing or crying, I don’t know.)

So given the median home price of around $450,000, mortgages are a little over $1,000 a month higher than they were last year.

Source: FRED

Gulp. I never said this was going to be easy.

How much income do you need?

It might be worth looking at what your take home pay needs to be to afford a home.

There are a number of metrics to use, but a good rough goal is to make sure that your mortgage payment isn’t more than 25%-30% of your take home pay. And that should include everything, including principal, interest, taxes, insurance, the whole thing.

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So if your take home pay is $6,000 a month that means that your mortgage costs should be between $1,500 and $1,800 a month.

Any more than that, and you’re likely to be spending too much on your home relative to your income, and run the risk of not being prepared for emergencies or life in general.

What can you do?

So you may have decided that you can’t afford a mortgage payment right now. While I know that’s disappointing, that doesn’t mean that you can’t still be working on your path to homeownership.

Here are some steps you can take to help make affording a home more doable in the future:

  • Sock away as much money as possible. The more money you can put down, the less your mortgage is going to be. That means lower monthly payments.
  • Pay down your debts. The less debt payments you have, the more you can put that money toward your mortgage. (And if you don’t have debt, don’t go acquiring any more.)
  • Work on your credit score. I hate focusing on credit scores, but this is one of the few times when getting your score up can be a very good idea, as it can lower your mortgage rates. You don’t need to do anything crafty, just pay your bills on time, don’t rack up too much debt, and fix any errors you have on your credit reports.
  • Think smaller. Your first home doesn’t need to be your last. You may have to scale back your ambitions for now. Maybe you relinquish all that space. Maybe you get a townhouse or a condo. Maybe you…
  • Go somewhere else. Homes vary widely in price even in the same metro area. And if you’re stuck in a permanently unaffordable area like San Francisco, maybe it’s worth looking elsewhere.
  • Be patient. As I’ve said before, a bad idea doesn’t become a good idea because it’s about to become a worse idea later. If you can’t afford it now, don’t jump into homeownership because you think it’s going to get harder later. And remember that rates will likely come down eventually. They aren’t going to remain high forever.

Be glad you’re not in England

England is a wonderful place, but they have a very different housing market when compared to the U.S.

Apparently, long-term fixed rate mortgages just aren’t done there, so as rates are rising there, buyers are having to adjust to higher mortgage rates.

This is why adjustable rate mortgages aren’t a good idea. Even the rate is currently high, once you lock it in, the wider rates could go to 300% and it wouldn’t matter at all for you.

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It’s not too late

It’s never too late to buy a home. As long as you’re working toward that goal, and know how much you need to afford it, you will eventually get there.

Will it take longer now that mortgage rates are higher? Yes. And that’s terrible for those who were relying on lower rates.

But it’s still not too late. The game may have changed, but the rules are the same. Keep working at it.

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