This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.
Hint: It’s not a small number.
Image source: Getty Images.
If you’re looking to buy a home, you may have noticed that property values aren’t quite as elevated as they may have been in 2021 or 2022. That’s because a combination of higher home prices and mortgage rates has led to a decline in buyer demand. So while sellers are still profiting in the course of selling their homes, they’re not profiting quite as much as they may have in the past couple of years.
Still, today’s homes are far from inexpensive. The median existing-home sale price in January was $359,000, as per the National Association of Realtors. That’s a 1.3% uptick from a year prior.
Of course, just because the median home sale price last month was $359,000 on a national level doesn’t mean that homes in your target neighborhood are anywhere near that number. It may be that you’re looking to buy in a less expensive part of the country where the median home is selling for $250,000. Or maybe you’re moving to an area where even a starter home costs upward of $500,000.
Either way, it’s important to know how much house you can afford. Going overboard could lead to a host of financial struggles you’re apt to want to avoid.
How much can you afford to spend on housing?
As a general rule, your housing costs should not exceed 30% of your take-home pay. And when we talk about housing costs in this context, we don’t just mean the amount you spend each month paying your mortgage.
Rather, that 30% should cover all of your predictable monthly housing costs. These might include:
Property taxesHomeowners insurance premiumsHOA feesPMI (private mortgage insurance), if you’re required to pay it as a result of putting down less than 20% on your home
So, let’s say you bring home $5,000 a month after taxes. That means you’re generally safe to spend $1,500 a month on housing.
Let’s say that based on home prices in your area, today’s mortgage rates, and the amount of money you have available for a down payment, you’re looking at a monthly mortgage payment of $1,100. If you think you can keep your remaining housing costs to $400 a month, you should be in good shape to move forward with a home purchase.
Don’t buy if the numbers don’t add up
In some cases, you may be okay to exceed that 30% limit and buy a home that costs you more. If you’re moving someplace with ample public transportation, for instance, then you may not need a car. That’s a huge expense to shed, which means you might have a little more leeway to spend a bit extra on a home.
But otherwise, do your best to stick to that 30% limit. If you go beyond it, you might struggle to keep up with your housing costs or other bills you’re on the hook for. And if you fall behind in either regard, you might end up damaging your credit, racking up costly debt, and, in an extreme situation, putting yourself at risk of losing the home you worked so hard to buy in the first place.
Our picks for the best credit cards
Our experts vetted the most popular offers to land on the select picks that are worthy of a spot in your wallet. These best-in-class cards pack in rich perks, such as big sign-up bonuses, long 0% intro APR offers, and robust rewards. Get started today with our recommended credit cards.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.
