New home sales skyrocketed in 2020. Many people took advantage of the strong real estate market to stop paying their landlords and to start building wealth of their own. With as many people that bought a new house last year, there were still many more that sat on the sidelines. Although they thought about buying a house and wanted to buy a house, they didn’t. Now, they are kicking themselves for not going through with it as they witness home prices soar. These people are thinking they missed the chance to buy a home because today’s prices are too much for them to afford. However, you should not let the sticker shock of today’s home prices make you think that you cannot afford to buy a home. There is more to home affordability than its cost and the team at Peoples Choice Mortgage is here to tell you why. 

Formula for Determining if a House is Affordable to Buy

Many potential homebuyers are scared into believing that buying a house is no longer affordable. No matter what publication you read or which news channel you are watching, you are being told that homes are too expensive. The problem with headlines like these is that they do not give you a full picture of affordability. Deciding whether or not you can afford to buy a house is about much more than the price of the house. More than anything, affordability is all about whether or not you can cover your monthly mortgage payments. If you can cover your mortgage payments without financial pain, then you can afford your house, no matter what its price was. To determine if buying a new home is affordable for your financial situation, you need to look at the affordability formula. The home affordability formula includes its price, your income, mortgage rates and offsetting costs. 

Home Prices and Affordability

The price of the house does impact whether or not a house is within your price range. The more your home costs, the larger your home loan needs to be in order to buy it. The cost of the home works out to be the principal portion of your mortgage. As the amount of the principal increases, so does the amount you will pay in interest over the life of your mortgage. Obviously, if the price of the home increases, then you will pay more for it. However, just because you end up paying more does not mean that it is not affordable. 

Income and Affordability 

Another aspect of determining whether or not you can afford to buy a house is your income. Unfortunately, the pandemic has not been good for our economy or many people’s incomes. Millions of Americans lost their jobs. For many others, their incomes either stagnated or decreased. This is an important component of affordability because lenders look to your debt-to-income ratio in order to calculate how much of a mortgage you can afford. However, even if your income has not kept pace with rising house prices, you should not assume you cannot afford to buy a house. Remember, house prices and your income are only a portion of the formula that you need to consider. 

Mortgage Rates and Affordability

Believe it or not, mortgage rates have the biggest impact on whether or not you can afford to buy a new home. This is great news for anyone who is looking to buy a new house because today’s mortgage rates are at historic lows. The lower your interest rate on your home loan, the lower your monthly payments. Monthly payments are the biggest factor when considering if a new home is in your budget. As long as you can comfortably accommodate the monthly payments, then you should not give up on your dream of owning a home. 

Even with today’s high prices, today’s low mortgage rates make owning a home more affordable. The graph included in this section was made with data from CoreLogic and demonstrates how affordable today’s rates make owning a home. Even though the average price of a house increased about 15% from last year, today’s average mortgage payment is at its lowest since 2012. This is incredible data given that monthly payment is the biggest factor when considering if buying a house is within your budget.

Offsetting Costs and Affordability

When you look at how today’s low mortgage rates make home ownership worth the cost of today’s prices, offsetting costs add even more support. If you are considering buying a home, you are not just adding mortgage payments to your budget. You are also subtracting rent. Rent payments are an anchor around the neck of your monthly budget and financial future. First, paying rent doesn’t help build your wealth because it all goes to your landlord. Second, in many markets rent payments are increasing relative to mortgage payments. In two-thirds of all real estate markets in the US is it more affordable to buy a home than it is to pay rent. House prices might be increasing, but so is the cost of rent. Today’s low mortgage rates mean that you can lock in a monthly payment that might help you save money and build equity at the same time. 

Final Thoughts

Even as the average cost of a house increased in 2020, people kept buying. Those that did, do not seem to regret it. According to a recent survey by realtor.com, over 68% of first time homebuyers were surprised and what they could afford. A lot of that has to do with the headlines surrounding the real estate market and the hidden savings from reduced mortgage rates. The big number purchase cost sticks out in your head; however, it is the tiny mortgage rate that makes the biggest impact. 

The bottom line is that if you have ever dreamed of owning your own home, you shouldn’t let sticker shock scare you away. Before you give up on your dream because you think you cannot afford it, you should contact us! Our professional, independent mortgage brokers can walk you through the nuts and bolts of buying a home that fits your budget. The truth is that most people are a lot closer to owning a home than they ever imagined. Our independent mortgage brokers can give you a complimentary mortgage qualification to let you know exactly where you stand. From there, we can work with your needs and your budget to find a plan that turns your dream of owning a home into a reality.