Are you one of the millions who are dreaming of owning your first home, but wonder if your paycheck could ever make this a reality?
You’re not alone.
The home buying landscape has shifted dramatically with today’s record-high prices and high interest rates.
Let’s look at how much income you’ll actually need to buy a home in today’s market.
Rent vs. Buy: The Eternal Debate
You’ve probably heard the saying, “Your rent is the most you’ll ever pay each month, and your mortgage is the least you’ll ever pay.” While it might sound like a catchy phrase, it’s actually a somewhat accurate reflection of reality.
Renting gives you predictable and stable monthly payments. You know exactly what you’re paying, and there are no surprise bills for repairs, taxes, or insurance. Buying, on the other hand, can be more like a rollercoaster ride.
You start with your mortgage payments, but that’s just the beginning. Factor in property taxes, insurance premiums, and those unexpected repairs that can seem to pop up out of nowhere. And depending on the type of property, you may need to pay monthly homeowner’s association fees (HOAs).
In many areas, renting can make more financial sense. Research from Redfin suggests that nationwide, the typical home costs an estimated 25% more per month to own than rent.
Owning a home is a big commitment and comes with a whole host of responsibilities.
Home Buying in Today’s Market
So, how much income do you need to buy a home in today’s market?
It’s not a simple answer, as prices and interest rates fluctuate, and affordability varies a lot depending on your location. Here are some stats:
- Average Home Prices: The median home price in the US is currently around $420,800.
- Current Mortgage Rates: As of May 2024, average 30-year fixed mortgage rates are hovering around 7.04% That means a borrower with a 20% down payment on a $400,000 home could expect a monthly mortgage payment of roughly $2,800.
- Average Incomes: The median household income in the US is around $74,755.
To gauge affordability, lenders typically use the 28/36 rule.
This benchmark says that your total housing expenses (mortgage, property taxes, and insurance) should be no more than 28% of your gross monthly income.
Additionally, your total debt payments, including all loans and credit cards, should not exceed 36% of your gross monthly income.
The Real Cost of Homeownership
Let’s say you’re buying a home in the Midwest or Southeast, using the median price home of $420,800.
A 20% down payment on a $420,000 home would be $84,160. This would leave a mortgage amount of $336,640. With a 7% interest rate on a 30-year fixed mortgage, your monthly payment would be around $2,232.
To comfortably afford this, you’d need an annual income of $95,652.
It’s a different story in major coastal cities. As of 2024, the average home value in San Francisco is approximately $1,299,639, while in New York City, it’s around $742,930.
Based on the 28/36 rule for the average home values in San Francisco and New York City:
San Francisco: The average home value is around $1,299,639.
- Assuming a 20% down payment, the mortgage amount would be $1,039,711.
- With a 7% interest rate on a 30-year fixed mortgage, the monthly payment would be approximately $6,918.
- You’ll need an annual income of $296,484.
New York City: The average home value is around $742,930.
- Assuming a 20% down payment, the mortgage amount would be $594,344.
- With a 7% interest rate on a 30-year fixed mortgage, the monthly payment would be approximately $3,958.
- You’ll need an annual income of $169,632.
The Takeaway
While homeownership remains a dream for many, you need to be realistic about affordability. In a market with rapidly rising prices and fluctuating interest rates, renting can be the more financially sensible option, at least for the short term.
At the end of the day, your goal is to find a housing solution that aligns with your finances. A home, whether rented or owned, should give you comfort, not more financial stress.
