Figuring out how much home you can afford entails much more than the interest rate on a mortgage loan and what your monthly mortgage payment will be.
Where you want to live plays a big part in housing prices, with some areas of the country much cheaper to live in than others. Home prices also vary by county and sometimes even neighborhoods, so it can be worthwhile to shop for homes, and mortgages.
Property taxes, home insurance, down payment size, upkeep, and other expenses add to the cost of buying and owning a home, of course. But the main thing most homebuyers consider is how much their mortgage payment will be.
This can vary by state and is mainly affected by the price of a home. All things being equal — such as down payment and credit score — homebuyers shouldn’t expect to see a major change in mortgage interest rates by state when compared to the national average.
National mortgage rates
The U.S. weekly average mortgage rates as of June 24, 2021, were, according to a market survey by Freddie Mac:
- 30-year fixed: 3.02%
- 15-year fixed: 2.34%
- 5-year ARM: 2.53%
Freddie Mac says it expects rates to continue to gradually rise in the second half of 2021, and recommended refinancing now if homeowners can benefit from doing so.
National mortgage payments
The average monthly mortgage payment in the United States is $1,487, according to the American Housing Survey from the U.S. Census Bureau.
The Census also found that the median monthly mortgage payment is $1,200.
The median is the exact middle value of a set of numbers. It can often give a better idea of where the middle is in a broad range. Averages can be misleading because extremely high or low values can distort them.
A 2020 profile of home buyers and sellers by the National Association of Realtors showed that the median price of a home was $272,500. A down payment of 10% would put the total loan at $245,250. For a 30-year fixed-rate mortgage at 3%, the monthly payment would be $1,034.
Average mortgage payments by state
Data from the Census Bureau lists the median mortgage payments by state, and not the average. As we described above, the median is the middle value of a set of numbers, and can more accurately reflect what someone in the exact middle of the range will pay. An average factors in extreme lows and highs, which can be misleading.
To compare apples to apples, we’re using the median monthly mortgage payment of $1,200 provided by the Census.
Here’s the median monthly mortgage payment in each state:
|State||Median monthly payment|
Factors that affect mortgage payments
The interest rate on a mortgage loan can be a big factor in deciding to buy a home, especially for first-time homebuyers who may not have as much money as home sellers for a down payment as a way to lower their interest rate.
Here are some other factors to consider:
Fixed rate vs adjustable loan terms
A fixed-rate mortgage is usually a little higher than an adjustable-rate. A fixed rate gives you the same mortgage payment for 30 or 15 years when the loan will be paid off. An adjustable-rate mortgage, or ARM, is fixed for the first five years of the loan, and then can go up or down each year depending on a market index it’s tied to.
A longer loan term also leads to a lower monthly payment, though you’ll pay more interest over the life of a longer loan vs. a shorter-term loan.
Paying a discount point on a mortgage is a fee paid at closing that lowers the interest rate on the mortgage. One discount point usually costs 1% of a mortgage, reducing the interest rate by 0.25%. For example, pay one point on a $300,000 mortgage, or $3,000, and a 3% interest rate can drop to 2.75% on a 30-year fixed mortgage. That drops a monthly payment of $1,265 to $1,225, a savings of $14,432 over a 30-year mortgage.
A larger down payment will lower the monthly mortgage payment. For most home loans that aren’t backed by the government, a 20% down payment is the general rule of thumb. On a $300,000 home, that means coming up with $60,000.
Here’s how a monthly mortgage would change with different down payment amounts, assuming a 3% interest rate on a 30-year fixed-rate mortgage for a $300,000 home:
|Loan amount after down payment||$285,000||$270,000||$240,000|
Private mortgage insurance
If you put less than 20% down, then your lender may require you to buy private mortgage insurance to protect it if you default on the loan. Once you reach 20% equity by paying down the mortgage, you should be able to get rid of this type of insurance.
Where you buy a home and the cost of that home is the biggest factor in determining a mortgage payment. The more money you spend on a house, the bigger the loan amount you’ll likely need.
Data from the National Association of Realtors shows that the highest median price of a home in the first quarter of 2021 was $1,185,951 in New York County, New York. That equated to a monthly mortgage payment of $4,460.
The cheapest monthly mortgage was $103 in Todd County, South Dakota, where the median price of a home was $27,323.
In general, the higher your credit score, the more likely you are to be offered a lower interest rate on your mortgage. The reason is simple: you’re more likely to make a mortgage payment if you have a lower credit score than a low one.
In other words, a lender has a higher expectation of foreclosure on the home if a borrower has a low credit score, so it may increase the interest rate offered to make up for that extra risk.
On the FICO credit score range of 300-850, a score of 700 or higher will likely get you a good rate. Push your score to 760 or higher and the best rates available may be yours.
A score below 620 can make it hard to qualify for a conventional home loan.
Taxes and fees
Property taxes, utilities, homeowner association fees, and upkeep are some of the extra costs of owning a home. While they’re unlikely to directly affect your mortgage costs, these extra expenses of owning a home should factor in when budgeting for a home purchase.
Property taxes vary by state, and sometimes even by county. Statewide averages can run as high as 2.21% in New Jersey to as low as 0.59% in Washington, D.C., according to the Tax Foundation.
The average HOA membership fee is $250 a month, according to a property management website. California and Florida have the highest number of HOAs nationwide.
First-time homebuyers pay more
This ties in with making a big down payment, but homeowners who have built up equity are more likely to have lower mortgages by selling their homes and using the profit to make a bigger down payment on their next new home.
This assumes, however, that they don’t buy a home so much higher in price than the bigger down payment doesn’t affect their monthly mortgage. But higher credit scores and better-paying jobs later in life can help them afford it and possibly get a lower interest rate.
First-time homebuyers, however, are less likely to buy expensive homes. They also make lower down payments of 7%, according to the National Association of Realtors. That can mean paying more each month for a home loan because the amount you need to borrow is higher.
Know how much you can afford
Mortgage lenders are unlikely to go over your family’s monthly budget, but they do want to know you can afford the home loan they’re offering you.
In general, your monthly home expenses should be 28% or less of your monthly gross household income. This is also called an income ratio, or a debt-to-income ratio
. If all of your monthly debts are included, the lender may want your income ratio no higher than 36%.
In 2019, the median U.S. household income was $68,703, according to Census figures. Twenty-eight percent of that is $19,236, and dividing that over 12 months equals $1,603 per month for home expenses.
Those home expenses aren’t just the monthly mortgage but should include property taxes, homeowners insurance, and maintenance, among other things.
Ways to lower your mortgage
Once you know how much home you can afford, you may realize that you don’t have enough money to buy the home you want.
To get there, you may need to wait a year or so and save more money for a down payment, or consider buying a smaller home in a different neighborhood. Here are some other ways to lower your mortgage:
- Improve your credit score enough to qualify for a better interest rate
- Pay off debts or increase your income to lower your debt-to-income ratio
- Save 20% for a down payment, which will help you avoid paying private mortgage insurance
- Shop for a mortgage by getting quotes from multiple lenders.
- Buy in an area without an HOA
- Buy a home in a cheaper neighborhood
How do I pay property taxes?
Not paying your property taxes can result in almost as big of a headache as not paying your mortgage bill. They’re payments you want to make on-time, or you could face late fees and interest charges, and ultimately your home could be sold to pay them.
Government agencies that charge and collect property taxes usually make it easy to know how much you owe and how to pay your bill when it’s due. Your county or state may have an online property tax estimator. It will likely send you a paper bill in the mail many months before it’s due.
Your mortgage lender may give you the option of paying the property taxes yourself or having an escrow account through the lender that the lender will use to pay the taxes. Some lenders may require having an escrow account. The amount due is added to your monthly mortgage.
Property taxes vary by municipality. When a home is sold, the amount of taxes may increase to a higher percentage or just a higher amount if the home was sold for more than what the previous owner paid for it. The home’s value may also be reassessed every few years when property taxes can go up or down.
How much are closing costs?
Closing costs are the various costs borrowers may pay to “close” a home loan. Lenders and other businesses involved in the paperwork of buying a home charge these fees as a way to make money.
Closing costs generally cost 2% to 3% of the cost of the home, so a $300,000 home loan could require paying $6,000 to $9,000 in closing costs.
These can sometimes be added to the loan, or “rolled” into the loan. Your total loan amount will go up by $6,000 or so, but you’ll pay it over the life of the loan instead of at one time.
What can I do if I don’t qualify for a conventional mortgage?
A conventional mortgage from a bank can be difficult to qualify for if you’re a first-time homebuyer or don’t have enough money for a big down payment. A lender will often require a 20% down payment for such a loan. Lenders may also require higher credit scores.
There are plenty of other options, especially for first-time homebuyers. The main one is an FHA loan.
Backed by the Federal Housing Administration, FHA loans require only 3.5% down, allow a credit score as low as 580, and even allow credit scores of 500 to 579 if a 10% down payment is made. A Higher DTI of up to 43% is allowed.
FHA loans do have downsides. They require having mortgage insurance for the life of the loan, and homes must meet minimum health and safety standards that may make buying a fixer-upper difficult.
There are also VA home loans for veterans that don’t require a down payment and USDA loans in rural areas that also don’t require down payments.
What documents do I need to show a lender?
Requirements can differ by lender, but in general, you should be ready with the following documents:
- Income verification. These include the last two years of tax returns, W-2s, 1099s, and your most recent pay stubs.
- Identification. Driver’s license, Social Security card, or other ID
- Bank statements
- Proof of funds. Bank statements and wherever else you’re getting money for closing costs, down payments, and future loan payments. These include wages, stock portfolios, and monetary gifts from parents.
The bottom line
How much house you can afford is a personal decision. But by knowing ahead of time what the median mortgage payment is in your state, you should have a rough idea of if buying a home is possible for your family.
Real estate agents, mortgage brokers, and lenders, among others, can help you determine how much of a home loan you can qualify for. They’ll often help you calculate this number for free. Some online research can also help you see how much a home loan will cost.
But only you know what your monthly budget is. If you’re paying off credit cards, car loans, and other debts, then you should find a home loan amount that’s comfortable with your budget. You may want to wait a while until most of your debts are paid off before shopping for a home.
Saving for a bigger down payment and raising your credit score can also help you qualify for a better interest rate on a home loan, which can make it more affordable in the long run.
Remember that lenders and others who help you buy a home also have their interests at heart. This includes making a profit and ensuring that you buy a home. Lenders are unlikely to approve a home loan that they don’t think you’ll make payments on or can’t afford, but they also may lend you more money than you think you can afford right now so that you can have a financial cushion when making an offer on a home.
That can be a good thing, but don’t let it outweigh your personal decision when buying a home that fits your budget.