How much do you need to earn to afford your $4,000 mortgage payment?

Many potential home buyers were hoping that the Federal Reserve’s rate cuts would lead to lower interest rates. So far it hasn’t worked.

Interest rates remain high, averaging 6.88%, the highest rate we’ve seen since July. Home prices also continue to rise, albeit at a more reasonable pace than we saw in 2021 and 2022.

The real estate landscape in the United States is extremely diverse. The national average price of a single-family home is $359,892, but the average price in each state can vary greatly. For example, home buyers in Kansas can expect to pay an average of $228,299, a fraction of what they would pay in more expensive states like New Jersey or California, where median home prices are $535,982 and $773,239, respectively. . In these states, it is not uncommon for your mortgage payment to be $4,000 or more.

This pushes the average American family out of the housing market in high-cost areas. This begs the question: How much would you have to earn to comfortably afford your $4,000 mortgage payment?

You need an income of $14,285 to afford a $4,000 mortgage.

To determine the income needed to pay off a $4,000 mortgage, you can use a rule of thumb known as the 28/36 rule, which states that your mortgage payment should be no more than 28% of your gross (or pre-tax) monthly income. income. . The amount you pay on your mortgage, credit cards and other debts should not exceed 36%. Lenders may adjust these limits for borrowers with high credit scores and sufficient reserves, but the 28/36 rule is widely accepted as the standard for your mortgage and debt levels.

Using the 28/36 rule, we can determine that a home buyer would need at least $14,285.72 in monthly income to pay a $4,000 mortgage payment ($14,285.72 x .28 = $4,000 ). Note that ideally, 28% should include all housing-related expenses, such as mortgage payments, property taxes, homeowners insurance, and, if necessary, private mortgage insurance (PMI), which is usually required if you save less than 20 %. from the purchase price of your home.

From here, we can use a mortgage calculator to figure out what’s on each borrower’s mind: How much house can I afford?

Let’s take the average single-family home in Massachusetts as an example. The median home price is $627,696, according to Zillow. Assuming a buyer makes a 20% down payment of $125,523 and receives a mortgage rate of 6.88%, the monthly mortgage payment of principal and interest would be $3,299.94. When you add estimated monthly payments of $596 for property taxes and $183 for homeowners insurance, your total monthly mortgage payment is $4,079.19.

How to lower your mortgage payment

Even though your monthly housing cost will likely be less than the $4,000 mortgage payment that is average for certain areas, there are ways to influence this figure.

Look for assistance programs

Brandon Norwood, owner and licensed financial planner at Oak City Financial, notes that even in areas with expensive real estate, there are offers to help first-time homebuyers.

“Explore state, local or lender programs that offer down payment assistance, reduced PMI or lower interest rate loans,” Norwood said.

Buy prices

Home buyers should compare mortgage lenders to find the best deal. Get at least three estimates and see if each lender can beat the others’ rates and terms.

Think about smaller homes and renovating the top.

Homes that are smaller than average in size or in below average condition will have a lower than average price and therefore a lower mortgage. Find a livable home that suits your needs, and you can upgrade it later.

Rent out part of the property

You can buy a multifamily property (such as a duplex) and rent out the units you don’t live in, you can buy a property containing an additional home or apartment and rent out an accessory dwelling unit (ADU), or you can even rent out rent unused warehouse space to increase your income. The extra income from these strategies can be applied toward your monthly mortgage payment, helping you pay off your loan faster.

Make sure you are ready to take out a mortgage

The main thing to avoid before taking out a 30-year mortgage is becoming “house poor.” This term refers to a homeowner who has little money for other things because housing costs make up a large portion of his monthly income. For many home buyers right now, the high cost of living and high mortgage rates may mean taking out a larger loan than they would actually be comfortable with.

For those who aren’t sure if they can even handle a mortgage, take it for a test drive first.

“Before you take out a mortgage, try deferring your expected mortgage payment for a few months,” Norwood said. “If you are having a hard time meeting your other financial needs, consider downsizing your mortgage.”

How we track mortgage rates

The national and state averages above are provided unchanged through the Zillow Mortgage API, assuming an 80% loan-to-value (LTV) ratio (i.e., a down payment of at least 20%) and an applicant’s credit score in the 680 range –739. The rates received represent what borrowers should expect when receiving quotes from lenders based on their qualifications, which may differ from advertised rates. © 2024 Zillow, Inc. Use subject to Zillow’s Terms of Use.