Decoding Housing Affordability: Tips for Finding Your Perfect Price Point

By Nicole Young on July 19, 2023

Over the last year, you’ve probably heard news about the impact of interest rates on the housing market. Whether you’re looking to buy your first home or thinking about an upgrade, it’s no secret that affordability fluctuates based on interest rate changes initiated by the Federal Reserve. When considering housing changes, it’s important to think about both cash flow affordability and the impact of new housing on your long-term financial plan.

To determine the price point that makes sense for you, consider the following variables that drive the cost of monthly payments:[i]

The loan type. For example, your loan may be a 30-year fixed, 30-year adjustable, 15-year fixed, etc.
The loan’s interest rate. This is driven largely by market interest as well as an assessment of how risky you are as a borrower using your credit score, income, and debt.
How much you can pay monthly. While there isn’t necessarily a “right” percentage that applies to everyone, here are some common rules of thumb:[ii]
1. Mortgage debt rule: Lenders usually don’t want you to spend more than 31%-36% of your monthly income on your total mortgage-related payment.
1. Total debt rule: Lenders usually don’t want you to spend more than 43%- 50% of your monthly income on your total debt, including your total mortgage-related payment as well as any credit card, auto, or other debt.
Your down payment. While this varies considerably, here are a few metrics to consider:
1. A 20% down payment is ideal. If you put down less, you will likely need to pay for mortgage insurance monthly.
1. According to the National Association of Realtors, the median national down payment was 13% in 2021.^v
1. While usually not advisable, first-time home buyers may get a conventional mortgage with a down payment as low as 3%.[iii]

There is little doubt: the affordability question can be confusing, consult with someone who is knowledgeable. Financial advisors often have software that can examine the impact of new housing on your long-term financial wellness. While cash flow affordability is important, it’s essential to understand the impact of a home purchase on your overall strategy and ability to achieve your goals.

Article by: Carrie Mangan, MSF, Private Vista Advisor

_{[i] Consumer Financial Protection Bureau, “Decide how much you want to spend on a home,” https://www.consumerfinance.gov/owning-a-home/prepare/decide-how-much-you-want-spend/. Accessed January 26, 2023.}

_{[ii] Fontinelle, Amy and Odion-Esene, Brai, “How Much House Can I Afford? Home Affordability Calculator,” Forbes, December 21, 2022, https://www.forbes.com/advisor/mortgages/how-much-house-can-i-afford/. Accessed January 26, 2023.}

_{[iii] Kielar, Hanna, “What Is A Conventional Loan?” ROCKET Mortgage, January 10, 2023, https://www.rocketmortgage.com/learn/conventional-mortgage. Accessed January 30, 2023.}

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