How Home Buyers Can Navigate Rising Mortgage Rates

Some financial planners may use a similar rough starting point: Spend no more than 28 percent of your gross income on all of your housing expenses — mortgage payments, property taxes, insurance — and an additional 1 to 2 percent allocated for repairs and maintenance.

That won’t work for everyone, though, especially in high-cost metropolitan areas where it’s often hard to find rentals within those strictures.

“Take all of your monthly expenses into account and truly decide how much you want to put toward housing,” said Tom Blower, a senior financial adviser with Fiduciary Financial Advisors. “I would never encourage a client to strictly follow a percentage of income to determine how much to spend each month. Rules of thumb are guidelines and something to consider, but not the end-all, be-all.”

Adjust your expectations.

The rise in interest rates means many people have had to rein in their price ranges — by a lot. A family earning $125,000 that wanted to put down 20 percent and dedicate no more than 28 percent of its gross income to housing — roughly $35,000 — could comfortably afford a $465,000 home when the interest rate was 3 percent. At 5 percent, that figure shrinks to $405,000, according to Eric Roberge, a financial planner and founder of Beyond Your Hammock in Boston. His calculation factored in property taxes, maintenance and insurance.

He generally suggests allocating a conservative share of household income — no more than about 23 percent — to housing, but acknowledged that’s difficult in many places. “Our calculation for affordability doesn’t change,” Mr. Roberge said. “However, the big jump in rates changes what is actually affordable.”

There are other considerations. With many Americans moving from cities to larger spaces in the suburbs, you’ll also need to consider how much more it will cost to run and furnish that home, for example, or how much extra you’ll need to spend on transportation.

Article source: https://www.nytimes.com/2022/05/01/your-money/home-buyers-mortgage-rates-inflation.html