Are you thinking of becoming a homeowner? Then you already know it’s most likely the most capital-intensive project you’ll embark on. So, how do you afford a 500k house?
A 500k house might seem expensive, but it’s not in today’s market. You can afford a house of 500k by earning anything from $74,607 before tax. However, you must consider several factors such as the downpayment, loan terms and interest rates, debt obligations, and closing costs based on location.
These variables can affect the overall cost of getting the house and make it unaffordable if you earn below $100,000. The best income to afford a house like this is anything above $150k. Here, we discuss how much you need to afford a 500k house.
Average Price of Homes
The average price of homes varies based on several factors, such as the age of the house, location, square footage, and several other characteristics. Regardless of all these, the consensus is that the price of homes is on the rise. Zillow claims the typical value of homes in the US is $337,560 as of March 2022. St Louis Fed claims the median sale price of houses is $428,700 in the first quarter of 2022. This shows just how expensive homes have become in the US and the fact that 500k homes are now more common than ever.
There are several places in the US where it’s hard to find homes in a good neighborhood for 500k. Cities such as New York City, San Francisco, Los Angeles, San Diego, and several others have become or are close to becoming million-dollar cities due to the average price of homes in those cities being over a million or close to that.
How Much Do You Need to Earn to Afford A 500k House?
Even though 500k houses might be more common now than before, not everyone can afford a 500k house. For most people who need a mortgage to become a homeowner, their income determines whether they can afford such a house.
The standard is that a person or household should spend above triple their pretax income on the mortgage to buy a house. Thus, the person who wants to spend 500k on the house should earn around 166 – 170k annually to afford the mortgage on the house comfortably.
However, this isn’t necessary, and it’s possible to still afford a 500k house while earning well. Using triple your income as a standard for whether you can afford a house won’t always work. But there are other ways to determine how much you need to be able to afford such a house.
The best way would be to use the rule that your mortgage payment isn’t more than 28% of your gross income. In such a case, a salary of $74,000 to $80,000 might be enough for you to afford a $500,000 house.
Factors affecting Affordability of a 500k House
Although a salary of between $74,000 to over $100,000 is enough to get a 500k house, there are several factors you also have to consider
A regular mortgage will usually require a down payment of $100,000, which is 20% of the purchase cost. Unless you’re using a government program with low to zero interest rates, you can expect lenders to ask for between 15 to 20% down payment. Some might even ask for 25%.
The down payment makes the initial cost of buying the house higher but paying a higher down payment could help make the mortgage easier and cheaper. The only issue is that only a few people can afford to save $100,000 for a down payment, especially if the annual income is also within that range. That’s why saving can help you have enough for when you finally decide to buy a house.
2. Loan Terms
The mortgage terms matter when determining how affordable the mortgage is. For instance, a 30-year mortgage with an interest rate of 3.25% and a 20% downpayment will only require $1,741 monthly as a mortgage payment. In that case, you can comfortably afford the house while earning $74,607 annually, and you won’t be spending more than 28% of your income on housing.
Thus, it’s crucial to understand the mortgage terms and how they affect you in the long run. A fixed interest rate is usually the best as it gives you the certainty of knowing how much you need to pay monthly. But there could be instances where variable interest rates might work.
The longer the loan is, the more expensive it is due to the interest, but you don’t notice this because your monthly repayments would be lower. Also, lenders are more open to long-term mortgages, and the interest rates might be a bit lower than if it’s a ten-year mortgage.
The most important thing is to be familiar with the implication of all the terms and, if possible, talk to a professional financial advisor or planner before choosing a mortgage.
3. Debt Obligations
Your debt obligations could also influence your ability to afford a 500,000 house and how much income you need. This obligation could include student loans, car loans, credit cards, and other debts you need to pay. It’s better to be debt-free before taking a mortgage.
This’ll improve your credit score and help you get better terms. But it’s not everyone that can afford that. Thus, you might have to get a mortgage while still having other debts. In such cases, it’s important that all your debts, including the mortgage, don’t exceed 36% of your gross income.
This ensures you have enough left after meeting your debt obligations to fulfill every other expense necessary to live a good and comfortable life.
The location also matters when determining how much you need to afford a house. This is because the closing costs and other post-closing expenses on the house will differ from one place to another, and so will the income you need to fulfill those obligations.
Normally, you need to have more than the down payment to be able to pay the closing costs. Also, there are property taxes and insurance to pay after purchase. Your location influences this a lot. For example, those living in areas prone to natural disasters will pay more on insurance premiums.
You only need an income of around 100k annually to afford a 500k house. But there are still things you have to consider that could determine the affordability. The most important thing is to analyze your financial position. If possible, seek the advice of a financial planner.