This Is the Average American's Mortgage Payment. Can You Afford It?

Signing a mortgage today is not the same as signing a mortgage three years ago. In 2020, mortgage lenders were offering almost ridiculously low interest rates to entice buyers during a financial crisis.

But mortgage rates have hovered around 7% for much of 2023. And when you combine that with elevated home prices, it has the makings of a real affordability crisis.

You may or may not be surprised to learn that the average home buyer today has a monthly mortgage payment of $2,866, according to a new report from Redfin. That's an increase of 20% from a year ago, when the average mortgage payment was $2,395. Today's typical mortgage payment also represents an all-time high, Redfin says.

Based on borrowing rates, home prices in your area, and the funds you have on hand for a down payment, you might run some numbers to figure out what mortgage payment you think you can afford. But your mortgage calculations might be incomplete for one big reason.

You need to look at the big picture

Let's say you're buying a $300,000 home that you can make a 20% down payment on, leaving you to borrow $240,000. Let's also assume you sign a 30-year mortgage at 7%. That leaves you with a monthly payment of about $1,600 for principal and interest on your loan.

Now, you'll often hear that it's wise to keep your monthly housing payments to 30% of your take-home income or less. So let's say you bring home $5,400 a month. A monthly mortgage payment of $1,600 puts you at just under that 30% threshold, so you might assume you're good to move forward with that sort of home purchase.

But that 30% guidance is meant to include your total housing costs, not just your mortgage. So, let's say that on top of a $1,600 mortgage payment, you're also looking at $100 a month in homeowners insurance and $200 a month in property taxes. Let's say you're also on the hook for homeowners association fees that cost $250 a month.

All told, your monthly housing costs are $2,150. If you bring home $5,400 a month, that's about 40% of your pay, which is really high. If you allow that much of your income to be eaten up by housing costs, you may not have enough money left over to cover your non-housing expenses.

Ways to lower your mortgage payments

You can take a few steps to keep your mortgage payments as low as possible.

First, try to put down more money at closing. That could mean delaying your home purchase until you've saved more.

Next, work on boosting your credit score. The higher it is, the more favorable a mortgage rate you might qualify for.

Finally, consider different neighborhoods if the one you're most focused on has higher home prices. You may want to look at a neighborhood that's in the process of being built up. There may not be such a big demand for homes in a neighborhood like that, and so you might snag a bargain. And while you might have to wait things out for a couple of years until local amenities improve, you could end up in a situation where you're able to get in and buy a really nice home before prices explode.

It may shock you to learn that the average home buyer today has a $2,866 mortgage payment. But whether the mortgage payment you're looking at is higher, lower, or similar, run the numbers and consider your total housing picture to decide whether it actually works for you.