The Average Mortgage Size Just Set a Record. Can You Afford It?

Borrowers are taking out higher mortgages to keep up with rising costs.

Anyone looking to buy a home in 2021 was in for a challenge. That's because housing prices soared last year, fueled by a glaring lack of real estate inventory.

But the one advantage buyers had in 2021 was low mortgage rates. This year, mortgage rates are trending higher, and as of this writing, the average rate for a 30-year loan is already above 4% -- a level not seen at all in 2021. Combine that with the fact that borrowers are having to take out larger mortgages, and it makes for a tough situation.

Borrowing is on the rise

Last week, the average mortgage amount was a record $453,000, as per the Mortgage Bankers Association. And the average contract interest rate for a 30-year fixed loan rose to 4.05% from 3.83% the week prior.

All told, it's clear home buyers today could end up spending a lot more money than last year's buyers to purchase a home. Many may inevitably come to the realization that homeownership just isn't within reach right now.

Can you afford a home today?

You may not be in a position to take on a $453,000 mortgage. But you also may not need to. If you're purchasing a home in a less expensive area of the country, or if you have a lot of money socked away for a down payment, then you may not have to borrow nearly as much as the average person who signed a mortgage last week.

Still, you may be struggling to determine whether you can afford to buy a home in today's market. And so to figure it out, you should really ask yourself one question: Will I be able to keep my housing costs to 30% of my take-home pay or less?

Now to be clear, in this context, "housing costs" mean not just your mortgage payment, but also your property taxes, homeowners insurance premiums, and HOA fees, if you're buying a home in a homeowners association. But if that total number comes to 30% or less of your pay, then you may be able to move forward with your plans.

So, let's assume that based on home prices in your target neighborhood, today's mortgage rates, and your down payment funds, you're looking at a mortgage payment of $1,000. Let's then tack on a monthly property tax bill of $300, insurance costs of $100 a month, and a monthly HOA fee of $250.

All told, that's $1,650. If you bring home $5,500 a month, you're good to go -- assuming, of course, that you're comfortable spending 30% of your income on housing. You may, depending on your personal circumstances, want to stick to a lower threshold.

In fact, it's a good idea to use a mortgage calculator to get a sense of what you might spend on a home. That way, you can see if house hunting is worthwhile or if you're better off waiting.

If you decide to put your buying plans on hold, there's no shame in that whatsoever. Today's real estate market is incredibly tough, and if you decide to pull out and wait for home prices to come down, you could end up buying a home with less financial stress.