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The typical mortgage payment now eats up a greater percentage of borrowers’ incomes than at any point since the Great Recession — giving potential buyers new reason to reconsider whether buying a home today makes sense.
As of the first quarter of 2018, mortgage payments for the median home value in the U.S. amounted to 17.1 percent of the median income, according to Zillow’s latest affordability report. And that statistic assumes buyers put down 20 percent.
The latest price-to-income ratio was up from 15.9 percent the previous quarter. It also was the highest since the second quarter of 2009. At that time — with the Great Recession not yet over — mortgage payments ate up 17.5 percent of income.
What it means for you
Obviously, the trend of mortgage payments consuming an ever-growing share of income underscores the importance of shopping around for the best interest rate before taking out a mortgage.
Failing to do this comparison shopping costs the average person $9,000 over the life of a 30-year mortgage, according to federal research.
Shopping around is a given, though — a step you should take regardless of the current state of the housing market or interest rates or any other factor.
If you’re considering buying a home, this news is all the more reason to first take a step back and be sure that buying is in your best interest right now.
Start by researching the price-to-rent ratio for the area where you are considering buying a home. That will help you determine whether buying or renting is more financially advantageous.
Then, consider whether you would be able to deduct your mortgage interest payments from your taxes. You may be unpleasantly surprised because, under the federal law that overhauled the tax code in December:
- You cannot deduct as much mortgage interest as in the past. For the new thresholds, see “3 Costly Ways Homeowner Tax Breaks Will Change in 2018.”
- The standard deduction is significantly higher. This effectively means it might not be in your financial interest to write off mortgage interest, as we detail in “4 Big Tax Deductions You Almost Surely Won’t Claim for 2018.”
If you are set on buying a home, this news is all the more reason to buy sooner than later.
Mortgage rates are likely to climb further as Federal Reserve rate hikes continue. And Zillow projects that mortgage payments will comprise a greater share of incomes in time — rising to 19 percent one year from now, based on a 5 percent mortgage interest rate.
Behind the trend
Zillow attributes the trend of mortgage payments consuming a growing share of incomes to the fact that home values and mortgages interest rates are now rising in tandem.
While home prices have been climbing for years, interest rates also have started creeping up.
As Zillow explains it:
“Throughout the recovery, low mortgage interest rates have helped keep homes relatively affordable, even as home values climbed to new peaks. Home values are still soaring — in April, they rose at their fastest rate in 12 years — but mortgage rates are no longer a salve.”
According to Freddie Mac, the average interest rate for fixed-rate 30-year mortgages has climbed about 1 percentage point over the past two years:
- May 2018: 4.59 percent
- May 2017: 4.01 percent
- May 2016: 3.60 percent
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