With the news New Hampshire has a 20-year low affordability index of 69 when it comes to buying a home, it helps to put “affordability” into perspective.
In this special “It’s Your Money” column, I’ll provide perspective on what affordability really means and how to look at the numbers if you want to wrap a big red ribbon around a new house for Christmas.
New Hampshire’s new record-low affordability index of 69 means that the state’s median income is 69 percent of what’s necessary to qualify to buy a median-priced home. That’s down from 106 this time last year. The affordability index figures in the price of the home and current interest rates, as well as property taxes and insurance, based on the median-priced home.
The affordability index highlights the most important thing to pay attention to if you’re house hunting. The sticker price is only part of the calculation. The number you must look at is what the house will cost monthly, including property taxes, insurance, and the interest rate. Savvy buyers also figure in maintenance costs, what repairs or renovations the house will need both short-term and long-term, upkeep, heating cost and more.
Interest rates have had a huge impact on affordability. The average mortgage interest rate on a 30-year fixed-rate mortgage for someone with a credit score of 740-850 in New Hampshire is 6.95 percent, up from around 2.95 percent last year. Like everything else, the exact interest rate depends on the borrower’s credit score, the property, the amount of down payment, the lender and more. Given all that, with all being equal, borrowers are paying much higher rates now than they were 12 months ago.
While it may seem like a small difference, the amount of interest you pay will be a major factor in whether you can afford to buy – and keep – a house.
High Rate, Low Rate
Let’s take a look at how much a $435,000 home will cost monthly now as opposed to 12 months ago. For hard-core optimists, we’ll also look at a $217,500 home.
Again, when you shop for a home, the sticker price is just part of the calculation. The real test is how much you will pay a month.
This scenario is best-case, someone with an excellent credit score of 740-850 who can put 20 percent ($87,000) down on the $435,000 house. We’ll use a random property tax amount of $5,000 and $1,000 home insurance, since this is for illustration purposes and not a legal document. (I used a mortgage calculator to get the figures.)
A $435,00 home, with a 6.95 percent mortgage interest rate, after 20 percent down, property tax and insurance included, would have a monthly payment of $2,803.58. By the payoff date in 2052, monthly payments will total $1,009,288.34.
The same house with a 2.95 percent interest rate, same down payment, property tax and insurance, would have a $1,957.81 monthly payment, for a total $704,813.21 by the payoff date.
As you can see, that’s nearly a $ 1,000-a-month difference.
Let’s say you’re willing to settle for a much cheaper house, assuming you can find one. Of course, it’ll likely be a fixer-upper, so you’ll have to calculate for maintenance and renovation, assuming this little gem even exists. That’s a column for a different day. For the sake of the exercise, property taxes are $2,500, homeowners insurance remains $1,000. The down payment is 20 percent ($43,500), so no private mortgage insurance is necessary, which is another factor you’ll have to consider when it comes to affordability if you can’t put 20 percent down.
At 6.95 percent interest, the monthly payment would be $1,443.46, and you’d pay a total $519,644.17 for the house by the 2052 payoff date.
At the 2.95 percent interest rate, the monthly payment would be $1,020.57, and when it’s paid off in 2052, you’ll have paid $367,406.61.
Armed for Affordability
House hunting can be a lot of fun. Looking at homes online, going to open houses and tours, imagining your design choices. Fun!
It’s the not-so-fun parts, though, that will help you tackle the affordability issue.
Don’t dismiss where your new home is located. New Hampshire homeowners pay high property taxes, well above the national average. Depending on where the house is located, it can be anywhere from $15 per $1,000 to $30.
The (relatively) good news is that a home’s property tax assessment is lower than its market value assessment, so if you buy a $435,000 home (the November median sales price in NH), that’s not the number your property tax will be based on. Property tax depends on the town or city’s tax rate and the house’s assessed value.
Before you start fantasizing about painting that accent wall or buying deck furniture, determine how much you can pay a month for the house:
- Do a detailed budget, taking into account your household’s current income and expenses. The bank won’t care if your boss promised a big raise next year, they are making a determination on your situation now. For more on budgeting, check out the October It’s Your Money column.
- Pull your credit report, take care of any errors, and if you have a low credit score, focus on working to improve it by paying down debt and making all your payments on time. The higher your credit score, the lower your interest rate. For more on credit scores and what to do about them, check out January’s It’s Your Money.
- Research where you want to live and what the property tax rates are. How much you’ll pay in taxes comes down to how much you want a house vs. how much you want the town. Property tax rates are public information and easy to find.
- Get pre-qualified by a lender, which will give you an idea of what kind of mortgage you can get, and it will also shine a light on any issues you have to fix. A prequalification includes a credit check, but isn’t the hard-core financial deep dive the lender will do when you apply for a mortgage.
- Be realistic and don’t invest all your emotion in finding the “perfect house,” or a house at all, until you can afford to buy one. Instead invest your emotion and mental energy at making yourself the best-qualified home buyer someone with your income can be, and then finding a house you can afford.