Owning a home is a big milestone. It marks that you reached a point where you can afford a major purchase, and one that is almost guaranteed to be a solid investment. But with housing priced more than 20% higher than it was just a few years ago and interest rates hovering around 6%, is this even a realistic goal nowadays?
The answer depends on your income, flexibility, and eligibility to take advantage of homeownership opportunities. Prepare for the real cost of traditional property purchases, and learn about how to make a housing choice that you can afford.
The American Housing Market Yesterday, Today, & Tomorrow
Before 2020, American housing had steady price growth, low mortgage rates (averaging 3.1%), and a relatively balanced supply and demand. Then the combination of low interest rates and remote work surged demand and created bidding wars. The result was rapid price appreciation.
In the last few years, mortgage rates have jumped (above 6%), making the high-price inventory even more expensive. So, sales volumes fell as affordability worsened. At the same time, rental housing also saw a rise in rent prices.
Prices and interest rates may settle down a little in the next few years, but they’ll never drop down to pre-2020 values. And Freddie Mac estimates that the country is short several million housing units for both sale and rent.
If you want to buy a home in the next 5 to 10 years, you need to start positioning yourself today:
- Boost your earning potential. Home prices are outpacing wages, so the only reliable way to close that gap is by improving your earning power.
- Start automated savings. Automate a small weekly transfer to a high-yield savings account or, better yet, invest your contributions in an ETF that closely follows the market.
- Strengthen your credit. To get the lowest mortgage rate possible, have good credit. Always make your payments, keep utilization under 30%, and don’t take out new credit in the two years before you apply for a mortgage.
During this preparation period, familiarize yourself with the market and watch population trends. Learn which neighborhoods are rising or declining, as prices move in the direction of population.
Unconventional Paths to Homeownership
Traditionally, a buyer put down 20% and received a 30-year mortgage for a suburban stand-alone home. However, the modern model is changing as prospective buyers are looking for more affordable options and ways to compete with high prices and rates.
Going Rural
If you still imagine your future with a home on an acre of land with a white picket fence, you’re going to need to look rural. And moving away from the city is a realistic option if you want a free-standing home that’s big enough for a family.
Rural and semi-rural counties, even just 30 to 60 minutes outside of a city, are way more affordable, and usually larger, than what you’ll find in a metropolitan. Even mid-size cities with stable job markets have a more reasonable price-to-income ratio than the hottest markets.
The United States Department of Agriculture (USDA) has home loans with low rates specifically to buy property in rural areas. Currently, rates for USDA loans average around 5.5% to 6.75%. Very low-income borrowers may obtain rates as low as 5.125%, and payment assistance may reduce the rate to as low as 1%.
Get a 50-Year Mortgage
Young Americans who have yet to establish an income high enough to qualify for a traditional mortgage may consider a longer term to obtain a loan with a lower monthly payment. While a 50-year loan means paying significantly more over the full course of the loan, it could be a first stepping stone into building equity.
Take a look at the difference for a $500,000 loan at 6% interest:
| 30-Year Loan | 50-Year Loan | Difference | |
| Monthly Payment | $2,998 | $2,567 | $432 |
| Total Interest | $579,190 | $1,040,326 | $461,136 |
| Total Payments | $1,079,190 | $1,540,326 | $461,136 |
For this loan size, the borrower would need an annual income of approximately $128,500 to qualify for the 30-year loan, but only $110,025 for the 50-year term. While a longer mortgage could get you in the door by lowering the income requirement by about $18,500, you would pay nearly double overall.
Is it worth it? Maybe. You can always refinance a few years later when your income increases or the rate significantly drops.
Co-Buy With Friends or Family
Changing with traditional home purchasing practices is buying alone or with just a spouse. Some have opted to buy a home with their best friend, sibling, cousin, and others, since it:
- Increases the overall buying power.
- Splits upfront costs like the down payment.
- Shares monthly expenses.
Co-ownership may also mean getting a home in a better neighborhood or with more amenities, like a pool, which could be another shared responsibility or an area of conflict. Cutting the bills in half sounds good in theory, but each borrower is on the hook for the total monthly payment. And lenders do not care who cannot pay their half; they want the full amount.
Affording Homeownership Once You Have It
After saving a down payment, qualifying for the mortgage, and buying a home, you still need to afford to live there. Budgeting for the mortgage, utilities, taxes, and other fees are just the start of what homeownership can surprise you with.
First-time homeowners often don’t consider the hidden costs of owning a home simply because they’re unaware of the required maintenance and possible repairs. The general rule is to budget 1% of the home’s value for maintenance (and 2% for older homes).
For a $500,000 home, that’s $5,000 to $10,000 annually, or $417 to $833 monthly. Some typical home maintenance includes:
- HVAC tune-ups
- Pest control
- Gutter cleaning
- Winterizing
Plus, appliances break down, foundations crack, plumbing leaks, and electrical issues occur. Especially if you don’t keep up with maintenance. Setting aside a few hundred a month can help you prepare for both planned maintenance and unexpected repairs or replacements.
By Ezra Summers –