In Case You Missed It - Mortgages Swallow Over 46% of Income

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ICYMI: Mortgages Swallow Over 46% of Income

In case you missed it, higher interest rates and sinking housing affordability mean that mortgages ate up 46.4% of median household incomes in October 2022, according to the latest data from the Federal Reserve Bank of Atlanta. That's an uptick from September when it was 46.3%, and a big jump from August when homeowners spent 43.3% of their income on their home loan.

That's almost twice as much as homeowners should be spending on their mortgages, according to the 28/36 rule. So if you're a homeowner, you should be looking to spend no more than 28% of your gross income (meaning, before taxes) on all bills or payments for your home. This includes your mortgage, insurance, and other expenses. In total, all of your debt—including student loans or credit card bills—shouldn't exceed 36% of your income.

But that's becoming increasingly difficult at a time when homes were 9% more expensive in October than the year prior, according to the most recent data from the CoreLogic Case-Shiller Index.

The average rate on a 30-year fixed-rate home loan also soared to over 7% in November, data from mortgage originator Freddie Mac shows. While mortgage rates have been on the decline, with the average 30-year rate at 6.15%, homeowners could still find themselves shelling out thousands of dollars more over the life of their home loan.

-Kristin

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Term of the Day

Debt-to-Income Ratio

A debt-to-income-ratio is a measurement of how much of your monthly earnings goes toward payments, such as student loans and credit card bills.

This information helps both you and lenders figure out how easy it is for you to afford monthly expenses. Along with your credit scores, your debt-to-income ratio is an important factor for getting approved for a loan.

A debt-to-income ratio, also known as a DTI ratio, is quoted as a percentage. For example, you might have a debt-to-income ratio of 25%, meaning one-quarter of your monthly income goes toward debt repayment. If your income is $4,000 per month, 25% of that would be $1,000 of total monthly debt payments.

Off the Charts

In some good news for homeowners and potential buyers, mortgage rates are finally coming down from last year's highs, and fell even further this week according to Freddie Mac. Average rates on a 30-year fixed-rate loan are now nearly a full percentage point lower than they were at the recent peak of 7.08% in November. The chart below shows how mortgage rates are trending down.