When it comes to determining what is a normal house payment, there are a few key factors to consider. The amount that is considered a normal house payment can vary greatly depending on your location, income, mortgage rates, and other expenses.
What Goes into a House Payment?
A house payment is made up of four main components:
- Principal – This is the portion of the payment that goes towards paying down the mortgage loan balance.
- Interest – The amount charged by the lender for borrowing the money.
- Taxes – Property taxes charged by the local government.
- Insurance – This includes homeowner’s insurance to protect against damage.
The principal and interest make up the core housing payment. Taxes and insurance get bundled in with the mortgage payment for convenience. However, the mortgage payment amount can vary greatly depending on the size of the down payment, mortgage rate, loan term, and more.
What is Considered Affordable?
A general rule of thumb is that your total monthly housing payment, including taxes and insurance, should be less than 28% of your gross monthly income. This percentage is based on recommendations from the Consumer Financial Protection Bureau.
So for example, if your total monthly income is $5,000 before taxes, 28% would be $1,400. So a home payment around $1,400 or less would be considered affordable based on the 28% recommendation.
However, in high cost areas like New York or San Francisco, that benchmark may not be realistic. In high cost cities, it’s not uncommon for people to pay 35% or even up to 50% of their income towards housing.
Average House Payment by Location
Here is a look at average monthly house payments in 2019 for owner-occupied homes by location, according to the U.S. Census Bureau:
| Area | Average Monthly Payment |
|---|---|
| Northeast | $1,689 |
| Midwest | $1,163 |
| South | $1,149 |
| West | $1,721 |
As you can see, average payments range from around $1,150 per month in the Midwest and South up to $1,700 per month in the West. However, keep in mind there can be significant variation even within these broad regions.
Factors That Impact House Payment
There are several key factors that determine what a normal or average house payment may be:
Location
As the table above shows, location has a big impact. Areas with a higher cost of living tend to have higher home prices and monthly payments. Small towns or rural areas tend to have lower home prices and monthly payments.
Home Price
The purchase price of the home is one of the biggest drivers of monthly payments. The more expensive the house, the higher the mortgage amount and monthly payment.
Down Payment Size
The larger the down payment, the lower the mortgage amount and monthly payments. Putting 20% down is ideal to avoid private mortgage insurance.
Interest Rates
Current mortgage rates have a direct impact on monthly payments. Lower rates mean lower payments. Today’s rates are still near historic lows.
Loan Term
The mortgage loan term affects payment as well. A 30 year fixed rate mortgage will have lower payments than a 15 year loan, for example.
Property Taxes
Some areas have much higher property tax rates than others, which adds to the monthly housing payment.
Homeowner’s Insurance
This insurance premium amount gets bundled into the total monthly home payment. More expensive houses may have higher insurance rates.
What is a Normal Payment on a $200,000 Home?
As an example, here is an estimate of what a normal monthly house payment would be on a $200,000 home:
- Home Price: $200,000
- Down Payment: 20% or $40,000
- Mortgage Amount: $160,000
- Interest Rate: 5% fixed rate
- Loan Term: 30 years
- Principal & Interest: Approximately $854/month
- Property Taxes (1%): $200/month
- Insurance ($100/month)
- Total Payment: Around $1,154/month
This example has a total monthly payment of about $1,150 with a moderate down payment, average mortgage rate, and estimated taxes and insurance. With a larger down payment, the payment could be under $1,000. On a more expensive home, the payment could easily exceed $1,500 or more per month.
How Much House Can I Afford?
A common question home buyers ask is “how much house can I afford on my income?” This gets at trying to define a normal house payment range based on your unique financial situation.
As a general guideline, aim to keep your total monthly home payment below 28% of your gross monthly income as mentioned earlier. But also consider other monthly obligations – car loans, student loans, credit card payments, child care, and more.
House Affordability Calculator
To estimate how much house you may be able to afford, use an online mortgage calculator or affordability calculator. You can enter details like:
- Income
- Debts
- Down payment savings
- Mortgage terms
- Estimated taxes, insurance, etc.
The calculator will estimate the maximum home price and payment you can likely qualify for and comfortably afford based on those factors. This can give you a ballpark idea of a normal payment for your situation.
Get Pre-Approved
For a more accurate home budget, meet with a lender and get pre-approved for a mortgage. They will evaluate your finances and provide a pre-approval letter estimating the loan amount, rates, and monthly payment you qualify for.
Compare Payment to Income Ratio
One metric to look at is the payment-to-income ratio on your housing payment, also called the front-end debt-to-income ratio (DTI). This compares your total monthly housing payment to your gross monthly income.
For example:
- Gross monthly income: $5,000
- Total monthly home payment: $1,500
- Payment-to-income ratio: $1,500/$5,000 = 30%
As noted earlier, a ratio below 28% is generally recommended by lenders for affordability. But up to 36% may be acceptable with good credit and money reserves. In high cost areas, ratios above 40 or even 50% are not uncommon.
The 50/30/20 Budget Rule
Another budgeting guideline is the 50/30/20 rule. This recommends limiting housing costs to no more than:
- 50% of after-tax income for needs like housing, food, utilities.
- 30% for wants like hobbies, travel, dining out.
- 20% for savings and debt repayment.
Based on this model, if your after-tax monthly income was $4,000:
- 50% = $2,000 could go towards housing and other needs.
- So an $1,800 mortgage and utilities may be affordable.
- 30% = $1,200 for wants.
- 20% = $800 for savings and debts.
This budget guideline aligns closely with limiting housing to around 28% before-tax income. The 50/30/20 approach also helps allocate for other savings and living expenses.
Save for Down Payment
The amount you’re able to save for a down payment has a big impact on the monthly payment. Here are some tips:
- Aim to save up at least 10-20% of the home’s price.
- Shop around for the best high yield savings account rates.
- Reduce spending and pay off debts to maximize savings.
- Use an IRS approved retirement account like a Roth IRA for some down payment funds.
Saving up even just 5% for a modest down payment can make home ownership more affordable. But the more you’re able put down, the lower your payment will be.
Lower Payment Options to Consider
If you are having trouble affording monthly payments in your target location, here are some options that could potentially lower your payment:
Buy Below Your Pre-Approval Limit
Getting pre-approved for too much home can lead to being “house poor” with high payments. Buying below your limit allows for savings and more wiggle room.
Extend the Loan Term
Going from a 30 year to 15 year mortgage will save on interest but have higher payments. You could go with a 30, 35, or 40 year term to lower payments.
Buy Down the Interest Rate
You can pay discount points upfront to buy down the interest rate and reduce payments.
Pay More Upfront
Increasing your down payment or paying additional upfront towards the principal lowers the balance and monthly payments.
Split Payments Bi-Weekly
Making half payments every two weeks saves on interest and pays the mortgage down faster long-term.
Get an Adjustable Rate Mortgage
ARMs start with lower teaser rates and payments, but the rate and payment later adjusts and can increase substantially.
Buy Outside the City
More affordable small towns and rural areas just outside high-cost cities can provide lower priced homes and payments. But factor in transportation costs.
The Tradeoff Between Lower Payments and Costs
There are always tradeoffs to consider when strategizing to lower your payment. While extended terms, teaser rates, and rural locations can lower the monthly payment, it often increases costs in other ways over the long run.
It’s important to run the numbers and understand the implications different options may have on your interest costs, equity, transportation, retirement goals, and other financial commitments.
Conclusion
Determining an affordable and normal house payment range depends greatly on your specific financial situation as well as factors like home prices and mortgage rates in your location. While there are rules of thumb, it’s wise to thoroughly assess your income, budget, down payment, and lifestyle to arrive at a payment you can manage over the long term without being house poor.