How much do you need to make to afford a home in Colorado?
One of the biggest parts of a person’s budget is their housing expense. If you’re looking to purchase a home, read this article to learn more about how home affordability has changed and what you can do to make things more affordable and fit your budget.
How has home affordability changed in Colorado?
Buying a home is an important milestone in many people’s financial journey. There are many reasons to buy a home, including escaping the rising cost of rent, building equity or having a long-term place to raise a family.
Whatever the reason, it is important to find a home that you can afford so you can focus on other things in your life. However, in the past few years, rising home prices and mortgage rates have made it more difficult to find a home that fits your budget.
The median single-family home price in Colorado is reported to be $575,000 (year-to-date August 2022). This is a 13.9% increase from the same period last year.
On the other side of the equation, it has also become more expensive to borrow money for a home. According to Freddie Mac, the average mortgage rate for a 30-year fixed mortgage recently surpassed 6%, a figure we haven’t seen since 2008. Higher mortgage rates mean that you’ll pay more in interest on a monthly basis and over the life of the loan.
How much do homes cost in Colorado?
Below are some estimates on how much you’d need to make to afford a home in counties across Colorado’s front range1. These estimates are based on the following assumptions:
- 10% down payment.
- 6% interest rate.
- 30-year fixed mortgage.
The monthly payment is principal and interest and does not include property taxes, mortgage insurance, home insurance, homeowner association fees and other costs.
Gross household annual income is the amount your household would need to make per year, before taxes, to afford a home if you were keeping your monthly housing expense under 30%. Our financial coaches generally recommend keeping your housing expense between 25%-30% of your gross income.
Another common rule of thumb is the 28/36 rule. According to this rule, a household shouldn’t spend more than 28% of their gross income on their total housing expense and no more than 36% on total debt payments.
El Paso County
Median single-family sale price: $483,000 (+12.3% from last year)
Monthly payment: $2,607
Gross household annual income: $104,250
Median single-family sale price: $700,000 (+11.1% from last year)
Monthly payment: $3,778
Gross household annual income: $151,087
Median single-family sale price: $590,000 (+18% from last year)
Monthly payment: $3,184
Gross household annual income: $127,320
Median single-family sale price: $322,000 (+13% from last year)
Monthly payment: $1,738
Gross household annual income: $69,500
How can I make a home more affordable?
While the cost of homeownership may be increasing, here are some ways to make your future home more affordable.
Increase your down payment
Increasing your down payment is one of the simplest ways to reduce your monthly mortgage payment. Typically, home buyers will have to put at least 3.5% of the home price as a down payment.
Down payment assistance programs and loans that only require a small amount as a down payment can be a great way to get into a home if you don’t have a lot of cash savings. However, it’s also important to remember that there are other costs to consider.
If you make a smaller down payment, you’ll pay more in interest over the life of the mortgage and you may have to pay mortgage insurance, both of which can increase your monthly payment.
The larger your down payment, the less you have to have to borrow, which will reduce your monthly principal and interest payment. If you pay 20% or more for your down payment, you will also avoid having to pay mortgage insurance which will help lower your monthly payment as well.
If monthly mortgage payments are looking a little high for your current budget, consider holding off and saving for a larger down payment.
However, as you’re building your cash reserves, make sure that you’re also paying down your debt. Mortgage lenders will look at your debt-to-income (DTI) ratio to help determine your ability to manage your monthly payments when approving your mortgage application. Most lenders require your DTI ratio to be below 43%.
Improve your credit score
If you know you want to buy a house in the near future, one of the best things you can do is to improve your credit score. Mortgage lenders will consider your credit score and other factors when determining your interest rate.
By improving your credit score, you increase your chances of getting the best interest rate possible, which can save you a lot of money on your monthly mortgage payment and the total amount of interest you pay over time.
Consider an adjustable-rate mortgage (ARM)
If you’re calculating your mortgage payment and find out that the monthly payment with a 30-year fixed rate mortgage may be too high for your budget, another option to consider is an ARM.
These types of mortgages can come with a lower initial interest rate than a fixed rate mortgage, which can help make your payments more affordable for a time. Unlike their fixed-rate counterparts, these types of mortgages have interest rates that change or adjust at set intervals. Some of these rates are fixed for several years before the rate will begin to adjust.
While these types of mortgages can be great for having a lower initial rate, make sure that you can afford your mortgage payments once the initial rate-lock period is over. Lenders usually have a cap on how high the interest rates can be adjusted.
You also have the option to refinance if fixed interest rates are lower at the time your ARM is set to change. There are usually closing costs associated with refinancing, which are usually between 2%-6% of the loan amount.
Although rising home prices and interest rates can make finding your dream home more challenging, there are still strategies you can use to help fit the monthly payment in your budget. Use these tips and work with an experienced lender to help you find an affordable option for your future home.