Mortgage Rates Drop: Can You Finally Afford a $400,000 Home?

Dreaming of owning your own home? You're not alone. It’s a goal for so many of us, that feeling of having your own space, building memories, and putting down roots. But let's be honest, lately, the path to homeownership has felt more like climbing a mountain than strolling through a park, especially with those mortgage rates seeming sky-high.

So, if you're wondering, “Mortgage rates are falling. Here’s how much income you need now to buy a house for $250,000, $400,000 and $1 million,” the good news is that things are starting to look a little brighter. With recent dips in mortgage rates, that dream house might just be inching a bit closer to reality.

According to recent data, to comfortably buy a $250,000 home right now, you’d likely need an annual income of around $66,300. For a $400,000 home, that income figure jumps to about $106,100, and if you've got your sights set on a million-dollar property, you’re looking at needing at least $265,100 a year. Let's dig into what's driving these changes and what it really means for you and your home buying aspirations.

Mortgage Rates Drop: Income Needed for $250K, $400K, $1M Homes

Why Are Mortgage Rates Finally Coming Down?

For what felt like ages, it seemed like mortgage rates were just stubbornly stuck up there, making it tougher and tougher for folks to afford a home. I remember talking to friends last year, and the frustration was palpable. “Is it even possible anymore?” was a common question. But thankfully, we're seeing a shift. According to MarketWatch, and data from Freddie Mac, mortgage rates have actually been falling for several weeks now. That's music to the ears of anyone in the market to buy a house!

So, what’s behind this welcome change? Well, it's a bit like reading tea leaves, but essentially, it boils down to what’s happening in the wider economy. Think of it like this: mortgage rates often follow what's happening with those 10-year Treasury notes. These are essentially government bonds, and their yields (the return you get on them) tend to move in the same direction as mortgage rates. And guess what? Those Treasury yields have been heading downwards lately.

Why are they falling? A big reason is that there are signs the U.S. economy might be slowing down. Now, a slowing economy might sound like bad news overall, and in some ways it can be. But in this case, it's actually contributing to lower mortgage rates. Investors are looking at this economic slowdown and thinking that the Federal Reserve, which is in charge of keeping inflation in check, might start to cut interest rates in the future to boost the economy. This anticipation of future rate cuts is pushing down those Treasury yields, and in turn, mortgage rates.

It's a bit of a silver lining in a potentially cloudy economic picture. As Lisa Sturtevant, chief economist at Bright MLS, put it, “Although a slowing economy may not seem like a good thing, lower rates could give the housing market the shot in the arm that it so desperately needs.” And I think she’s right on the money.

What Does This Mean for the Housing Market?

Let's be real, the housing market has been feeling the pressure. High mortgage rates have definitely put a damper on things. Fewer people have been buying, and those who are still looking are often finding it harder to qualify for a loan and afford those monthly payments.

We saw this reflected in the numbers. The National Association of Realtors reported a 4.6% drop in pending home sales just in January. That's a significant decrease, and it tells us that people were holding back. Pending home sales are actually at an all-time low since they started tracking this data way back in 2001! That’s a long time to see such a dip.

But falling mortgage rates could be the turning point we've been waiting for. Sam Khater, chief economist at Freddie Mac, rightly pointed out that this drop in rates, along with a slight increase in the number of homes available for sale, is “an encouraging sign for consumers in the market to buy a home.” I agree. It's like a little pick-me-up for the housing market, which has been feeling sluggish.

For those of us dreaming of buying, even a small decrease in mortgage rates can make a big difference in our monthly payments and overall affordability. Lawrence Yun, chief economist at the National Association of Realtors, put it well: “Even a slight reduction in mortgage rates will likely ignite buyer interest, given rising incomes, increased jobs and more inventory choices.” It's like taking a weight off your shoulders – suddenly, that dream of owning a home feels a little less out of reach.

Income Needed: Breaking Down the Numbers

Okay, so we know rates are coming down, which is great. But how does this translate into actual dollars and cents? How much income do you really need to buy a home at different price points? That’s the million-dollar question, (or rather, the $250,000, $400,000, and $1 million question!).

Realtor.com, in their analysis for MarketWatch, crunched the numbers to give us a clearer picture. They looked at what it takes to afford a home at various price points, considering a 20% down payment, an estimated 30-year mortgage rate of 6.76%, and also factoring in those often-forgotten but crucial costs like property taxes and homeowners insurance.

Here’s what they found:

• For a $250,000 Home: You'd need an annual income of approximately $66,300.
• For a $400,000 Home: The required income jumps to around $106,100 per year. This is important because $400,000 was roughly the median price of an existing home recently. So, if you’re aiming for a typical home, that’s the ballpark income you’re looking at.
• For a $1 Million Home: To afford a home at this price point, you would need to earn at least $265,100 annually. Now, a million dollars might sound like a lot, but the reality is that million-dollar homes are becoming much more common. In fact, Zillow estimates there are nearly 1 million more homes in the U.S. worth $1 million or more compared to before the pandemic. That's a pretty staggering increase!

Let's put this data into a more digestible format. Here’s a quick table summarizing the income needed for different home prices:

Home Price	Estimated Annual Income Needed
$250,000	$66,300
$400,000	$106,100
$1,000,000	$265,100

Source: Data from Realtor.com analysis reported by MarketWatch, February 2025. Assumes 20% down payment, 30-year mortgage rate of 6.76%, property taxes, and homeowners insurance.

The 30% Rule: What Does It Really Mean?

These income figures are based on the widely accepted principle that you shouldn't spend more than 30% of your gross monthly income on housing costs. This “30% rule” is a guideline that lenders and financial advisors often use to assess affordability.

But what does “housing costs” actually include? It’s not just your mortgage payment. It typically encompasses what’s known as PITI:

• Principal: The actual loan amount you borrowed.
• Interest: The cost of borrowing the money (your mortgage rate).
• Taxes: Property taxes, which can vary significantly depending on location.
• Insurance: Homeowners insurance, which protects your property.

So, when you're calculating that 30%, you need to factor in all of these elements, not just your principal and interest payment. And remember, this is gross income, meaning your income before taxes and other deductions.

This 30% rule isn't just some random number. It's a guideline to help you avoid becoming house-poor. Being house-poor means spending so much of your income on housing that you have little left over for other essential expenses, savings, or just enjoying life. It’s a situation nobody wants to be in.

Beyond Income: Other Factors to Consider

While income is a huge piece of the puzzle, it's not the only thing lenders look at, and it's not the only thing you should consider when deciding if you can afford a home. Here are a few other key factors to keep in mind:

• Down Payment: While these calculations assume a 20% down payment, not everyone puts down 20%. Putting down less might make it possible to buy sooner, but it also means a higher monthly payment and potentially paying for Private Mortgage Insurance (PMI), which adds to your costs. On the other hand, a larger down payment means lower monthly payments and more equity from the start.
• Credit Score and Debt: Lenders will scrutinize your credit score to assess your creditworthiness. A higher credit score usually means better interest rates. They'll also look at your debt-to-income ratio (DTI), which compares your monthly debt payments to your gross monthly income. Having too much existing debt can make it harder to qualify for a mortgage, even if your income seems sufficient.
• Property Taxes and Insurance: As mentioned earlier, these can vary widely depending on location and the value of your home. Don't underestimate these costs! Get estimates for property taxes and insurance in the areas you're considering to get a realistic picture of your total housing expenses.
• Home Maintenance and Repairs: Homeownership comes with ongoing costs beyond just the mortgage. You'll need to budget for maintenance, repairs, and potential unexpected expenses. Things break down, roofs need replacing, and appliances give out – it's all part of the game. Having a financial cushion for these costs is crucial. I always advise new homeowners to set aside a percentage of their home's value each year for maintenance – even if you don’t need it, it’s better to be prepared.
• Long-Term Financial Goals: Buying a home is a long-term financial commitment. Think about your overall financial goals. Do you have other significant expenses coming up, like college for kids, or are you prioritizing retirement savings? Make sure buying a home fits into your broader financial plan and doesn't derail your other important goals.

Is Now a Good Time to Buy?

With mortgage rates falling, it's definitely becoming a slightly more favorable time to buy than it was just a few months ago. However, “good time” is relative and very personal. There's no one-size-fits-all answer.

Here’s what I think:

• If you're financially ready and have found the right home: The slight dip in rates is definitely a positive. It might be worth taking a serious look at the market and seeing what’s out there. Lower rates mean lower monthly payments, which can make a big difference to your budget.
• Don't rush into anything: Falling rates are encouraging, but don't let it pressure you into making a hasty decision. Take your time, do your research, and make sure you’re truly ready. Buying a home is a huge decision, and it's not just about meeting an income threshold. It’s about being financially prepared in the long run and finding a place that genuinely fits your needs and lifestyle.
• Keep an eye on the market: Mortgage rates can still fluctuate, and the housing market is constantly evolving. Stay informed, talk to a mortgage professional, and work with a real estate agent who can guide you through the process.

Ultimately, buying a home is a big step. It's exciting, and it's a major financial commitment. Falling mortgage rates are a welcome sign and can make homeownership more attainable for many. Just be sure to do your homework, understand what you can truly afford, and make a decision that’s right for you. Happy house hunting!