- HOME BUYING
“Home is where one starts from.” T.S. Eliot
How Much Does a Home Really Cost?
Thinking about buying a home or a condo?
The Today Show, on a segment entitled Avoiding Foolish Money Mistakes, reminded me of A VERY IMPORTANT HOME BUYING FACT.
How much you pay for your home is significantly influenced by the mortgage rate.
When shopping for a home, buyers typically look at the home prices. For example, your price range might be $200,000 to $225,000 (of course not in NYC or LA), but the cost to you actually varies depending on your financing options.
In addition to the price of the home, you must consider the mortage interest rate. Unless of course you pay cash for your home. 🙂
As the media is quick to remind us, the current and future state of housing prices is far from certain. You remember the recent housing “bubble” when housing prices rose quickly and unsustainably up.
Presently, there is a decline in housing prices to a lower and more sustainable level. Have housing prices bottomed out? Hindsight will provide the only accurate answer to that question.
Clarify Home Buying
There is a lot of information about home buying and this article will SIMPLIFY it for you.
Housing prices are only one part of the overall equation. Unless you are buying your home for cash, interest rates are a major factor in the home purchase decision.
Check out this example.
- Purchase price: $200,000.00
- 20% down payment: $40,000.00
- Mortgage amount: $160,000.00
- Mortgage term: 30 Years
- Mortgage rate: 5%
- Monthly mortage payment (principle and interest): $858.91
Wow, $858.91 seems like an affordable house payment. You’re thinking, okay, I’ll work really hard to save up the down payment and in a couple of years, buy a home. My mortgage payment won’t be any more than my rent!
That’s where you are wrong.
Interest rates are at historical lows now. Back in the 1980’s mortgage rates were over 10%.
What Happens When Interest Rates Rise?
Imagine that interest rates rise to 7.5% in a few years.
- Purchase price: $200,000.00
- 20% down payment: $40,000.00
- Mortgage amount: $160,000.00
- Mortgage term: 30 Years
- Mortgage rate: 7.5%
- Monthly mortgage payment (principle and interest): $1,118.74
It’s likely that not only will interest rates rise, but home prices may increase as well. Assuming you can still buy the home for the same price, a 7.5% mortgage would cost more than $259.00 additional dollars per month. This scenario is quite plausible.
In fact, as soon as economic growth picks up, inflation is likely to accelerate.
The takeaway
Use this information to educate yourself. It is easy to think that the economic situation is permanent and will continue on the same trajectory. If history is any guide, use both past and present information to inform your financial decisions.
ACTION STEP:
Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it to keep all of your personal finance goals, thoughts, activities, and plans.
- If buying a home is in your future, spend the present to focus on saving for a down payment and researching the process.
- Consider buying sooner rather than later, as interest rates are at historical lows and housing prices have recently dropped.
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What are your thoughts and experiences regarding buying a home? Would you rather avoid it all together and rent?
data credit; HSH.com & image credit; hetsluvdesign
