By in Debt, Real Estate, Saving | 15 comments


“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.


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.
  • For a quick overview of Investing Strategies, pick up my FREE eBook; 20 Minute Guide to Investing (top right of the page). If you like what you’re reading, sign up for my RSS feed or email subscription and follow me on twitter so you get the word immediately.  

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



  1. The low interest rate is great for home owner. We refinanced to lock in the lower rate and are happy at 5.xx%. I think we got around 7.5% rate on our first home in 2000.


    April 15, 2011

  2. Hi Retire, As usual, a very smart move. You’re going to save thousands over the life of the loan.These low rates are not going to stick around!


    April 15, 2011

  3. Not knowing if home prices stabilized is a significant cloud over the market! You are right that we won’t know until later. Only the sophisticated, or lucky or fools are buying now? The low interest rate will cover some of the mistakes, if there are any. If I were buying now, I would aim for the “very best”lowest price in the best neighborhood I could find. Perhaps, a fixer upper in Beverly Hills may be a choice, but the price would need to be low!


    April 15, 2011

  4. @Krantcents-Wise thinking. The problem with economic transition is hindsight is the only way to verify whether a market has bottomed out. I don’t think you have to hit the exact bottom, being in the ballpark is usually good enough!


    April 15, 2011

  5. I got my rate in at 5% about a year ago, though it’s hovered below that ever since. I did receive the federal tax credit, but I would definitely be a little upset if that wasnt the case. Home prices have continued to drop as well

    Justin @ MoneyIsTheRoot

    April 15, 2011

  6. Hi Barb,

    We paid off our house a while back, but I don’t think that I can sit on the sidelines any longer. I think that it is time to take advantage of these great rates and buy a rental property. Your post just convinced me to get off my butt and do it. My wife and I have been talking about it. I’ll have her read your post.


    Joe Edward

    April 15, 2011

  7. Excellent write-up Barb! Always take into account gas prices (commuting to work) and property taxes! Both don’t remain the same and affects your monthlies!


    April 16, 2011

  8. Great point. I also like to quantify the total costs over time. That’s even more eyeopening when you multiply 1,000 a month times 30 years versus 800 a month times 30 years. When it comes down to that, its even more striking.

    Pat S.

    April 16, 2011

  9. This was a topic of discussion with my girlfriend recently. I brought up buying a house and we riled in angst. We have ZERO interest in locking in our assets any time soon. It just doesn’t make sense to us. We’d rather rent, be able to move around the country, and not worry about the water heater breaking down. There are so many hidden costs, it’s ridiculous.

    I firmly believe this is just the beginning and the double dip housing crash is around the corner, just wait and see! If not, I still win, because I’m at least 15 years out from buying a home. I’ll be around the the second dip, who’s ready for it?!

    Jon | Free Money Wisdom

    April 16, 2011

  10. @Justin-It’s always a bit scary to seem prices fall a bit after purchase. You have to enjoy your low interest loan and your home. The value is irrelevant unless you plan to sell.
    @Joe-Personally, I do think it’s a good time to invest in real estate. Please don’t look me up if the value doesn’t immediately appreciate 🙂 .
    @Moneycone-Absolutely, the price of so many items is totally out of our control. Presently, RE taxes are fairly stable, gas prices, not so much.
    @Pat-There are some great on line calculators to give you idea of the amount of interest you will pay over a lifetime at various interest rates and time periods.
    @Jon-Whatever the future holds, you are wise not to buy if you cannot commit to being in a home for at least 5 years and hopefully longer. REnting gives much more flexibility.Gotta do what’s right for your own situation.


    April 16, 2011

  11. I strongly believe one of the key things that contributed to the housing crash were the mortgages. Many people who should have qualified for A or alt-A mortgages were forced into sub-prime loans, by unscrupulous lenders and brokers. They made a lot of money on yield-spread premium, but this saddled the homeowners with horrbile terms and interest rates. A lot of these people walked when the housing prices dropped.

    Bret @ Hope to Prosper

    April 17, 2011

  12. Hi Bret-Interesting theory. I don’t know about A list candidates getting funneled into sub primes. I know lots of unqualified candidates were approved for loans they couldn’t maintain & didn’t understand. And homes that they couldn’t afford!


    April 18, 2011

  13. I recently started a website offering free info on mortgages and foreclosures. I hope that will help the poor people that fell victim of this.

    David Jones

    July 31, 2011

  14. You’re right, Barbara. That’s the same thing I always tell my clients when it comes to buying homes here in Springfield Mo. You would never know what would happen tomorrow. So if you’re really interested in buying a property, take advantage of the recent drop of interest rate… unless you have the cash to pay it in full. Thanks for sharing this. I’m sure many would realize that what we, as real estate professionals, are trying to say all the time is true.

  15. @Springfield, Our home, which we purchased at a short sale 20 months ago has appreciated over 25%. Who would have guessed it?


    March 5, 2013

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