Buying a Home? The COST Is More Important Than the PRICE

When to buy has been the question on people's minds for some time now.

You'll hear many different answers to this question and most of those are focused on housing prices and when will we reach the bottom. My typical answer to that question surrounds the cost of the home vs. the price. Our friends at Keeping Current Matters have joined the chorus on this subject.

So when considering Buying a Home - remember - The COST Is More Important Than the PRICE!...

I've often advised buyers to look at the COST of purchasing a house more than the PRICE of the home. Obviously, price is part of the cost equation. The other piece, assuming you are not an all cash buyer, is the mortgage rate.

The mortgage rate to finance a purchase can have a dramatic impact on the overall cost. Recently, there are more people talking about the possibility that mortgage rates could begin to increase.

HSH.com studies trends in mortgage rates. They explain:

“A better economic climate almost always brings higher rates, and a lessening of the troubles in Europe from massive central bank assistance adds to the movement of money from safe havens to more risky assets, driving rates upward.”

Dan Green of The Daily Market Reports recently stated:

“The Fed sees growth coming faster than originally expected. There’s suddenly less chance that the Federal Reserve will intervene to help keep mortgage rates low. Absent Fed intervention, mortgage rates are apt to rise and Wall Street is now betting that the Fed has bowed out. With no stimulus, mortgage rates rise.”

Lawrence Yun, chief economist for the National Assoc of Realtors, recently wrote:

“Mortgage rates will be starting to rise. From the 3.9 to 4.0 percent average rate in the past five months on a 30-year fixed mortgage, the new rates will soon be in the range of 4.3 to 4.6 percent.”

Yun explains his logic here.

We do not attempt to predict future interest rates. We leave that up to the experts in the field. However, we want our readers to understand the potential impact on the cost of purchasing a home if they do rise. Here is a simple table that shows, even if the PRICE of a home softens, the COST of a home could increase.


Bottom Line

Many purchasers think they should wait until they are sure that prices have hit bottom. Deciding whether or not to wait should be determined by where the COST of a home is headed.

The PRICE Is the Same, But the COST Is Less

Let's put things into perspective. When you are comparing today's real estate market to the environment in 2004 you can make dramatic headlines. When you really get down to the purchase price and making that decision on whether it's a good time to buy our friends at Keeping Current Matters have laid it out well...The PRICE Is the Same, But the COST Is Less.

There is more and more research coming out showing that it makes great financial sense to purchase a home today . Whether it be rent vs. buy ratios, income-to-price ratios or income-to-mortgage payment ratios, purchasing a home right now is a bargain compared to historic norms. Now we want to look at the COST of a home today compared to pre-peak prices.

According to the most recent S&P Case Shiller price index, residential real estate values have returned to 2003 1Q PRICEs. That, in itself, says something. However, when you factor in mortgage rates, the case for buying a home today becomes even more compelling.

In 2003, 30 year mortgage rates stood at 5.88%. Today, they are 4%. How does that impact the actual COST of a home? On a home purchased for $250,000, here is the difference in monthly cost:

That means you save $285.30 a month, $3,423.60 a year and $102,708 over the life of a 30 year mortgage! You buy the home for the same PRICE but the COST is over $100,000 less.

Bottom Line
This is why so many financial advisors are saying that this may be one of the greatest times in history to purchase a home.