Mortgage Matters: rate is as important as price
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6/7/2009 - 6/7/09
Buying a home in 2009 in Santa Fe... No Brainer! Postponing the decision for a year or two... Not Wise! Two important reasons bring us to this simple conclusion. Interest rates have never been lower, and asking prices for homes have bottomed. Thirdly, home prices are predicted to begin their ascent in the near future.
Interest payments are definitely the greatest cost factor of home ownership. The rate and monthly payments can make or break the affordability for some buyers. Today's low interest rates actually lower the buyer's cost of ownership, just as if the purchase price were reduced at closing.
Currently, interest rates offer buyers as much as a 30 percent lower cost compared to a few years ago. The simple fact, however, is that rates have only one direction in which to go, and that is up.
Inflation may also push the cost of purchasing a home to a higher level. As an example, the value of a $500,000 becomes $605,000 after two years of 10 percent inflation. The monthly payment after a 20 percent down payment is $2,086 for a 30-year, fixed-rate loan at 4.75 percent. The monthly payment after two years of inflation becomes $2,825, even if the rate only increases to 5.75 percent.
Most experts say the U.S. economy will see inflation in the near future. Home values could rise over the next several years, and supply-and-demand pressures on Santa Fe real estate by national buyers could push values much higher.
The true cost of a home is measured by including the cost of taxes, insurance, and the interest expense of a mortgage, as well as the purchase price. The accompanying chart compares the cost of ownership of a Santa Fe home purchased and held for 10 years under three scenarios. The three columns compare the costs of a 2009 purchase with the costs of a purchase in 2011. The first comparison shows a 10 percent increase per year in the home cost and an interest rate of 5.75 percent. The second comparison shows a 10 percent increase per year and a rate of 6.75 percent.
The 10-year cost of a home purchased now, in 2009, could be as much as $188,960 less than waiting two years. Should interest rates also increase to 6.75, the cost could be as much as $237,000.
An interest rate increase of 5.75 percent or 6.75 percent would only put rates back to normal level experienced in the 1980s and 1990s. These rates seem high because we are at historic record low rates this year.
The bottom line is that for those who want a new home, waiting is the enemy. Delaying a home purchase for a year or two could be very costly.
Jim Gay was a real-estate broker for 20 years and has been a consultant to Fortune 500 companies. He is currently loan officer/partner with Superior Mortgage Services, LLC.
