Why the COST of a Home is More Important Than The Price
Today I'm going to be talking about why the cost of a home is more important than the price of a home. So lately we've been talking about how housing inventory is that an all time low, as well as interest rates. And we're going to stick along with the theme of that this week as well, just to show you why, like I said, the COST of a home is more important than the price.
So right now there are 39% fewer homes for sale than at this same time last year, and whenever there's a shortage in supply of an item, that's in high demand, that in turn increases the price of that item, which is exactly what's happening in the real estate market right now.
CoreLogic's latest home price index indicates that values have increased 5.5% over the last year. This is great news, if you're planning on selling your house, but if you're a buyer, this might sound like some troubling news. But don't worry, because we're here to talk about why the cost of a home is more important than the price.
So let's break it down. There are several factors that influence the cost of a home. And the two major ones are the price of the home and the interest rate at which you, the buyer, can borrow the funds to purchase the home.
Last week we talked about how interest rates hit an all time low at 2.87%. Looking back at this same time last year, the average rate was 3.73%. So how does this difference in rates affect the true cost of a home?
Assume you purchased a home last year and took out a mortgage of $250,000. As I already mentioned, home values have increased 5.5%. So if you were to buy that same home this year, you'd need to take out a mortgage of $263,750. So how will your monthly mortgage payment change based on today's lower rates?
Today with that same home, even at a higher mortgage price, puts your monthly payment at $61 cheaper per month due to the lower interest rate. That's a saving of $61 monthly, which adds up to be $732 annually and a little under $22,000 over the life of your loan.
So even though home values have appreciated, it's still a really great time to buy a home because the mortgage rates, as we've been mentioning over the last several weeks, are at historic lows right now.