When you are buying a home, you may think the price of the home is the most important part of the equation but think again. The number you should pay the most attention to is the interest rate. That doesn’t mean price isn’t important because it is but the amount of interest you pay on the home could be almost as much as the price of the home depending on your interest rate.
Before we go any further, let’s clarify the difference in cost vs. price. The price is what you pay for the home when you purchase it. The cost is what you pay for the house when you add up all your monthly mortgage payments. Therefore, the cost will be relative to the interest rate you pay on your mortgage loan.
Because your monthly budget is a fixed amount when you purchase a home, the larger the portion of your housing budget that goes toward interest, it will reduce the amount of your budget that is left over to cover the principal of the loan and in turn reduce the amount you can spend on a home.
For example, if you purchase a $300,000 home with a 20% down payment at an interest rate of 4.36%, for 30 years, you will pay $190,618.39 in interest over the life of the loan. If interest rates rise to 5%, you would then spend $223,813.88 in interest. Unfortunately, interest rates are expected to continue rising as the year progresses getting close to 5% by the end of 2018.
I am definitely not saying that you should not buy a house if interest rates go up because real estate is still one of the best investments you will ever make but the sooner you buy a house, the more money you will save in interest. Home prices are also continuing to appreciate in many markets, which will drive up both your price and cost.
Be responsible about making payments on loans and credit cards to maintain a good credit score as that will also impact the interest rate you get. Don’t feel like you have to be an expert on the real estate market. Call or email us anytime you have a question and we will help you understand the current real estate market.