Wait. Isn’t that like saying zero is greater than zero?
Well, not really. Here’s the point. When you buy a home you choose a price range. Then you look for a home in that range. If you happen to see a home that you love but it’s $30,000.00 above the price that you’ve tagged as affordable then you are disappointed because you can’t afford it. But why can’t you afford it? Because the payments per month would be too high. Since we all live on monthly budgets we look at the home purchase as a monthly commitment of so many hundreds of dollars per month instead of what the home’s price tag actually is.
But the monthly payment is made up of several variables. First there’s the repayment of the loan. That part of the payment actually has three parts: principal, interest, and mortgage insurance premium. Then there are the property taxes. Finally there is the hazard insurance premium. Add all of those up and you get your monthly payment.
Any one of these items can be adjusted a bit to affect what you pay each month. Find a cheaper hazard insurance policy and your payment goes down. Property tax increases make you payment go up. But right now the biggest influence on your house payment is the historically low interest rates.
Take a look at this comparison from Brian O’Connell at TheStreet.com. These numbers are for a $200,000.00 home. Note the interest rate on example #1 is 3.5%. The interest rate on example #2 is 4.6%. And remember that it wasn’t too long ago that mortgage rates were above 6%.
Mortgage amount: $200,000
Term: 30-years, fixed rate mortgage
Interest rate: 3.50%
Monthly payment: $898.09
Total payments: $323,311.97
Total interest: $123,311.97
Mortgage amount: $200,000
Term: 30 years, fixed-rate mortgage
Interest rate: 4.6%
Monthly payment: $1,025.29
Total payments: $369,103.49
Total interest: $169,103.49
(Note these examples are for the principal and interest only. Taxes and insurance are not included.)
Not only is there a difference of $127 per month in your payment but over the life of the loan you will pay an additional $46,000.00 in mortgage interest. Nothing about the house changed. But the cost of the money you borrowed to purchase the house went up.
In this same example, if you wanted to keep the payment the same (roughly $900 per month) after the interest rate went up there would be only one way to do it: buy less house.
So the point here is simple. If you’re sitting on the fence wondering if now is a good time to buy a home, the answer is yes. Even if you don’t get that screaming deal on the house of your dreams, you will most definitely get a screaming deal on the interest rate. Rates have been kept low by the Fed to help the ailing economy along. They are artificially low. They won’t stay that way forever. And when they go back up and you’re sitting in your shiny new home with an interest rate in the fours while others are settling for fives and sixes you’ll be smiling all the way to the mortgage company.
The reason you would consider buying a home isn’t only about the interest rate. But if you know you need to do something get off the fence. This opportunity to spend more of your money on the house and less on the interest rate most likely will never be this good again.