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Mar 19

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

We have 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.

Not attempting to predict future interest rates here! Leaving that up to the experts in the field. However, understanding the potential impact on the cost of purchasing a home if rates do rise is important for Buyers. Here is a simple table that shows, even if the PRICE of a home softens, the COST of a home could increase.

The rows show the increase in mortgage payment as the theoretical price goes up. The highlighted boxes show the same, but with a lower interest rate.

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.

Reprinted with permission from KCM Blog, March 19, 2012

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