First time homebuyers, like all homebuyers, are typically more concerned with the price of a home rather than how it fits into their budget. The reality, unless a buyer is paying all cash, the price of the home is irrelevant – what matters most is how much home they can afford. The most critical aspect of what they can afford is the monthly payment.
Monthly payments consist of four unique elements. There is the Principal – the amount of the payment that pays down the principal balance; There is the Interest – the amount of the payment that pays the lender for the use of the money to buy the home; then we can’t forget the Taxes – every piece of real estate is responsible for real estate property taxes; when real estate is financed, the lender always insists that the property is Insured; and the final element of a payment is often, but not always, is Private Mortgage Insurance (PMI) – depending on the loan type and the amount of down payment used to purchase the home. Collectively the monthly expense is often referred to as PITI. Additionally, the PITI calculation will also include Homeowners Association (HOA) Dues, if any.
The collective payment hinges, in general, on two very important factors: The amount of the home purchase financed and the interest rate for the loan. In addition to having the buying power of being a pre-approved buyer, a major advantage of meeting with a lender prior to home shopping is to determine how much home you can buy for a payment you are comfortable paying monthly.
Let’s look at how changes in the market affect your buying power. For the sake of this discussion, we’ll look at a typical Southwest Riverside County single family starter home consisting of 3 bedrooms, 2 bath with about 2,000 sq. ft. of living space. We’ll only consider the principal and interest aspects of the payment as the taxes, insurance, PMI & HOA dues are unique to each property – but still must be considered.
The starter home we’re looking at sold, on average, for $254,945 in Oct 2012.
DATE Oct 2012
MONEY DOWN $8,923
INTEREST RATE 3.5%
PAYMENT – P&I $1,104.74
Looking at the identical home, one year later, today we can see not only an increase in prices but Interest Rates are up about one point (1%). Look at what a difference a year makes:
DATE Oct 2013
MONEY DOWN $11,896
INTEREST RATE 4.5%
PAYMENT – P&I $1,661.94
The value of the home increased 25% in a year. With the higher interest rates, the monthly payment increased to $557.20. That is a 66% payment increase.
While no one has a crystal ball, most industry experts are projecting interest rates to be a point higher this time next year. The other issue is what the value of our typical starter home will be. If we were to see an increase similar to the last 12 months, our typical starter home would be worth over $410,000. If we cut the rate of appreciation in half, we’re still looking at nearly $370,000 for the same home that cost just over $250,000 a year ago.
MONEY DOWN $12,491
INTEREST RATE 5.5%
PAYMENT – P&I $1,955.49
MONEY DOWN $13,383
INTEREST RATE 5.5%
PAYMENT – P&I $2,095.15
MONEY DOWN $14,870
INTEREST RATE 5.5%
PAYMENT – P&I $2,327.96
You can see, the cost of home ownership is only going up. If you have any desire to own a home, anytime soon, it only makes financial sense to do it sooner rather than later. Call and find out about the First Time Homebuyer Workshop I will be co-sponsoring this week with fellow REALTOR® John Occhi who researched and contributed to this column. Learn from a panel of industry experts on what it takes to qualify and purchase your first home…it’s not as scary as you might think.
Call me today and get the information you need to make the right decision. Do not miss this opportunity. The info is free, (951) 296-8887.
Questions regarding available inventory and/or other real estate matters please contact me, [email protected] Mike Mason, Broker/Owner of MASON Real Estate Cal BRE: 01483044, Board of Director of your Southwest Riverside County Association of Realtors® (SRCAR), Traveling State Director, California Association of Realtors® (CAR).