Cost to Purchase a Home: Last Year… Today… Next Year

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.

LAST YEAR

The starter home we’re looking at sold, on average, for $254,945 in Oct 2012.

DATE Oct 2012

PRICE $254,945

MONEY DOWN $8,923

MORTGAGE $246,022

INTEREST RATE 3.5%

PAYMENT – P&I $1,104.74

TODAY

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

PRICE $339,900

MONEY DOWN $11,896

MORTGAGE $328,004

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.

NEXT YEAR

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.

DATE Oct-14

APPRECIATION

PROJECTION 5%

PRICE $356,895

MONEY DOWN $12,491

MORTGAGE $344,404

INTEREST RATE 5.5%

PAYMENT – P&I $1,955.49

DATE Oct-14

APPRECIATION

PROJECTION 12.50%

PRICE $382,387

MONEY DOWN $13,383

MORTGAGE $369,003

INTEREST RATE 5.5%

PAYMENT – P&I $2,095.15

DATE Oct-14

APPRECIATION

PROJECTION 25%

PRICE $424,875

MONEY DOWN $14,870

MORTGAGE $410,004

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

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