Pandemic, Inflation, Housing Shortages, Corporate Greed, Supply Chain, Great Resignation, Labor Shortage, Cheap Money, and the list goes on. Some or all may be to blame or explanations as to why housing prices are higher than we have seen. On history, it tells us that one thing is for sure, things will have to change at some point. Recently the prognosticators and the Federal Reserve have been pointing toward higher interest rates. What will this mean regarding the cost for a home?
The purchase price for a home will most likely decrease as interest rates go up. But what does that really mean you are paying for the lower priced home? Let’s look at an example here:
If we take a home that currently costs $750,000 and put a 20% down payment, we procure a $600,000 mortgage. If we lock our 30-year mortgage in at 3.0% our monthly payment would be $ 2,529.62.
Now say prices drop by 20%, which is close to what they did during the Great Recession, Schiller et al. So being a wise investor, we wait it out and buy the same house at the adjusted purchase price of $ 600,000. While waiting for the prices to recede, the mortgage rates rise to 6%, closer to being in line with historical averages. The new mortgage amount would be $480,000, with a 20% down payment. Our new combination would produce a monthly payment amount of $2,877.84.
The difference in the monthly payment of the $600,000 mortgage at 3% and the $480,000 mortgage at 6% would be $384.22. That’s right our $480,000 mortgage would cost us $384.22 more per month!
If we look at this $384.22 additional monthly cost over the life of a 30-year mortgage $384.22 X 360 (# of payments) = $125,359.20. We would pay $125,359.20 more!!!!
The markets in 2022 have started out quite turbulent. We as individual consumers may not be able to change the direction of the economy, but we can make informed decisions on our purchases. If you are considering purchasing or building a home know that for every $100/month your mortgage costs increase you will pay $36,000 over the life of a 30 year mortgage. Have questions about this topic or anything else home related let us know, we would love to hear from you!