Back in 1980 I was in a situation where I had to refinance my mortgage. The loan was $100,000 and the interest rate was a whopping 17.65%. The payments were $1,479 per month. In 1998 I purchased a home for $405,000, and financed $227,000. This time the interest rate was a way more palatable 7.5% with a $1,587 monthly payment. Several refinances later, my interest rate is 4.75%, loan amount $250,000 and the monthly payment is $1,304. The area where I live, Walnut Creek, CA, has some of the highest priced real estate in the U.S, so these prices might seem excessive, but just use them as examples.
What is wrong (or right ) with this picture? When a buyer is house shopping, usually their main criteria is price. But this can be misleading, and it about time we start helping the buyers choose a home based upon monthly cost, not selling price. To use my example above, let me present a small chart:
1980 2010
Monthly Payment: $1,479 Monthly Payment: $1,479
Mortgage Amount: $100,000 Mortgage Amount: $227,000
House Price (assuming 20% down) $120,000 House Price (assuming 20% down) $284,000
YOU CAN BORROW OVER TWICE AS MUCH MONEY FOR THE SAME MONTHLY PAYMENT!
And you can probably get twice as much house as you could 5 years ago.
What I don't understand is why isn't everybody who has a steady income going out and buying a house? Ok, the unemployment rate ranges from a low of 3.7% in N. Dakota to a high o f 14.4% in Nevada, that still leaves 96.3% - 85.6% of the population employed and being conservative, about half of them would most likely be able to qualify for a mortgage.
Now, along with the reduced interest rates, the prices for homes has dropped considerably. Check out this chart. According to the chart below we are back to year 2000 home prices, when mortgage rates were 8.5%-9%. So if you borrowed $100,000 in the year 2000, your monthly mortgage payment would have been $769/month. If you borrow that same amount now your montly payment will be $507/month. You can't rent a 2bedroom residence for that price, plus you are saving $262/month.
So, to sum it up, you can purchase a home for the same price as you would have paid in the year 2000, and your interest rate will be half of the prevailing rate in year 2000. What I find confusing is that in the year 2000 people were getting desperate to buy homes, multiple offers were becoming the norm and prices were rising steadily and the demand was increasing exponentially. Now, you can buy the same home you fought over, and probably lost to a higher bidder, for the same price but with a much, much lower payment. So what is going on? Why is everyone passing up the bargain of the past 2 centuries?
Save money, go out and buy a house!
For More information about real estate trends and DEALS please call Suzanne at 925-788-5693 or email her at: Homes@SuzanneMasella.com.
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