I'll give you a moment to pick yourself off the floor and calm down....
Ok, now let me explain. I admit that the title was a bit sensationalist, but in essence it is correct for anyone financing a real estate purchase.
Let's say you are ready to buy a Louisville or Bullitt County Home. You have already taken the advice of a local real estate expert and gotten a pre-approved letter from a reputable lender. The letter states that you are pre-approved for a loan of $200,000 at 6% with 5% down. So, does this mean that you can actually buy a $200,000 house? Not necessarily.
When your mortgage professional wrote this letter, Monthly Payment, not price, was the most critical factor in determining how much home you could afford. Price is a by-product of the process and is determined by a calculation involving taxes, property insurance, mortgage insurance, interest rate, and downpayment. If any of these 5 terms change, then the price you can afford changes. Of course, this can work to your advantage as well as to your disadvantage. A ½% drop in interest rates, gives you a 5% increase in purchasing power.
Without changing price, the following chart shows vastly different results not only in whether you can buy a $200,000 house, but also in how much house you can afford. Note: Based on the terms above, we can assume that your mortgage lender determined you can afford to pay around $1,140 / month after taxes, property insurance, and mortgage insurance.
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Example 1
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Example 2
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Example 3
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Example 4
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Example 5
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Price
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$200,000
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$200,000
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$200,000
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$200,000
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$200,000
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Interest Rate
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6%
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6.5%
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6%
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5.5%
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5.5%
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Available Cash
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$10,000
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$10,000
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$8,000
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$10,000
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$15,000
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Monthly Payment
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$1139
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$1201
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$1151
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$1078
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$1050
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Can you buy?
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Yes
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No- Monthly PMT too high
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No - Not enough cash to put down
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Yes
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Yes
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Max. Price that you can afford
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$200,000
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$191,500 - Limited by Interest Rate
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$160,000 - Limited by Cash
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$200,000 - Limited by Cash
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$217,500
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Three important points come to mind
- Make sure your loan officer and real estate agent keep you informed on interest rate changes while you are looking.
- Do not spend your down-payment money.
- I purchased my first house at an 8.5% rate. If rates were 5.5% like today, I would have had 35% more buying power. (Sorry, that had nothing to do with you).
So, the question that you need to be asking when you consider buying a Louisville or Bullitt County home is, "What will my monthly payment be?" That is the question your lender will be asking. More importantly, the answer will become a reality on the first day of every month for a long time. Whether you can handle that bill is the ultimate measure of importance. The price you pay for the house is meaningless.
Final notes:
- A good agent and mortgage broker can help you understand how to best leverage your finances to purchase a house without causing a burden.
- Louisville, Shepherdsville, and Mt Washington homes are at near record inventory levels. There are plenty of houses available that will meet your needs and wants in every price range. Don't stretch!
- This is a Buyer's Market. Call me and let's buy something!
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Erik Hitzelberger is a licensed real estate agent with RE/MAX Alliance in Louisville. If you need a Louisville Real Estate agent please email me or call 502.921.3989.
I specialize in the following areas of the Metro Louisville Area: Jeffersontown (J-Town), Okolona, Fern Creek, Shepherdsville, Mt Washington, Hillview, Brooks and Pewee Valley. Click the following links to learn more about Louisville and Bullitt County Real Estate or to Search the Metro Louisville MLS.
;)
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I have to go over monthly payments with a lot of buyers. I also explain to all of them that they should not buy at the very top of their price range, it's the first step in over extending themselves.