They say that buying a home is the largest purchase you’ll make in your life, and yet most people don’t really understand what it is they are buying. Sure, we can look at the price tag of the house and know the dollar amount, but there’s a lot more that goes into the true cost. In fact, there are four factors that go into that true cost, which are: 1) price, 2) interest rate, 3) inventory, and 4) loan type. To truly ensure that you’re getting not only the best price on your home, but paying the lowest total cost, it’s important to weight out these four factors.
1. Price. We know this one - prices go up, and then they go down, and then they go up again. So why don’t we just all buy when the prices are low and leave it alone when they are high? (“Buy low, sell high,” or, put better, “the time to buy is when there’s blood in the streets!”) In real life it’s not that simple, because we aren’t just buying real estate as an investment, we need someplace to live! It's easy to figure out the price, but there other other factors that go into the cost.
2. Interest rate. When you buy a house, you are not buying the house. Before you call me crazy and have the guys in white coats come to take me away, read on. It’s true – unless you’re paying cash for a property you need a mortgage loan, and that means you’re buying the money (from the bank) to buy the home. Therefore the interest rate you pay on this loan is so important. A $350,000 home at 4% and a $250,000 home at 6% interest rates yield you around the same total cost long term, so this is a factor you can’t overlook.
3. Inventory. Right now we’re going through a rare period in real estate history, when prices are low AND interest rates are incredibly low. That usually doesn’t happen, so what’s the catch? The inventory is low - there just aren’t that many homes out there on the market to choose from in some markets, or, more accurately, they are being scooped up by cash investors and big real estate trusts before you and me, the average home buyer, can get to them. So when buying a home you may have to work harder, make more offers, bid higher, have less to choose from, and ultimately, settle for something that isn’t ideal, just because supply and demand is out of whack, which makes it an important factor in the total cost of a home.
4. The type of loan. Even if you know the price tag of the home, the interest rate of your loan, and you can find the home you want, there is another factor not to be overlooked – the type of loan. Rates may be hovering around historical lows, but if you can’t qualify for the loan, what good does that do you? In years past, as the housing bubble inflated larger and larger, the interest rates and home prices were much higher, but EVERYONE could qualify for a loan, including the family dog. We know how that turned out. It’s more difficult to qualify for a home loan now because banks have learned their lesson (hopefully) – and are more conservative and risk-averse. Besides a more stringent qualifying process, you have fewer loan programs to choose from. Even the difference between a 15-year and 30-year amortized loan can save you, or cost you, a tremendous amount of money, so this is a big factor in the total cost of your home.
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Now you know the four factors that go into the true cost of your next home. You’ll probably never get all four of them aligned perfectly, but by being conscious of these factors and mapping out the pro’s and con’s of each, you’ll be able to formulate a responsible and balanced strategy to buying your next home – based on its true cost.
Contact us if you have questions about buying your first home!
contact@bluewatercredit.com
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