| Purchasing a home in today's market can be complex | | | | were to take that money and invest it each month for |
| and confusing. While it certainly seems as though | | | | 30 years, assuming a 7% yearly return, you would |
| prices are low, there are some critical distinctions about | | | | have $221,000 in savings. That is money that could go |
| the existing market that should be understood if you | | | | a long way towards retirement or funding a child's |
| are considering buying a home in the near future. One | | | | college education. |
| of those distinctions is the difference between the | | | | You must also take into consideration the impact a |
| cost of a home and the actual cost of buying a home. | | | | higher interest rate can have on your actual ability to |
| Although the two may sound the same, they are | | | | quality for a mortgage. If you have an income of |
| actually much different and it is imperative to | | | | $100,000 per year you would probably be able to |
| understand that difference and the long term impacts | | | | qualify for a mortgage of around $340,000 with a |
| the cost of your mortgage could have on your | | | | mortgage rate of 5%, but if you increase that interest |
| financial situation. | | | | rate to 6%, the amount you are able to qualify for |
| The cost of purchasing a home includes not only the | | | | drops to less than $310,000. |
| purchase price, but also the interest you will pay on the | | | | All things considered a 6% mortgage rate is still |
| mortgage. Even as little as a single point increase in | | | | relatively low and prices on homes in many areas are |
| interest rates can increase the cost of purchasing a | | | | historically low, meaning that now could still be an |
| house by more than 10%. The average interest rate | | | | excellent time to consider buying a home, but it is |
| on a 30 year fixed rate mortgage has increased by | | | | important to make sure you understand the impact an |
| half a percentage point in just the last few months. | | | | interest rate increase can have, especially over the |
| Some experts in the real estate industry think that | | | | long-term. |
| interest rates could jump from around 5.3% to 6% by | | | | You should also take into consideration what the |
| the end of the year. That one point may not sound like | | | | impact will be if you are not able to make a 20% |
| much of a difference, but let's take a look at the actual | | | | down payment on your mortgage. There are often |
| math. If you have a 5% interest rate on your | | | | many lending programs available that make it possible |
| mortgage, you will pay more than $193,000 for each | | | | to purchase a home with less than a 20% down |
| $100,000 you borrow over a 30 year loan; including | | | | payment, especially for first-time home buyers. What |
| interest and principal. If you bump that interest rate to | | | | you may not realize; however, is that if you do make |
| 6%, the cost of your mortgage will rise to more than | | | | less than a 20% down payment you will be subject to |
| $215,000. So, even though less than a percentage point | | | | private mortgage insurance. Private mortgage |
| may not sound like much, over the life of your loan it | | | | insurance, also sometimes referred to as PMI, is |
| can actually end up costing you significantly. | | | | charged when the loan to value ratio on a mortgage is |
| Unfortunately, this never registers with many buyers | | | | higher than 80% in order to protect the lender from a |
| because they tend to zero in on the sales price and | | | | perceived increase in risk on the loan due to the low |
| whether they will be able to afford the payment on | | | | down payment. The cost of private mortgage |
| the mortgage each month. The impact of a higher | | | | insurance will increase the cost of your monthly |
| interest rate becomes even more serious when you | | | | mortgage payment and could make the difference |
| take into consideration what is sometimes known as | | | | between your mortgage note being affordable and it |
| the "opportunity cost." This is what you could be doing | | | | suddenly becoming unaffordable. |
| with that extra money you are paying in interest if you | | | | The more information you have available, the better |
| were not paying it on your mortgage. Increasing the | | | | informed decisions you will be able to make, whether |
| interest rate from 5% to 6% will raise your monthly | | | | you are considering buying a home or even refinancing |
| payment by nearly $200 on a $300,000 loan. If you | | | | an existing mortgage. |