Why The Price Doesn’t Matter
Just the title of this blog article makes me shake, and I wrote it! But I want to address something very important and very common: buyers focusing on the wrong number. Here’s the truth, the purchase price does matter but only in how it impacts your monthly payment. The only ones that should be focusing on the price are the sellers because it directly impacts their net profit. For a buyer, however, the purchase price is far less impactful on their monthly mortgage than the interest rate.
Let’s look at a scenario. Imagine a buyer is purchasing a home for $400,000. The seller still owes $300,000 on the home. The average commission paid is 6% plus around another 1% for seller repairs/mortgage fees/lawyer fees.
In this scenario, here’s how it looks for both the buyer and the seller assuming the buyer’s interest rate is 3.0% and the buyer is putting down 5% as a down payment. (Now remember, the mortgage payment includes the principal and interest paid back to the bank which are directly impacted by the interest rate AND your monthly homeowner’s insurance and monthly real estate taxes. For our scenario, the homeowner’s insurance is $100/month, and taxes are $250/month).
Here’s why a buyer MUST focus on the monthly mortgage and NOT the purchase price of the home. In our scenario, the buyer’s monthly cost is $1,952. On the same exact house – same exact purchase price, taxes, and homeowner’s insurance – but with an interest rate that is now at 4% instead of 3%, the new monthly mortgage is $2,164. That’s $212 more per month for the exact same house. But what happens when we increase the price of the house by $10,000 but go back to our original interest rate of 3%? The mortgage cost is $1,994 – only $42 more per month. In order to pay $2,164/month like you would at a $400,000 purchase price and a 4% rate, the purchase price would have to be $450,000 at a 3% interest rate.
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I know this is a lot of numbers but here’s the point – as a buyer focus on the monthly cost and not the purchase price. If you have to raise the purchase price by $10,000 to win the contract well you didn’t just spend $10,000 you spent $42 a month. When prices are high but interest rates are low take advantage of it because the price does not matter.
When my parents bought their first house the interest rate was a whopping 14%! If they had bought this same house at $400,000 with a 14% interest rate, their mortgage would be an absurd $5,444 a month!
It’s easy to get stuck on price, we all do it, but what really matters is all of the factors that go into your monthly price. Stay focused on the right numbers, and you will make a wiser, more informed buying decision.
