July 8, 2014
The Price Vs. The Cost of Owning Real Estate
If you’ve been reading my market reports, you know that prices and the number of sold properties in Crested Butte and Gunnison are on the rise. For many types of properties, however, there is a good chance that the price today will not be drastically higher than what it was a couple of years ago, with the one notable exception being that there are fewer distressed properties (i.e. foreclosures and short sales). For a buyer who is “just looking”, most can say that there is no rush to purchase a property because prices are not rising very quickly.
However, that discussion relates directly to the price of property. What about the cost? For most buyers, there is a difference.
For buyers who need to get a loan on a property that they wish to purchase, the cost of buying property can change just as quickly as the price. Let’s look at some examples. In the following scenario, the buyer is purchasing a property for $250,000 and 20% down, with a great rate of 4.25%:
Notice that the buyer will pay roughly $50,000 more over the life of the loan- that is what is meant by the cost versus the price of owning real estate. Not only that, but look how the monthly payment balloons up roughly $150 per month. That means less money for satellite TV or going out to dinner- or it might mean not being able to purchase the home you were hoping for.
In the scenario above, if the buyer can only afford roughly $1,000 per month on their mortgage, a rise in interest rates will mean they can no longer afford that $250,000 property. If the prevailing interest rate is 5.5%, that same buyer, with $50,000 down, only has roughly $225,000 to spend while keeping the monthly payment below $1,000/ month:
Interest rates have been historically low for quite some time now, and it only stands to reason that they will rise at some point in the future. Where those rates go can have serious implications for a buyer, as seen in the real-life example above. Take a look at my mortgage calculator on the right sidebar, and examine what a change in interest rates could do to the cost of buying real estate.