Cost of Home Ownership Based on Both Price and Mortgage Rates
The total cost of home ownership is a point that buyers do not always consider when purchasing a home. Buyers will often get hung up on the purchase price of a house, with negotiations going back and forth over just a few thousand dollars and neither side willing to give in.
Purchase price is short-term while cost is long-term. While it is important for a buyer to understand price trends and the direction home values are headed, a factor of equal importance is the long-term cost of home ownership. Both the price and the interest rates must be calculated into the long-term cost.
Rising Interest Rates Increase the Cost of Home Ownership
CNN Money stated in a recent article that mortgage rates dropped again, sending the 15-year and 30-year fixed rate loans to a record low. Average rates on 30-year fixed mortgages fell to 3.34%, while the 15-year fixed fell to 2.65%. Interest rates are continuing to fall, but what if that changes? The last report from the Mortgage Bankers Association stated that interest rates are expected to rise. It is predicted that rates will rise to 3.8% by the end of the year, then to 3.9 % by first quarter next year and 4.4% by the fourth quarter of 2013. Although this is not a large increase, it is a slow gradual jump in rates.
Calculating the Cost of Home Ownership
If you look at the Payment Based on Interest Rates table it shows the impact of increasing interest rates. Take a $400K loan for a Chicago home, if home prices went down but interest rates rose, the monthly mortgage payment and the cost of home ownership would increase. In reality home prices are beginning to creep up in most Chicago neighborhoods. The home price expectation survey shows that in 2013 prices will go up 2.44 %. Other surveys like the WSJ Economic survey predict gains close to 3.25 %.
If you are holding off on purchasing and waiting for the market to bottom out, it might be too late. In fact you should consider getting in before both price and interest rates continue to go up. Recent statistics indicate that the prices for homes in Chicago and nationwide have already started to increase.
If you were to purchase a condo in Chicago valued at $200K and prices went up by 2.44%, the increase in purchase price would be almost $5,000. If interests rates also go up to 4.4%, as predicted by the Mortgage Bankers Association, the increase in both price and cost would result in an extra $127.87 a month or $1,500 a year. Over the term of your 30-year mortgage this amounts to $45,000. In a nutshell, waiting just 1 year will cost you $45,000 over the long term. Certainly a compelling reason to buy now.
Another important point to take into consideration is that in January, mortgage guidelines could redefine what is considered a “quality residential mortgage”. A change in government guidelines will affect Fannie Mae, Freddie Mac and FHA, who collectively own 85%-90% of all mortgages, and ultimately the cost of home ownership. If you do not fit into these new rules, you might not get a loan backed by the government. If you qualify for private funding it could cost you more.
If you are on the fence and thinking about buying a home in Chicago, don’t wait to buy under new rules with tougher standards. Contact Us at Chicagocondofinder.com or call Helaine Cohen at 312-953-0961.