Cost vs. Price

Everyone tells you, “It’s the best time to buy”.  If you are a seller, especially, you are wondering if people have lost their mind. To understand, you have to know the concept of cost vs. price. This is how taking $10k to $15k less (than you think it is worth)  on your current home  could save you $80k on the next home you buy.

Cost vs. Price

This is a relatively easy concept once you understand it and it will open your eyes to the incredible opportunity presented to us in the current market.  This market is great for move up buyers and buyers who have a lot of equity in their current home. (Let’s not fail to mention those exceptionally smart individuals who save and have money to put down aside from sale proceeds of a home.)

It  is a simple concept that works like this;

I have a home worth $150k in today’s market. It WAS worth $165k two years ago. I want to  move,but I want what I (note this has nothing to do with what it is actually worth at the moment) think my home is worth. So, I think I will wait another 1.5 years for the market to inch up a little. Basically, I want my $15k back. 

I want a house worth $350k. Today interest rates are 4.75%. With a 10% down payment I would finance $315k for 30 years with a P&I payment of $1,643.19 a month. This equates to $276k in interest over the life of the loan.

                Remember…I am waiting to get my $15k back

It is 1.5 years later and I got my $15k back on selling my house.  But now interest rates have risen to 6%.

·   That $350k house with a 10% down payment (finance $315k) at 6% interest has my monthly P&I at $1,888.58. This equates to $364k in interest over the life of a 30 year loan.

           In essence, your $15k has cost you $80k in interest. This is cost vs. price.

As we usually break down and base our mortgage decisions on monthly payment, here is another visual for you.  This shows you what rising interest rates (on the left) do to the monthly payments as they fluctuate.

 RATE    $360k (loan)    $380k (loan)
6.00%    $2,158             $2,278
5.75%    $2,100             $2,218
5.50%    $2,044             $2,158
5.25%    $1,988             $2,098
5.00%    $1,932             $2,040
4.75%    $1,824             $1,926

I could go on about this topic, but frankly, the numbers speak for themselves.  As I said before, this is a relatively easy concept to grasp once you study it. It is a different way of thinking about selling and buying; going against the grain of our instant gratification mindset to thinking long term and looking big picture.