The Cost of a Home Is Far More Important than the Price

Housing inventory is at an all-time low. Nationwide there are 39% fewer homes for sale today than at this time last year, and buyer demand continues to set records. In the Twin Cities the number is similar, with 31.5% fewer homes for sale now vs. the same time last year. Zillow recently reported:

“Newly pending sales are up 25.5% compared to the same week last year, the highest year-over-year increase in the weekly Zillow database.”

Whenever there is a shortage in supply of an item that is in high demand, the price of that item increases. That is exactly what is happening in the real estate market right now. CoreLogic’s latest Home Price Index reports that values have increased by 5.5% over the last year.

This is great news if you are planning to sell your house; on the other hand, as either a first-time or repeat buyer, this may instead seem like troubling news. However, purchasers should realize that the price of a house is not as important as the cost. Let’s break it down.

There are several factors that influence the cost of a home. The two major ones are the price of the home and the interest rate at which a buyer can borrow the funds necessary to purchase the home.

Last week, Freddie Mac announced that the average interest rate for a 30-year fixed-rate mortgage was 2.87%. At this time last year, the rate was 3.73%. Let’s use an example to see how that difference impacts the true cost of a home.

Assume you purchased a home last year and took out a $250,000 mortgage. As mentioned above, home values have increased by 5.5% over the last year. To buy that same home this year, you would need to take out a mortgage of $263,750.

How will your monthly mortgage payment change based on today’s lower mortgage rate?

This table calculates the difference in your monthly payment:

That is a savings of $61 monthly, which adds up to $732 annually and $21,960 over the life of the loan.

Bottom Line

Even though home values have appreciated, it continues to be an excellent time to buy a home because mortgage rates are currently at historic lows. Let’s connect to see what the current market means for your plans to buy or sell. In the meantime; check out the newest listings in the Minneapolis/Saint Paul area to see if anything piques your interest.