Understand the Real Price of a Home

Do you know how much it costs to buy a house? When most people think about buying a home they think only about the purchase price of the house without consideration of interest payments on the loan they acquire with it.

Freddie Mac reports current average home loan rates (as I write) to be 6.67% for 30 year loans and 6.34% for 15 year loans. Sometimes the rate difference is much more, making shorter term loans even more preferrable.

Take the average home today, about $200,000 in price. Interest payments on a 30 year loan at these current rates would require $1,286.58 payments per month with interest payments of $263,168.27 over the loan period. A 15 year payment plan would require $1,724.67 monthly with interest payments of $110,440.85 over the loan period.

You will see that the total cost of the house with a thirty year note is $463,168.27 while with the 15 year note it is $310,440.35. Observe that this is a difference of $152,727.92.

Please read those last two sentences over a couple of times and let the numbers sink in. We are not talking about small change here. And this is at a time when the two rates are relatively close!

Real estate salespeople naturally want to sell you the most expensive house you can qualify for, generating the most commission for themselves. Unfortunately, too often we want to buy the most expensive house we can, thinking about the short term benefit rather than the long term consequence.

Clearly a shorter term note is better, but most often people say they can't afford the higher payments. So what should a person do?

A buyer may consider buying a less expensive home than they could afford but with a shorter term loan; after buying they will make extra principal payments to make the payoff time even shorter. Later they can trade up.

Another plan, which I have used myself, is to build a new house and add on to it later. In my case I added a large sun room, triple garage, and concrete driveway a few years after building my home.

My parents followed a great plan. They saved up and bought a fixer upper for cash, made improvements, and sold it. Then they did it again, eventually enabling my mother to trade their lake home for a new house in town free and clear after my father's death. No loan was ever involved.

There are many other factors to consider when buying a house. For example, remember that costs are higher if you do not put down at least 20% of the loan up front. And, naturally, you want to make sure you have your credit rating high enough to qualify for a better than average loan rate.

Not all offerings are the same. The most important thing is to get acquainted with loan facts and options before commiting to whatever is offered by someone who will benefit financially by your purchase.

Perhaps most important is to approach any financing with the right mind set. It you talk to a lender as someone looking for help, leaving the impression that you are at their mercy, you are destined for trouble. If you talk to them as a potential customer who is shopping around for the best offer, it is a whole different story.

In any case, make sure you consider all the potential plans for providing housing for yourself and your family. And don’t ever lose site of the fact that it is not the cost of the house, but the cost of the financing, that is your number one consideration. Then you will be sure to get the most for your money.