Home Cost Vs. Home Price

    We have often discussed and blogged about the major differences between the price of a house and its cost. We have lost count of how many times we have been asked what the price of the house is rather than its cost. For, when you truly know the difference, the cost of a house plays a much larger role than the price. Sure, the price pays a large role in the overall cost of the house, but do not be fooled, it is not the whole story. If you want to truly know what buying a house will mean to you then you must look strongly at its cost compared to its price.

    As a seller, you will often be most concerned about the “short term price” – where home values are headed over the next 6 months. As either a first time or repeat buyer, you must not be concerned about the price but instead about the “longer term cost” of the home. After all, we are all after our own piece of the American Dream and we do not want to mortgage our lives in ordered to achieve it (that’s what got us in trouble in 2008). We are smarter than we once were and we should be prepared to act accordingly.

    Recently, we reported that a nationwide panel of over 100 economists, real estate experts, and investment/market strategists projected that home values would appreciate by approximately 4% from now until the end of 2015. Additionally, Freddie Mac’s most recent Economic Commentary & Projections Table predicts that the 30 year fixed mortgage rate will be 5% by the end of next year. So, what does that mean for the buyer?

    Here is a simple demonstration of what impact these projected changes would have on the mortgage payment of a home selling for approximately $250k today:

    Not only does this accurately and succinctly demonstrate the long term cost to you (an extra $66,542.40 in payments over the lifetime of the loan), but it, in a roundabout way, shows you the danger of waiting to buy rather than buying a house today. So, when we are looking to buy a home we are often fixated on the price of that home without accurately calculating the long term cost to us as homeowners. It would seem that the thing that affects the cost of the home almost as much as the price is the interest rate and thusly the timing.

    We are all trying to time things perfectly so that everything aligns in just the right way to maximize our potential. We could factor in all of the other little costs associated with owning a home and we could also factor in the benefits (building equity is a big one), but it is often easier to understand large principles using the simplest of methods. Owning a house does not have to be so daunting, but just be sure that you understand the cost you are undertaking rather than just the price you are paying.


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