Why the Cost of a Home Is More Critical Than the Price

Gabriel Fancher
Gabriel Fancher
Published on April 16, 2021

Housing inventory is at an all-time low. There are 25.7% fewer homes for sale today than there were this time last year, and buyer demand is very strong. The Pending Home Sales Index (PHSI) by the National Association of Realtors (NAR) reports:

“Year-over-year, contract signings rose 13.0%.”

As we’ve established, whenever there’s a shortage in supply of an item that’s in high demand, the price of that item increases. That’s exactly what’s happening in the real estate market right now. The Home Price Index from CoreLogic reports that home prices increased by 10% over the past year. CoreLogic also forecasts a 3.3% home price increase on a year-over-year basis by the end of 2021, and that’s on the low end of most expert forecasts, so they may rise even higher.

This is great news if you’re 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.

According to Freddie Mac, the average interest rate for a 30-year fixed-rate mortgage in January 2020 was 3.62%. The rate for January 2021 was 2.73%. Let’s use an example to see how that difference impacts the true cost of a home.

Assume you purchased a home in January of 2020 and took out a $350,000 mortgage. To buy that same home in January of 2021, applying last year’s appreciation of 10%, you would have needed to take out a mortgage of $385,000.

How will your monthly payment change based on this year’s lower mortgage rates?

This table calculates the difference you would see in your monthly payment at a lower mortgage rate while applying home price appreciation as well:

Difference in Monthly Payment

Time of Purchase Mortgage Amount* Interest Rate** Monthly Mortgage Payment (Principal & Interest)
2020 $350,000 3.62% $1,595.19
2021 $385,000 2.73% $1,567.65
Difference in Payment: You Save $27.54
*Using a 10% increase in home values for the past year, per CoreLogic **Freddie Mac Mortgage rates for January 2020 and 2021

That’s a savings of almost $28 per month, which equates to $336 annually or $10,080 over the life of the 30-year home loan.

Bottom Line

Even as home values continue to appreciate, it’s a great time to buy a home while mortgage rates are still very low. Check out my mortgage calculator to see what your payment for a new home would be!

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