The question seems simple enough. The answer is not that easy. The answer is even more complex if there is a mortgage involved. The National Association of Realtors states that approximately 65% to 70% of all buyers obtain a mortgage to purchase their home.
The first thing we need to find out is the interest rate and term of the mortgage. For this example I will use a mortgage amount of $100,000(easy math). Our interest rate will be 3.75% and the term of the mortgage will be 30 years.
The principal and interest payment is $463.00. What this means is for every $1,000 borrowed the cost is $4.63. This is the “COST FACTOR”.
Ok, just to make sure this is clear…If you take a mortgage of $250,000 at 3.75% interest and 30 year term the principal and interest payment would be $1,157.50 ($4.63 x 250).
That was the easy part…Really!
Now let’s add the property taxes. If the taxes on our $100,000 home are $3,000 per year, (County, Township & School), that adds $250.00 per month to our payment. If the taxes are higher, let’s say $3,600 per year, we would now add $300.00 or $50.00 more per month.
Here is how the COST FACTOR works…That extra $50.00 per month would buy us $10,800 more house. This is over 10% of our mortgage amount!
Remember, each $1,000 we loan to purchase the home costs $4.63. The extra $50.00 does not seem like much until you look at the COST FACTOR ($50.00 divided by $4.63=$10,800). Now it looks more substantial.
There are homes in Berks County that are priced in the $300,000 range with taxes of $6,000 per year. Others at the same price may have a $9,000 a year tax bill. Yes, a whopping $3,000 difference or $250.00 more per month. Let’s put our COST FACTOR to work here…$250.00 divided by $4.63= $54,000 more, WOW!
Other factors that can have an impact on the COST FACTOR are homeowners’ insurance, private mortgage insurance (PMI), utility costs & travel costs (location).
Every time you spend $4.63 towards your home purchase it has a purchase value of $1,000. If you do not have 20% down cash you will likely pay PMI. There are ways around this.
It is important to get utility costs on a home you are purchasing. This will give you an idea of how well the home is insulated and how the mechanicals are functioning. If the costs are unusually high there could be a problem. There goes more $4.63’s out the window or chimney.
If you purchase a home farther away from your job, family, schools and shopping because it is less expensive think again. With the cost of gasoline where it is you can burn a lot of $4.63’s? Not to mention wear and tear on vehicles and the time you will never get back.
The moral of this lesson is simple…Call a Realtor® with a good calculator and a solid understanding of how your $$$ work when purchasing a home!
Jeffrey C. Hogue