Mortgage rates rise and home prices rise not even sure what the difference is between the two. How does this affect my chances of buying my new home? I don’t really get Real Estate jargon and I’m terrified of getting scammed.
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Home prices are the price you agree to pay for the house, like the price tag on something at the store. Mortgage rate is how much the bank charges you in interest on the loan to pay for the purchase of the house. The higher the interest rate on teh mortgage, the more you pay in interest over the life of the loan, which makes your monthly payments higher. Both play into how much you’ll need to pay for a house each month. The purchase price being higher also affects the down payment, which is usually a percentage of the purchase price. Higher price = higher down payment.
to avoid getting scammed, ask a friend who bought a house who their agent was, or generally ask around for established real estate agencies in your area.
An agent makes a lot of money when you buy a house, so they will be very happy to explain everything to you.
YOu can also talk to your bank (the number on the back of your bank card), they will help you get a pre-approved for a mortgage, and explain the terms. Again, this is their business and they will be happy to telp.
As a good rule: finance as little as possible. Lowest price is the best starting point. Interest rates will change over time. You may be able to refinance in a few years, if you wish.
Home prices are like the pricetag for a house. You’re buying a house for $200,000.
Mortgage rates are how much you pay the bank to loan you the money for your house. For example, let’s say you want to buy that $200,000 house, but only have $20,000 available to spend; you’re gong to need to borrow $180,000 (do note: we’re neglecting some other costs that go into the purchase of a house, like closing costs and buying points on the mortgage and PMI, for sake of simplicity. If you’re working with a good real estate agent or Realtor, they can essentially tell you “the house will cost $x, plus $y to close,” so the house cost will be $[x+y]). So you borrow the $180,000 on a 30-year fixed mortgage (you pay back the loan in 360 monthly installments, and the interest rate does not change). You get a 30-year fixed mortgage with a 7.5% APR (Annual Percent Return), which means that you pay $1259 a month, and wind up paying $453,091 over the lifetime of the loan ($273,091 in interest, and the $180,000 principal). If you find a loan with a lower interest rate, say, 6% APR, you pay less overall (in our example case, your monthly payment would be $1079, and your lifetime interest would be $208,509, so that 1.5% drop saves you $65,000 over the lifetime of the loan, or just under $200 a month in payments).
So home price: pricetag. Mortgage rate: interest rate on the loan to buy the house. Both affect your ability to buy a house.
Best way to save money on a loan: start with as small of a loan as possible, with as low an interest rate as possible. Also, one tip from my Realtor when we bought our house: if you’re paid biweekly, take your monthly mortgage payment, divide by 2, and pay that out of every paycheck; you get an extra payment in every year, and you chip away at the interest faster, since you’re paying faster.
The rate is the interest you pay on the loan. It’s a complex subject, but lets just say if you have to borrow say 200K to buy a home, your monthly payment will be higher if your interest rate is higher, and lower if your interest rate is lower. The cost of the home will be the same, but your monthly mortgage payment will be higher. You are basically paying more to borrow the same amount of money.
For the housing costs- they are supply and demand dependent. Often when interest rates go up, the demand goes down for the homes (because the cost of mortgages goes up). The guy who could afford a 200K home at low rates, may only be able to afford a 175k house at a higher mortgage rate. The demand goes down. People’s ability to pay more for a house goes down, and in many cases, that can slow down the rate that housing prices go up (and can even make them fall). (this is a little more complex, as interest rates can also impact new homes being built, renovated etc., but the general idea is when it costs more to borrow money, it slows things down a bit)
God our education sucks. I took a ‘trial’ home economics class that focused on economics. We had to balance a checkbook, we picked stocks, we opened fake ‘credit cards’ and tracked expenses, had to calculate, by hand APR and compounding interest, and for our final paper build a home budget. Everyday the teacher had on the board the expenses we took and income we earned over a week or month. The last test for bonus points was completing tax forms by hand using our classes fake W2, charity donation, mortgage…. . I thought it was fun and I took those lessons with me unlike most other class in HS or College. I don’t think they still have this class (91 or 92?) since my 2yr younger brother didn’t have the option.
It really all boils down to your monthly payment. Your monthly payment is going to be the sum of interest (affected by the interest rate) and principle (affected by the home price). Mortgages are typically 30 year or 15 year, so your monthly payments would be adjusted accordingly.
Experts say that a mortgage monthly payment should not exceed 25% of your take home pay. Keep in mind that while rent can be more expensive than a mortgage, renters are typically not supposed to pay for maintenance of the home.
Okay. So. Interest rate is the cost of the loan. So for a 600k loan at 6% interest over 30 years equates to around 1.2 mil. The interest rate will also effect your monthly payment. 600k at 3% is around 2500 a month. 600k at 6% is like 3500-4K a month.
So if you get into a purchase deal you need to factors a few things in. The cost of the home (home price) and how much it’s risen/fallen, the current interest rate on mortgage loans and where you think interest rates will be in the future. Based on the cost of the home and where the value is headed will help you figure out if you need to “buy down” your interest rate. It’s usually around 8k to “buy down” .25% off your interest rate- it’s called a point.
One piece of advice. Never get an ARM (adjustable rate mortgage) loan unless you are flush with cash and hardly need a home loan in the first place.
A good example of a home buying process right here:
Find home you like. Listed price is 650k. You have 60k for a down payment. You find a lender and talk with them about a home loan for 590k. That’s when the rate conversation comes up. Different companies offer different rates. The rate will determine your monthly payment and overall amortization (total cost of loan and interest) over the term of the loan (usually 15-30 years)
I think I said that all right. Baked and have a real estate license I don’t use.
Interest is how much you pay the person that loans you money. It’s typically specified as a percentage of the loan and calculated on a yearly basis. This is money you never see again.
Principle is a magical word that refers to the payments you make towards the loan amount. It’s money you will never see again. It just means you owe less money.
The purchase price is the amount of money the seller is receiving for their hoom.
Most lenders want you to chip in what’s called a down payment. Your down payment plus the loan amount will add up the the purchase price. You can expect this to be at least 3% of the purchase price. It’s money you will never see again but in exchange you get to borrow less money.
You can expect a hundred other fees associated with the middlemen that you or the seller choose to hire. These are called closing costs. Typically the seller has to pay off the buyer’s realtor but you will still be on the hook for all sorts of stuff. You can expect closing costs to be around 10% of the hoom purchase price. This is money you never see again.
When you sell your hoom, you get the purchase price minus however much you are paying the middlemen who you and the buyer hired. You can expect to get a check for 94% of the hoom sales price.
The lender will require you to pay off the loan before you see a dime of that.
Equity is a magical word that refers to the amount you will get to keep after you sell and pay everyone off. It is determined at the time you sell.
The correct way to evaluate whether a hoom was a good investment is decide how much you would be willing to pay to rent the place out. Take the amount of equity you got after you sold it after paying everybody off, and subtract it from every penny you paid along the way including everything I mentioned above plus any additional money you spent maintaining or improving the hoom, taxes, insurance, and hoom owner association fees. Divide that amount by the number of months you lived the hoom. If the amount you were willing to pay in rent is more than the amount you spent to live there then you got a good deal.
Unfortunately you won’t know whether you got a good deal until you sell your hoom.
Be sure to interview the middlemen before you agree to enlist their services. Be wary of realtors who tell you things they cannot know such as future interest rates and future hoom sales prices. Be wary of lenders who do not require a fee to lock in your loan interest rate before the sale occurs. Be wary of sellers who require non refundable payments prior to the hoom sale. Basically be very careful and skeptical of everyone because they are the ones getting paid and you are what’s for dinner.
Rwj212 is right! Typically (especially now) you wouldn’t keep your rate long term. You see as interest rates eventually adjust down you can lower your rate by refinancing.
As far as house prices go those are actually adjusting down, not up. The reason rates are so high is to decrease the housing prices. It accounts for the majority of inflation.
As far as finding someone to help that can be pretty difficult to find a good lender that can get you the best deal. A real estate agent is easier you can just check reviews.
If you want to ask me specific questions on the process I’d be happy to explain. I do both real estate and lending so my knowledge is vast. I do a lot of videos on this topic on insta and YouTube you can contact me there or go to my site that is just my name dotcome.
Chris Hageman
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