Thursday, June 13, 2019 / by Kristin & Mark Stampini
Homeownership and the true cost of homeownership
What Everyone Ought to Know About The True Cost of Homeownership?
Many people don’t really understand the details about the true costs of homeownership. Today, we’re going to be talking about the true costs of homeownership and the other factors that come with buying a home.
Homeownership is a long-term financial commitment. Buying a home requires a down payment, closing costs, and other expenses. The true cost of homeownership is calculated along with other factors included in the home buying process. On this article, we will discuss how $707 is the true cost of homeownership when buying a $315,000 house.
So what is the true cost of homeownership?
There is no universal answer to this question, you simply have to run the numbers.
But if you are after a precise answer, the analysis can be quite complex.
- Current interest rates, where they are and where are they headed with the feds
- the mortgage financing
- and the qualifying for a home mortgage
Above are essential factors of knowing the true cost of homeownership.
$707 = True cost of homeownership
What if I told you and or the audience that a $315,000 house costs approximately now about $707 a month?
For example, we take a $315,000 house and put down 5%. Let’s first start off with 5% down, which is $16,000. That would mean we have a loan amount of $300,000.
We want to emphasize that from a consumer’s perspective if we ask 10 people what it costs to buy a $315,000 house, 80% will tell you $40,000 – $60,000. They needed this unbelievably high credit score.
Principal and interest on that loan amount would be $1,610.
I’m going to use $250 a month for homeowners insurance, $400 a month for real estate taxes and $132 for mortgage insurance, giving us a grand total of $2,392 a month in terms of a monthly payment.
How is $707/month the True Cost of Homeownership for a $315,000 home?
We understand that the principal interest, taxes, and insurance are $2,392 per month, let’s now dive into the numbers.
- TAX DEDUCTION
Let’s break down the tax deduction on a monthly basis, $800 of that payment interests.
So that means $9,600 of that annually will add up to $9,600 a year in annual interest real estate taxes.
If it’s $400 a month that would mean $4,800 a year would be the real estate taxes. So we add the two together, which is 14,400, assuming a 30% tax bracket that would mean a true refund.
A true refund of $4,320 a year, meaning $360 a month.
If we have a $2,392 payment, we understand that $360 of that will be coming back to us for owning the home.
Let’s go a little further……….
- PRINCIPAL & INTEREST PAYMENT
We understand that of the $1,600 worth of principal and interest is principal meaning $800 of it, that would mean, the principal is money coming out of our personal savings account and going into our home savings account. So that $800 which is $9,600 / year is going into our home savings account, right?
Take that amount of money because it’s our money going into that savings account off of the monthly payment. So that’s another $800 a month. So, so far we have $360 coming off the payment because of tax deduction. $800 because of our principal.
- ANNUAL APPRECIATION
And last but not least, using a 2% annual appreciation, which is ultra conservative.
Ultra conservative. So that’s less than the cost of living would be $6,000 a year roughly, which would be equal to $525 per month.
LET’S DO THE MATH!
We start off with principal interest, taxes, and insurance of this payment being $2,392 minus the tax deduction of $360 a month. We minus our principal payment of $800 per month and we minus our appreciation of $525 a month giving us a true cost of homeownership for $707 a month based on these facts.
Isn’t that interesting?
Other people aren’t so much numbers people, but the bottom line is when you’re working with different professionals and things like that and they can really explain it to you and how it works out to basically buying a home at $315,000 and the actual hard costs to you by the time you back out everything is only $707 a month!
Why is everybody out there running to purchase a home?
Lack of education.
Our industry does a poor job of providing this type of data. Some professionals don’t educate the consumer enough as to what the true cost of homeownership is. Now, of course there’s going to be maintained that you have with the home and so on, but when you stop and think about it now we’re using a 2% factor in terms of appreciation. We can all agree that’s a very low number. And here in Florida, depending on the market, even 4% it’s quite low.
When you think about long term homeownership, you always hear the stories about our relatives up in the northeast sold their home and moved down here, owned it for 10-15 plus years. When you look at their acquisition price versus what they sold for and you get it all out, even with maintenance, half the time you’ve owned the home for free and sometimes in a profitable situation.
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When we think about the overall market and where we’re at right now, a couple of things. We go back to the educational component. And the biggest challenge that I think people have and even agents as well is not understanding how simplistic mortgage financing is.
The vast majority of Buyers put themselves at an overwhelming disadvantage by approaching the process entirely wrong.
Now that you already know the true cost of homeownership, it’s time to obtain the Best Rates & Lowest Closing Costs in South Florida
From 2008 to 2018 where are we today? And the truth of the matter is that it’s never been easier in a sense to get mortgage financing.
Now we have FHA government programs to where there’s no credit score requirement.
The way it works nowadays is it’s through automated underwriting systems.
So for example, we approve someone with as low as a 550 credit score just two weeks ago.
But virtually no credit score requirement, you can use baselines. 580 credit score is acceptable for conventional financing, 620 is acceptable. So these are not the highest of scores down payment, as little as 3%. And we also nowadays have these government grant programs that are built into the loan products. So you’re not running around from city to city trying to see who’s got the money.
We actually have a product that we actually give you the money through the loan products or you’re putting down zero.
So what debt to income ratio mean?
A lot of people out there don’t really understand that. What’s the backend?
Debt to Income Ratios
We can go over 50% debt to income ratio. That is your income up against your housing expense can be over 50%. So when you think about that, we have co-borrowers that we can bring on. If someone doesn’t qualify, mom and dad can jump on the loan. There are so many different avenues to get them home.
Let’s use a $5,000 a month income. And let’s say that someone’s mortgage payment is going to be $2,500 a month. That would be 50%, right? So their income is $5,000 their mortgage payment would be, $2,500 so the front end debt ratio.
Think about that, that’s almost 50% of their income can be used for the mortgage payments to qualify. It’s a big number.
That is a big number. Aren’t people, don’t people get scared about that number?
It depends on who you’re asking. Look what it does, it builds wealth.
Federal Reserve: So where are we headed?
Interest rates have been creeping up just a little all-time low still, but they’ve been creeping up a little bit.
Interest rates are up about three-quarters of a percent in the past, we’ll call it 9 to 10 months. We are what we would refer to as in an ascending rate environment. Rates are moving up. Rates right now are falling anywhere between the high 4’s to low 5’s depending on the overall profile. And I have to tell you that it’s an interesting adjustment on a day to day basis in terms of communicating that five number.
It’s still a bargain. The federal prime rate right now is at 5%. It’ll probably end up near five and a half percent by year-end is what we would think. But let’s put all of that into perspective.
We should have interest rates. Interest rates should be around seven and a half percent. The truth of the matter is, is that a fourth, seven and a half percent that means the banks are giving you 5% 500% of your CTE, right? That means the fixed income retired borrower is getting more money on there, on their savings, more money circulating.
If the Federal Reserve confident to increase rates, that means we’re doing well as a country, as a whole.
Our economic position is gaining momentum. We’re creating more jobs.
So someone can let’s say, pay 4.875 on an interest rate, which is up to three-quarters of a percent, but they’re 401k is up 25%.
I mean, what are those numbers really look like when you think about it?
Homeownership is really the American dream and really designed to get you there. Now, of course, there’s a lot of different factors at play when it comes to knowing the true cost of homeownership, but on the long term, we can all agree you can never go wrong.
If you are thinking of buying today, don’t wait any longer. If you have a correct plan in place, know the true cost of homeownership and if you understand what your length of ownership is going to be.
A home is not trading stock. It’s not trying to sharpshoot a bottom. That’s not how wealth is created. The purpose of real estate is to own it.
And so if we think about it from that perspective, a home houses our family, it brings us a lot of joy. It brings us a lot of financial benefits. It brings us tax deductions, a whole lot of benefits come along with being a homeowner. We all know that if we put a long term time frame on real estate, we will almost never go wrong.
Each month, we publish a series of articles of interest to homeowners in Palm Beach and Broward County– money-saving tips, household safety checklists, home improvement advice, real estate insider secrets, etc. Whether you currently are in the market for a new home in South Florida, or not, we hope that this information is of value to you. Please feel free to pass these articles on to your family and friends.
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