If you have been thinking of buying a home, chances are you have noticed the rise in home prices over the past year. While higher home prices can certainly be intimidating, they may not be as scary as you think. Let’s take a look.
In this scenario, we will say you are looking for a single-family home for around $450,000. You go through the pre-approval process and get an interest rate of 2.5%. You find the perfect home and decide to make an offer, and it is accepted! What will you be paying a month, and how much can you expect to pay interest over the life of the loan?
Here we can see that for a $450,000 mortgage at 2.5%, you can expect to pay around $1580.48/month, and you can expect to pay $169,974.09 over the life of the loan.
NOW, let’s look at what you would have paid around five or six years ago for the $450,000 mortgage but a five percent interest rate. I know that the interest rate was around this because that is when I purchase a home.
WHOA! Not only would you be paying $637.66 /month MORE than what you could pay now, but the total interest paid on loan is colossal! Over the life of the loan, you would be paying $229,555.17 MORE than the mortgage with a 2.5% interest rate. That is HUGE!
| $450,000 | $450,000 |
| 2.5% interest | 5% interest |
| Total Paid: $640,095.56 | Total Paid: $869,651.03 |
At this point, you might be thinking, “well, it doesn’t matter because I will just refinance my loan.” Yes! You should definitely do that if you have a 5% and can get a lower interest rate. With that said, when we take a look at the amortization schedule, we see that you will be paying massive amounts of interest from the very first payment. Below we see that with the 2.5% interest rate, you will be paying about $937 of interest for your first payment. The 5% interest rate schedule shows you will pay $1,875 in interest on your first payment on the right side. While refinancing is definitely an option, buying at low-interest rates saves you money!
If you are in the process of purchasing a home, hopefully, this helps ease your mind when it comes to the competition and rising home prices!
Please feel free to contact me if you have any questions about this or any other real estate questions feel free to send me a message or visit my website: https://dixonproperties.kw.com/contact.
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