Think fast: When you buy a home, which would you rather have, a low price or a low mortgage rate?
These days, it’s an issue worth thinking about. Mortgage rates have inched up recently, but home prices are still way below their peak of a few years ago. As long as the combination of home price and mortgage rate produces an acceptable monthly payment, does it really matter how you get there?
Well, it can.
Imagine you had your eye on a $300,000 home that could be bought with a 20% down payment, the standard these days. This week, the average 30-year fixed-rate mortgage charges 4.549% interest, according to the BankingMyWay survey. So you’d pay $1,223 a month on a $240,000 loan, the BankingMyWay Mortgage Loan Calculator says.
A week earlier, 30-year loans averaged 4.290%, and you’d have paid $1,186 a month to borrow the same amount, $37 less.
That’s not a crushing difference – the price of a modest dinner out. But it starts to look worse when you realize that this tiny rate increase will cost you $13,320 during the life of the loan. If you invested that money at an 8% return, you could have more than $52,000 after 30 years. Even if you assume inflation would chew at that total, it’s not a sum to ignore.
To offset the difference, you could make a lower offer on the home. To keep the payment at about $1,186 a month at today’s slightly higher mortgage rate, you’d get a mortgage of $233,000 rather than $240,000. If you assume you could still make a $60,000 down payment, you’d pay $293,000 for the home instead of $300,000.
During the next 30 years, the total payments would be about the same regardless of whether you took the smaller loan at the higher rate or the bigger loan at the lower rate – about $427,000. That stands to reason since the monthly payments are nearly identical.