How To Measure The Cost Of Money In Real Estate
Most people understand the significance of cost trends for sticks, bricks, land and labor, but the cost of money in real estate has a far larger impact on a family’s budget than do the other major items in a home purchase.
Whether you are building a new home or buying an existing home, odds are good that you plan on borrowing the majority of the money to make the purchase. Do you have any idea what the cost of money is going to be, and how potential changes in interest rates could change your financial position?
Measuring The Cost Of Money In Real Estate
If you were to borrow $200,000 today at 3.5% using a thirty year amortization period, the interest you would pay over the life of the loan (your cost of money) would be roughly 38% of the total cost paid for your home. But if interest rates returned to their 50 year average, that would increase your cost of money to roughly 65% of your total cost.
The following real estate graph shows the change in monthly mortgage payments as interest rates rise.
As you can see, when interest rates return to 10%, the cost of money will be twice as much as it is at today’s low levels.
Leveraging The Cost Of Money In Real Estate
These low interest rates have lasted longer than I believe the US can afford. Historically, we have seen the Fed raise rates as the economy recovers, and this time should not be any different, though it certainly is taking longer.
Regardless of your housing situation, you should try to leverage the low cost of money right now (or as soon as possible). If you are still at a wealth-building stage of your life, or if you do not have all the money that you will ever need, it is likely that you can use the current low cost of money to your advantage in your real estate holdings.
If you have been thinking about selling your home and moving, do it now. If you have been thinking about staying where you are, then look to refinance your home. Just don’t allow these low mortgage interest rates to pass you by.
If you feel like you are trapped in your home, their are solutions for you as well. Want to know more?
Just drop me a note and we can schedule a time to determine how you can best use the low cost of money in real estate to your advantage.4 September 2013