What is the true cost of a house?
If you are in the market for a new home, be sure you understand the true cost of any house you’re considering. Of course, you need to factor in maintenance, taxes, utilities and similar expenses. However, the focus of this article is to explain the difference in mortgaged money versus cash. In order to clarify the true cost of a house, an example will help.
When is a $500,000 house not a $500,000 house?
When you’re considering a mortgage vs. cash. Let’s assume your plan is to purchase with 20% down and your lender has pre-approved you for a house priced at up to $500,000. Then, your agent sends you a house that needs updating, but would be worth $500,000 if the work were done. That second house is only priced at $400,000, but needs $100,000 worth of work. To the casual observer, the cost of these two houses is the same.
Upon a closer look, though, the financial obligation is quite different. Let’s assume the monthly payment on the $500,000 house is $2,434 (assuming an 80% loan). Using these same rates, the monthly payment on a $400,000 house would be $1,960. So it’s a savings of $474 per month, or about $5,688 per year.
Now, consider where that $100,000 in cash to remodel the $400,000 property will come from. If you have it handy, then you might consider spending it on the upgrades. (Note: you almost never see more than about 70% return on investment from remodels unless you’re a contractor who pays no mark-up.) If you don’t have that much sitting around, be aware that your mortgage payment savings are under $6,000 a year. It would take many years of saving up to be able to generate the required cash from that source alone.
Cost of a house: understand the specifics
I hope that now you can see how two houses that will cost $500,000, total, may not both be affordable, depending on your circumstances. Understanding what the word “cost” means in different scenarios is vital to not making an expensive mistake. Please contact me for more information or to discuss your options.