Most home buyers have been trained by the media to be highly focused on interest rate. As you will see below, changes in interest rate have less impact than purchase price and property taxes. Property taxes and purchase price have the largest impact on monthly payment, interest rate typically comes third, and homeowner’s insurance has the smallest impact. Weighing each of these factors is important in determining a comfortable purchase price range.
The home buying process involves a number of different aspects that all determine buying power and the ability to purchase a particular home. The primary determinants of a mortgage payment are purchase price, property taxes, interest rate, and homeowner’s insurance. Let’s evaluate each in more detail.
Purchase Price—Largest Impact on Payment
A $300k home purchase with five percent down generates a loan for $285,000. With rates in the mid 4’s right now, the payment would be ~$1444 per month for principal and interest. If the home were in high demand and ended up selling for $310k, the payment would increase to $1492. This $10k increase in purchase price would increase the monthly payment by $48 per month. When clients tell me they are looking in the $300k to $350k range, that translates to a payment difference of around $250 per month. Determining a reasonable purchase price range is a big step towards an affordable mortgage payment.
Property Taxes—Major Impact on Monthly Payment
In Oregon, property tax increases were capped at three percent per year back in the late ‘90s by Measures 47 and 50. Over the past 20 years, these measures have led to vast differences in the property taxes on homes with very similar market values. In Portland today, two $350k homes could have property taxes that range from $2400 to as high as $4000. That $1600 difference in property taxes translates to a whopping $133 per month! Obviously, home buyers have no control over the property taxes on a particular property. However, with the large impact that property taxes have on the overall monthly payment, buyers should be mindful of property taxes as a major component of the monthly payment.
Interest Rates—Less Critical Than Many Think
Interest rates also impact the monthly payment on a home. On that $300k home purchase above, .25 percent change in rate would change the monthly payment by $42 per month. The larger the loan amount, the more a change in rate will impact the monthly payment.
Homeowner’s Insurance—Smallest Impact on Payment
Homeowners insurance has the smallest overall impact on the monthly payment for a mortgage. Pricing ranges from about $600 to $900 per year, so differences in pricing have only a modest effect on the monthly mortgage payment.
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