Whether you’re buying or selling a home, you’re going to be confronted and perhaps overwhelmed by numbers: interest rates, days on market, loan terms and many more. They’re all significant in the transaction. But what do they really mean?
This column is not the place for in-depth analysis of real estate math. That would be a tall order. I hope to convey two things: the importance of understanding what the numbers mean and that there is help available to decipher it all.
A 15- or 30-year loan?
Many buyers can shorten their financial obligation by choosing a 15-year mortgage instead of the 30-year variety. The payments on 15-year mortgages are certainly larger, but not, as it may seem, twice as large. If you can handle the bigger monthly expense, you’ll build equity faster because a greater portion of each payment goes toward principal rather than interest. Additionally, the lower rate and shorter term lessen the overall interest due.
With a longer loan term, you have a higher interest rate and build equity more slowly, but you get the benefit of lower monthly payments and, perhaps, increased buying power. You also still have the option to shorten your loan by making additional payments when possible.
Time is money
When negotiations between a buyer and seller stall, each party should think about what the difference in the offers actually means.
To a seller, it means more money at the time of sale, of course. But there could be more to consider. Has the house been on the market a long time? If you decide to stick to your guns on a number, do a little math to be sure it makes financial sense. Should the home linger on the market another two or three months, the cost of keeping the house may be close to or even surpass the amount you’re holding out for. Your move may be delayed and you could end up paying two mortgages, two utility bills, two landscaping bills and so on.
As a buyer, plug the numbers in to see the difference on your monthly payment. It may be that the extra money each month pushes the home beyond your budget, or it could just be a few dollars per month — an amount you may decide isn’t worth it to lose the home.
Real estate is local
Don’t be confused by national real estate numbers that have little to do with our market. Also keep in mind that in most cases real estate investments hold their value quite well, appreciating consistently over the long term. Think about it this way: If you bought a home four years ago, and its value increased $80,000 over the first three years but dropped $12,000 in the fourth, are you down $12,000 or up $68,000? Unless you bought in the third year and are selling in the fourth, that $12,000 drop is not as bad as it sounds.
To the rescue
There’s more to real estate math than this column could possibly explain. We did not cover buy-down points, fixed-rate vs. ARM loans, tax implications, credit scores, loan ratios and many other concepts. The intricacies of a transaction this large, along with your specific situation, call for extensive knowledge about numbers in the real estate world.
I encourage you to make the smart choice and hire a Realtor. Realtors work with these figures and concepts regularly and can help you navigate the financial waters and make sense of the numbers. Additionally, Realtors are bound by a strict code of ethics, which means that they are obligated to act in your best interest.
For more information on buying and selling real estate, or to find a Realtor, visit HAR.com.
John Nugent, with RE/MAX Space Center, is 2020 chairman of the Houston Association of Realtors/HAR.com.