When you’re shopping for a house, there are certain facts and figures that you (or your real estate agent) are expected to know.
These would include things like your overall budget, your closing costs, and your general mortgage pre-approval range.
But even when you have all of this information going into your house hunt, there’s still often one problem:
There are a lot of other numbers out there that could be the difference between “I can totally afford this!” and “Oh my goodness, I never thought of that expense!”
So without further ado, here are 4 important numbers that every future homeowner needs to know.
1. Your Mortgage Interest Rate
When you’re shopping for a house, the natural tendency is to focus on the price of the home when you’re having the whole “Can we actually afford to buy this?” conversation.
But besides the actual sales price, the number that has arguably the biggest impact on the true cost of buying your home is your interest rate.
Here’s an example:
According to Calculator.net’s mortgage calculator, if you bought a $300,000 house with a 15% down payment on a 3% interest rate, you could expect to pay around $132,032 in interest on a 30-year mortgage. However, to own the same house with a mortgage interest rate of 3.5%, you would have to pay $157,223 in interest over the same time period.
That’s a difference of roughly $27,000.
In addition to the raw numbers, however, there’s also the reality that a higher interest rate also means that it’ll take you longer to gain equity in your house. As such, it may be necessary to adjust your upper buying limit based on the interest rate you’re offered.
All of this brings us to the next point . . .
2. Your Credit Score
Do you know what number lenders rely on when they’re offering you an interest rate?
That’s right. It’s your credit score.
This three-figure number is made up of several factors that lenders rely on to get a sense of how good you are at managing your credit. These include:
- Your payment history
- Your credit utilization ratio
- Your credit mix
- Your account history
- The presence of credit inquiries
The general rule of thumb is the higher your credit score, the lower interest rate you will have to pay on your mortgage. If you want to get a solid sense of where your credit score stands and how you can improve it ahead of your mortgage application, credit-monitoring is a powerful and often free service that you can use to proactively manage your credit.
3. Your Breakeven Horizon
If your job were to ask you to relocate or if your life situation were to suddenly change, at what point would you have saved money by owning as opposed to renting?
The number that can answer this question is your breakeven horizon.
To that end, Zillow has a convenient rent vs buy calculator that will tell you exactly how long you’ll have to live in your house before owning becomes more profitable than renting. According to this calculator, if you bought a house for $250,000, your breakeven horizon would be 2 years and 3 months.
No one can predict the future and a lot can happen in two years. But if you could see yourself moving before your breakeven horizon kicks in, it may be worth your while to consider protecting your financial interests by having an exit strategy or a Plan B in place if you do decide to buy.
4. The Size of Your Down Payment
Making a 20% down payment can save you money in two ways:
Firstly, on mortgage insurance. With smaller down payments, lenders will often require mortgage insurance as a means of protecting themselves in the event that you’re not able to make your payments. And if you’re the buyer, this insurance is paid by you unless you’re able to put down 20%.
In addition to the mortgage insurance savings, a larger down payment can also save you money by making it possible for you to request a smaller loan amount. This in turn allows you to free up even more cash over the long term.
That being said, if a 20% down payment isn’t economically feasible for you that’s okay. A conventional loan can be acquired with as little as 3.5% down. The important thing is that you know what you’re signing up for either way.
Here’s the bottom line:
Whether you’re touring homes or you’re still polishing up your finances ahead of your mortgage application, if you know these four numbers going in, you’ll be in a much better position to make a well-informed home purchasing decision.
Photo by Tara Winstead from Pexels