The most common question we get is “What is the monthly payment going to be?”
While the monthly payment is a big part of the cost of living in a home or apartment, there are other issues to consider that are even more critical than the monthly payment.
Consider three friends, Al, Bryan, and Charlie.
All have credit scores at or below 600 and are unable to obtain the best interest rates.They each fall in love with identical three-bedroom, two-bath 1600 square foot home in Boise. Each home currently appraises for $200,000.
- Al rents his house at $900 per month.
- Bryan decides to purchase his house, but the best interest rate terms he can get are 8% for the first 80% of his loan and a 10% interest rate on a second mortgage on the remaining 20%. He is required to put $20,000 down (10%) and finances the rest on a 30-year mortgage at 8% interest rate.
- Charlie leases a similar home in the same neighborhood on a lease-to-own program. His lease payment is $1400 per month and he has an option to purchase the house at $230,000 within one year.
All three friends are living in the same size house. Which is paying the most?
Let’s look at some numbers.
|
Al |
Bryan |
Charlie |
Monthly house payment |
$900 |
$1750 |
$1400
|
Amount paid up front |
$1800
(first month rent + security deposit) |
$5,000
(closing costs on the loan) |
$1400
(first month lease payment, no down payment or security deposit) |
Total amount paid after one year |
$11,700
(12 month rent + security deposit) |
$26,000
$1,750 per month *12=$21,000 (includes principal, interest, taxes, insurance) + $5,000 closing costs |
$16,800
$1,400 * 12 months |
At the end of the first year, Charlie has repaired his credit and purchases the home for $230,000. He decides to finance the $5,000 closing costs and gets a mortgage for $235,000. He gets the best rate available, 6.5%, and his monthly payments now become $1650 per month.
At the same time, Bryan also gets his credit repaired and refinances through a traditional lender. He gets the best rate available, also 6.5%, and puts 10% down.
|
Al |
Bryan |
Charlie |
Monthly house payment |
$900 |
$1300 |
$1650
|
Other costs |
0 |
$24,000
$19,000 down payment + $5,000 closing costs |
0 |
At the end of three years
(two years after Charlie
purchased his house) |
$33,300
(36 months rent +
security deposit) |
$86,200
$5,000 initial closing costs
$26,000 first year pmts @ $1750
$24,000 2nd close + down
$31,200 24 month pmts @ $1300 |
$56,400
12 monthly payments @ $1400
and 24 payments @ $1650 |
After three years, it’s tempting to say that Al got the best deal. They all lived in comparable houses and Al paid only half of Bryan’s payment and almost $25,000 less than Charlie paid.
But look what each has to show for their time.If all three moved out of their homes at the three year mark, here’s how it would stack up.
|
Al |
Bryan |
Charlie |
Total Payments |
-$33,300 |
-$86,200
|
-$56,400
|
Total Returns |
0 |
$105,000
(The house sells for $305,000 and Bryan nets $105,000.assumes 15% annual growth over three years. |
$75,000
(The house sells for $305,000 and Bryan nets $105,000.) |
Net Return |
-$33,300 |
+$18,800 |
+18,600 |
Return |
0% |
22% |
33% |
After spending $33,300, Al made zero, for a return of 0%.
After spending $86,200, Bryan made $18,800 for a return of 22%.
After spending $56,400, Charlie made $18,600 for a return of 33%
In summary:
Al lost over $33,000 even though it appeared he was “saving money”.
Bryan made over $100,000 but spend $86,000 to do it, netting only $18,000 on an $86,000 investment.
Charlie made the same amount Bryan did, but spent $30,000 less doing it.
