We are fascinated with the price tag
Sometimes our obsession razor sharp focus on the price tag causes us to overlook other factors that contribute to the all-important bottom line. Marketers have been using price tags to get over on consumers for ages. $3.99 each for knives that cut through soda cans? Gotta have that. $12.99 for shipping and handling? Not so much. (And why do I need two of these anyway?)
We all love a good deal, and we especially love to talk about our good deals. Picking up an item on sale becomes exponentially more rewarding each time you brag about it to your friends, who also tend to focus on the price tag and happily overlook the 20 bucks you spent on gas to “save” five bucks on your prized purchase.
This fascination with the price tag seems to apply to all sorts of purchases big and small, and real estate is no different. When neighbors dish about the most recent home sales in the neighborhood, they talk about the price tag. When REALTOR associations publish housing stats, they talk about price tags. When agents do market updates and the like, myself included, we talk about price tags. We usually don’t account for closing costs, loan costs, concessions, etc. It’s not wrong. It makes sense for averages and broad comparisons.
For the individual home buyers and sellers it’s all about the bottom line
I’ve said before that price isn’t everything when buying a home, contrasting a price drop with an interest rate increase. A few weeks later in June, when rates started creeping up, I posted this example using Bullhead City prices. The interest rate is just one example of factors aside from the price tag at play that must not be overlooked when considering overall cost.
In another lending-related example of factors affecting cost and afordability, FHA Mortgage Insurance Premium rates will now be higher for many new borrowers. This means that the popular FHA loan could cost a borrower more money both at closing and in their monthly payment, eating into monthly payment and possibly their down payment. Translation: Many FHA borrowers can afford less house as of today.
Shailesh Ghimire’s blog, azmortgageguru.com:
FHA has always charged a flat upfront mortgage insurance premium for every borrower regardless of credit risk. Until last week UFMIP on the 30 year fixed FHA loan was at 1.5%. The monthly mortgage insurance payment has also always been fixed at 0.5% for the 30 Year loan. These percentages will now change effective Monday.
UFMIP will now be charged on a risk basis, i.e., based on your credit score. It will range from 1.25% for lower-risk borrowers to 2.25% for riskier borrowers. In dollar terms this means that on a $200,000 loan UFMIP can range from $2,500 to $4,500. Remember this is on top of the closing costs and down payment already due. Since this can be financed into the loan, your final loan amount will reflect this cost. Having poor credit will now be expensive even on FHA loans.
The world of financing is literally changing on a daily basis as everyone from banks to lenders to investors to borrowers try to navigate their way through unprecedented territory. Borrowing money isn’t getting any easier - or cheaper. I know we can’t help focusing on those price tags, but don’t obsess over them and lose sight of other important factors, like the cost of borrowing money.
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The loan world is certainly changing every day. Who knows what the market will do in reaction to today’s Fannie/Freddie backing from the Feds. Who knows!