I thought about the subject of this column one night right before I fell asleep.
My assistant, Erin, is in the market to purchase her first home. She’s looking in a fashionable, up-and-coming neighborhood in Charleston, S.C., that’s filled with cute single-family homes with yards and porches. Her price range is between $260,000 and $270,000.
Back in 1987, I purchased my first home for $168,000 in the fashionable, up-and-coming Alexandria neighborhood of Del Ray. In fact, the neighborhood in Charleston is remarkably similar to how Del Ray was 25 years ago.
While the difference in purchase price surely is significant, it’s largely offset by the equally different financing terms that are available today compared to what was available back in 1987.
I paid $168,000 for the home, put 5 percent down, and obtained a fixed-rate loan at 10.25 percent, plus private mortgage insurance (PMI). No lender credit toward closing costs was available back then. In fact, I had to pay all closing costs plus a one-point origination fee.
Let’s assume Erin purchases a home for $265,000. She plans on putting 5 percent down. Let’s compare the numbers.
My 5 percent down payment totaled $8,400. Closing costs, including the origination fee, upfront PMI and escrow deposits for taxes and insurance added up to about $8,500. To buy my house, I needed almost $17,000 for a 5 percent down payment and all costs and deposits.
Erin’s 5 percent adds up to $13,250. She plans on locking into a 30-year fixed rate at 4.375 percent that carries no origination fee, includes PMI, and gives a lender closing-cost credit of 3 percent, or $7,552. Her closing costs and escrow deposits are estimated to be about $8,000. Erin’s estimated cash needed is only about $13,698 ($13,250 + $8,000 — $7552).
Now let’s compare the monthly payments. At 10.25 percent, my principal-and-interest payment was $1,430. The monthly PMI added another $70. Taxes and insurance, if I recall, were about $175, making my total monthly nut $1,675.
At 4.375 percent, Erin’s P&I payment is $1,257, including PMI. Her taxes and insurance, including flood insurance (which doesn’t exist in Alexandria), totals $380. Erin’s total nut to crack is $1,637 per month.
I’ve always said that numbers don’t lie. It’s cheaper for Erin to buy a home in 2012 than it was when I bought my first home in 1987. But then again, back in the day, I had to walk five miles to school in the snow every day, uphill, both ways.
Today’s numerical exercise makes me think home prices have hit bottom and folks should start looking.
Henry Savage is president of PMC Mortgage in Alexandria. Send email to firstname.lastname@example.org.
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