Back in the ’70s when I was growing up, my father worked a full-time job and farmed. Through buying and selling smaller farms he ended up owning some of the best farm ground in the county. Most of it now is called Liberty Park on the north edge of Hillsboro.
I remember well working the ground after school and on the weekends with Dad and my brother. That was a job I did not apply for and really had no choice about whether I would participate.
Even though we all worked long hours and very hard, Dad ended up losing the farm back to the bank. At that time, I wasn’t privy as to the why, but I learned the reason some years later. I am sure a lot of you know the answer before its even revealed. The interest rate for the money Dad borrowed went from 10 percent all the way up to 19 percent.
Currently, we are looking at around 5 percent for a 30-year fixed mortgage. There’s not much point to argue that there is a very big difference between 5 percent and 19 percent. That’s huge. It changes not only the payment, but also the amount being paid back.
Here’s my main point. The price you pay to borrow the money is more important than the price you pay for your home. Think of it this way — how hard is it to pay off your credit card balance by paying only the minimum due? We’ve all been there.
The numbers below will show my point. I will use the even number of a $100,000 home price. You will still have to consider down payment, bank fees, property taxes and insurance.
On $100,000 at 5 percent for 30 years your payment will be $536.82 Your total payback for the loan is $193,256.52.
On $100,00 at 19 percent for 30 years your payment will be $1,588.89 with a payback of $572,045.27.
These numbers can scare even the most fearless borrower out there, but they do not lie.
Now, lets look at this another way. Going with the current rate of 5 percent versus the rate of 19 percent some 40 years ago, you could purchase a home for $295,000 and have the same payment per month and total payback as you would for buying a house for $100,000 at the higher rate. That’s crazy, but once again the numbers do not lie.
So, how important is the cost to borrow money? Does it effect what price range I can afford?
Without a doubt, the answer is YES!!!!!
Now, I wasn’t yet borrowing money much back in the 19 percent time, but I do know the interest rate before it jumped was right at 10 percent. Anyone borrowing money then was fine with that. Now, we have only 5 percent. It would be good to remember that we are in very good times when it comes to borrowing money now compared to borrowing it during the “good old days!”
Looking back to the times when my Dad lost his farm, there were several others that did the same, along with homes lost in foreclosure. Gas prices were crazy high then, too. We even gave the time a name — The Great Recession. Anyone that was there would not want that to repeat ever again.
There are many out there that have a high resistance to change, myself included. This is one area that has been a great change for us all.
Please feel free to comment as I would love to hear your thoughts.
Randy Butler is a lifelong resident of Highland County and a licensed real estate agent for Classic Real Estate in Hillsboro.