How mortgage rates affect Homeownership ROR

The Texas Real Estate Research Center recently looked at how different interest rates can affect the rate of return on homeownership for first-time buyers. The study’s model made several assumptions (Table 2). 

  • The home costs $250,000, which was the first-quartile  sales price for first-time buyers for an existing single-family home in Texas in 2Q2022.
  • The buyer made a 5 percent down payment ($12,500) on a $250,000 home.
  • Rent reflected the first-quartile rent for an existing single-family home in Texas in 2Q2022—$1,800 per month, or $21,600 annually. Rent reflects the opportunity cost incurred by the homeowner in purchasing a home. In other words, by purchasing a home, the homeowner is saving on rent. However, the true opportunity cost of homeownership is renting and investing the difference between the mortgage payment and rent in an investment account. For more on that, read “Purchasing a Home Versus Renting and Investing.”
  • As the loan-to-value ratio exceeds 80 percent (in other words, if there’s less than a 20 percent down payment), the model assumes private mortgage insurance of 0.5 percent.
  • The loan term was 30 years.
  • Property taxes were 3 percent of the home price; insurance, 1 percent.
  • Maintenance costs were 2 percent of the home price.
  • Closing costs equated to 2 percent of the purchase price; selling fees were 6 percent

For example, with a rate of 3 percent, homeowners can expect to expend $27,421 in year five on mortgage principal and interest and property taxes, insurance, and maintenance (Table 4). That amount increases to $32,637 with a 6 percent rate.

Meanwhile, homeowners with a rate of 3 percent can expect to make $72,883 from the sale of the home in year five, but only $63,587 with a 6 percent rate.

In addition, higher mortgage rates leave higher residual mortgage balances, because it takes longer for the mortgage principal to be paid down.

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