Best Price or Lowest Payment?

What's more important to you when making a major purchase like a house or car - the best initial price or the lowest monthly payment?

You might object, saying, "Aren't they pretty much the same thing?", and the answer is "No, not really."

The initial price is driven by the price of other competitive properties or vehicles. It is somewhat related to the supply of money and its cost (interest rates). The monthly payment is related to the price, of course, but it is also driven by the supply of money and its cost (interest rates). 

I have younger friends who when they hear what we paid for our house, say "You bought your house at just the right time!" As far as the initial price goes, yes we did.

But when I say we got a 30-year, fixed-rate loan at around 10% interest, they say, "Whoa! You bought your house at the wrong time!" As far as the monthly payment (based on loan rates), we bought at the wrong time (or so it seems today).

The red lines on this chart indicate when I got (or re-financed) my 3 real estate loans. At least I got better at this as time went along!

35 years of average home loan interest rates

It's interesting (for me, in hindsight) to see this but doesn't help you in deciding if now is the time to buy.

A Buyer most likely to be interested in getting the lowest initial price is a

• short-term owner
• putting down lots of cash
• buying an asset in a stable or declining market

A Buyer most likely to be interested in the lowest monthly payment is a

• long-term owner
• putting down little cash
• buying an asset in a stable or improving market

Today we are at a point in our local market where the prices of homes are reasonable, but interest rates are low. That makes payments low. But the housing market is still chaotic; prices are likely to continue to decline; therefore short-term or cash buyers are not so inclined to jump in.

For more information on this subject, and how it particularly applies to housing in the Southern California area, read this nicely-written article. If this is totally confusing to you, ask your kids to help. We teach interest rates and percentages in our Excel Math curriculum.