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Why this really matters can be seen the in following graph which covers the life of each oan.
After 12 months are difference was $3,720 but after 19 years it widens to over $59,000.
Let's assume that both of these buyers wanted to sell there house after 10 years. The low interest loan balance is $320,358 and the high interest loan is $357,719 for a difference of over $37,000 after Year 10. The high interest borrower barely has 10% equity while his low interest counterpart has almost 20%. Unlike what the Real Estate broker promised you, we are going to assume that after 10 years, there was absolutely no appreciation in either house. The cost to sell a house typically runs about 10% with the largest portion being the 5-6% real estate broker fees. Each owner is able to get exactly $360,000 net of fees after selling their houses. The high interest borrower walks away with about $2,000 and the low interest borrower walks with about $40,000. Of course, if they put any money down they would get that too but its just a return of the original investment.
This assumes that there is no appreciation, if the value of the property declines by 5% over 5 or 10 years, the high interest borrower won't be able to sell unless they get the bank to agree to a short sale.
The Real Estate mantra that its always a great time to buy just isn't true. If your only option is a high cost loan, not only are you wasting your money and likely better off renting, but you are banking on price appreciation to bail you out if you plan to sell in less than 15 years. On the other hand if you can get a coveted low interest loan, easily afford the payments, and have 20% down, the likelihood of being underwater on your home drops dramatically every year you make your payments.
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