How Low Mortgage Rates Should Change Your View Of High Assessments

A couple of years ago I did an analysis of the tradeoff between assessments and purchase price when buying a condo. In that analysis I concluded that with mortgage rates of 5% a condo assessment that is lower by $100 per month would allow you to purchase a condo that costs $41,311 more. In other words, economically there is no difference between a $500,000 condo with a $600 per month assessment and a $541,311 condo with a $500 per month assessment. In other words, you can spend a lot more money on a condo with lower assessments. In other words, a lower monthly assessment is worth a lot of money.

But what happens when mortgage rates drop to 4%, which has happened in the last 2 years? As I mentioned in yesterday's post the cost of a mortgage is reflected in the interest component of the monthly payment. Well, when your interest rate goes down you can spend even more on a condo without raising your monthly expenses because the cost of the higher purchase price has gone down.

So how does a drop to 4% affect my assessment evaluation from 2 years ago? Repeating that calculation I determined that the equivalent purchase price differential has gone up from $41,311 to $52,007. As Bob Padla* used to say, "That's a lot of jingle!"

*Bob Padla was the previous owner of the second home we bought and lost our asses on - to the tune of $90,000 - and that was back in the early 90s. Bob was a roofer so, as we eventually discovered, tar was the solution to all home repairs.

Filed under: Mortgages

Tags: Assessments, mortgage rates

Comments

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  • But...

    1. Can you get a loan when the banks give you the paperwork runaround, and then, as what reported with respect to BoA yesterday, 90% get sold to Fannie and Freedy, and BoA (and assumedly its former Countrywide unit) are getting out of that business?

    2. Does it pay to pay more while prices are still falling?

    3. Does the high assessment mean that the association is trying to make up for years of "deferred maintenance?" Are you going to get a special assessment because the roof or furnace is about to go?

  • It's really not that hard to get a mortgage if you have the down payment. I'm not sure what all the fuss is about but I suspect it's just the fact that the requirements are no longer ridiculously lenient.

    As for falling prices...trends only continue until they don't.

  • In reply to Gary Lucido:

    The question for those with good credit and the down payment is not so much that the requirements for them were so lenient, but that the banks, instead of honoring "Timesaver" pledges and the like, put everyone through the same Freddy paperwork morass. The news seems to have stories on "people are not taking advantage of record low rates" and one would think that has to be the reason. The guy who was advertising "I'll refinance you again at no cost" no longer is advertising that.

    As far as "trends continuing until they don't," unless you have the crystal ball on when they stop, it is even odds that they will continue for a while.

  • In reply to jack:

    There are several conditions which suggest that prices may be bottoming. Case Shiller comes out tomorrow for December and while I believe it will show continued declines I think this will be more of normal seasonality. Inventories are very low and buyer activity is very high.

  • I live near Chicago and want to buy a condo. Since assessment fees and situations are unique for each building. What is the best way to compare and contrast several different condo monthly assessment fees on the market? For example, one condo may have zero savings put away for sudden emergencies like the roof leaking or pipes bursting and have a bad history of charging high one-time special assessments. Other condos may historically have a high monthly assessment fee, but have a large emergency savings put away for emergencies and have a good history of NOT charging one-time special assessments for unforeseen emergencies.

    Also, the age of the building and documentation of the building's repair work history would be a factor I would need to look at. Is all this information available on the internet or do I have to call up each individual condo building and speak in person to get these kinds of questions answered?

  • In reply to userken87:

    You are thinking about the issues correctly. You also have to factor in how much of your monthly assessment is going towards building the reserverses. Because figuring all this out is a lot of work I would narrow down your building choices before digging in to this level of detail. And, no, this information is not usually readily available. But you shouldn't have to be making these phone calls yourself. That's what your agent should be doing.

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