Home > Personal Finance > Stop Talking about Monthly Payments

How many times have we gone into a car dealership and the first question out of the salesperson's mouth is, "How much per month can you afford?" Being the financially savvy person that I am, that question will never work with me. It is not about the monthly payment, it is about how much the vehicle costs. It is also not a matter of whether I intend to finance or not. Why would a car salesperson care about the monthly payment? The monthly payment will work out to be whatever it works out to be...

In real estate, even though this discussion is not entirely the same, in many ways, it is. It is after all about how much you want to pay for the house. It is not a matter of $10,000 over a period of 30 years is approximately only $70 more per month. Any person that heads the discussion this way forget about the time value of money and the net present value of $10,000 today.

To pay $10,000 more for a house, spreaded over a period of 30 years (assuming interest rates are at 6%) will end up being $21,584.

This is a valid discussion - "it's only $70 more per month". But it does not work with every buyer - especially the financially savvy ones. For those who intends to pay off their 30 year note in 2 or 3 years, that same $10,000 is "worth" more to this buyer than that who either does not live in the house for the entire loan or for those who plans on paying off the house 5 years earlier than the contractual time.

Thus in negotiation, for some buyers, even though the $1,000 or $5,000 may seem tiny - in the grand scheme of things.... it really is not. No doubt, for buyers to give the sellers that $1,000 more for that house seems "small" to buyer and "large" to seller, think again. What type of buyer do you want to be?

It's a matter of choice. There is no right or wrong. Some buyers are price sensitive while some buyers feel for something they like, it is worth that $1,000 more. On the other hand, for Sellers in a Buyer's market, is the $1,000 or $5,000 worth the risk for sitting on the market another one or six months?

Stop talking about monthly payments. Start thinking how much it actually costs. Perhaps stop living paycheck to paycheck too. Now, that could change your financial world. The choice is yours.

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