You’ve saved for a rainy day or retirement. Congratulations but don’t get too comfortable yet; where is it invested? It’s estimated that over 25% of Americans have their long-term savings in cash instead of investments like stocks, bonds or real estate.
The memories of the financial crisis of 2008 are recent enough to understand why some people may want to avoid the stock market and real estate. Even though Wall Street and housing have rebounded considerably, uncertain investors are sitting on their cash. However, trying to avoid a bad decision can have serious costs too.
If your money is not earning at least at the current inflation rate, you’re losing the purchasing power of your dollars. Bankrate.com estimates the average money-market deposit yields 0.11% and the average five-year certificate of deposit currently yields 0.78%.
Rents are continuing to rise and there is a shortage of good, affordable housing. Single family homes have a significant advantage over many other types of investments. They have high loan-to-value mortgages available at fixed interest rates for long-terms on appreciating assets with distinct tax advantages.
The cash flows are considered to be one of the most attractive features of rental properties. Some investors think of it as a growth stock that pays substantial dividends. In the example shown below, a $125,000 rental with an 80% loan-to-value mortgage at 5% that rents for $1,250 per month, has a positive cash flow before taxes of $3,000 a year.
The rate of return on rental property can be substantially higher than other investments while allowing the investor control that isn’t available in alternatives.
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Following his heart surgery last week, after an issue was discovered during his annual physical, President George W. Bush encouraged everyone to get regular check-ups.
Another important checkup that should be done on a regular basis and can be just as beneficial for your finances is an annual homeowner advisory. Why would you treat your investment in your home with less care than you treat your car or even your HVAC system?
Consider investigating the following:
• Know the value of your home by obtaining a list of comparable sales in your immediate area as well as what is currently on the market for sale.
• Have you compared your assessed value for tax purposes to the fair market value in order to possibly reduce your property taxes?
• Even if you’ve refinanced in the last two years, can you save money and recapture the cost of refinancing in the time you plan to remain in your home?
• Have you considered reducing your mortgage debt with low-earning cash reserves that will not be needed in the near future?
• Have you considered investing in rental homes in good neighborhoods to increase your yields and avoid the volatility of the stock market?
• Recommendations of repairmen and other service providers from a trusted source who deals with them more frequently than you do.
Our goal is to create a lifelong relationship to help you be better homeowners. We want to be your “go to” person whenever you have a real estate question. We want to help you not only when you buy and sell but all of the years in between.
We want to provide good, consumer-based information about homeownership on a regular basis through email and social networking. If it benefits you by helping you be a better homeowner, hopefully, you’ll consider us your real estate professional for life.
Anytime you or your friends need help, please call. Knowing where to get the answer is just as important as knowing the answer. If you’d like information on any of the items we suggested, please let us know.
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It’s been said that more money has been lost due to indecision than was ever lost because of a bad decision. Regardless of whether you agree with the statement, delaying the decision to buy in today’s market is going to cost the buyer more.
Home prices have gone up considerably in almost every market in the country in the past year and while inventories are beginning to grow, prices are expected to continue to rise. Mortgage rates jumped 1% from the beginning of May to now. They could easily reach 5% by the end of the year and continue to rise in 2014.
Many of the financial experts in the country believe that the economy will not be strong until rates are in the 7% area.
The two components that move the cost of housing are price and mortgage rates. Escalation of either one will have an affect but when both are going up simultaneously, it is dramatic. It can literally eliminate buyers who could have purchased earlier.
The following example shows what would happen to the payments on a $200,000 home if the price were to go up 3% at the same time that the mortgage rates went up 1%. Not only would the payments go up by $150.81 per month, the price of the home would be $6,000 more. Even though the down payment may not change much, the new owner would have to borrow more money. By not acting, it is costing them more in price and payment. The loss of the appreciation would have been equity had they purchased prior to the rise in price.
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Rising interest rates are great if you are renewing a certificate of deposit but not so much when you’re borrowing money. With interest rates on the rise as well as home prices, housing affordability is a concern for would-be homeowners.
A rough rule of thumb is that a person’s or family’s housing should not exceed 28% of their monthly gross income. While rental rates and home prices have been consistently increasing, mortgage rates have been soaring in the past month. In one week, according to the Freddie Mac Primary Mortgage Market Survey, they jumped by .5%.
This means that people have to pay a larger percentage of their income for housing unless their incomes have been increasing at an equal pace. A $200,000 mortgage would be over $100 more per month if closed in July compared to closing at the interest rates available in January of 2013.
If rates increase by .5% by the time you close on the same size mortgage, payments would increase by almost $60 per month. In order to keep the payments the same, a borrower would have to put an additional $11,000 down to lower the mortgage amount.
The National Association of REALTORS® suggests that housing is more affordable now than one year ago. However, with all of the variables in play including inflation that was not addressed in this piece, it is unclear how long conditions will remain “affordable”.
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