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Real Estate Information |
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Dont Overpay for a House, Even in Todays Market
If there's one thing American investors love, it's an over-inflated market. Which is why they keep buying houses and new ones keep coming onto the market. According to the latest data, housing starts rose an annualized 3.4% in September, matching a 17-year high. Whoo-ha! Go, baby go. I wonder if the people buying these houses, for ever-rising prices, are the same people who couldn't get enough Amazon.com stock at $100 or Lucent shares for $75? Having been burned in the stock market, I guess they decided to re-invest what was left in their homes. Are we in a housing bubble? I don't know, but I suspect that we are, at least in some areas of the country. Don't misunderstand me, now. I own a home, and I think home ownership is one of the great freedoms we enjoy in this country. I get nervous about the people who are pulling all the equity out of their homes with new mortgages. I suspect that most of these people are spending the equity, not investing it. What they're left with is a larger mortgage, and a bunch of worthless Chinese made goods. The current low-interest rate environment is a once-in-a-lifetime chance to lock in a cheap 30-year mortgage on your home. If you refinance the balance of your current mortgage, you've won. If you refinance, and max out on your equity, you're probably hurting yourself. You might say that by refinancing the equity in your home, you're just cashing in on your home's rise in value. Well, not exactly. What you're really doing is collateralizing the portion of the house that you own to get a cash loan, with the intention of paying back the loan at a later date. You've really transferred ownership of the equity in your house to your lender, not cashed it out. If you want to cash out your equity, you have to sell your house, plain and simple. For those who are buying new homes, the low interest environment is a double-edged sword. On the one hand, you can get a tremendous rate on a 30-year mortgage, the likes of which you see once in a lifetime. On the other hand, because we live in a world where the monthly payment is all that matters, lower interest rate mean higher home prices. The monthly payment stays the same, but now you've got a much higher mortgage balance, which could turn around to bite you in the future. The dangers of refinancing the equity out of your home are readily apparent, but why shouldn't you buy a home in the current environment? I'm not saying you shouldn't. What I'm saying is you have to be careful. Most real estate professionals understand that the monthly payment matters, not the price of the house, when selling a house. Therefore, the lower interest rates fall, the more money can be charged for a house. If you're a home buyer, with a set amount of money for a downpayment, the price of the house will determine how much equity you start with. And, it determines whether you get a conventional mortgage, with 20% down, or some other form with less downpayment. That equity percentage will determine whether you'll be paying for the great rip-off known as Private Mortgage Insurance (PMI). Trust me, it's just another monthly payout that goes down a giant rat-hole. There's no value in PMI, and you don't want to pay it. For the sake of argument, let's assume that you won't be paying any PMI. Now, let's compare two neighbors, with identical houses, who have the same monthly payments on thirty year mortgages. The first neighbor has a $100,000 mortgage at 10% interest, the second has a $146,000 mortgage at 6%. You may think this is extreme, but I can tell you that this is what has happened in my neighborhood over the last 5-7 years. The type of house I'm living in retailed for under $100,000 in 1999, and retails now in the $130,000's. Back to our example. Both of our neighbors are paying about $875 per month on their mortgage. Now let's suppose that both of them decide to pay extra on their mortgages, upping their payments to $1,100 per month. Both neighbors are reducing their principal balances by $225 more per month, and here's where the first neighbor has the advantage. The balance on the $100,000 mortgage goes down much quicker than the $146,000 mortgage, such that while the first neighbor is paying more in interest every month than the second neighbor, by sometime in the seventh year, neighbor one is actually paying less in total interest. Neighbor one will pay his house off in a little over 14 years, while neighbor two will take about 18 years to pay off. In this example, we don't even take into account the possibility that neighbor one could refinance the balance on his mortgage when interest rates decline. This would lower his required payment, and allow him to pay off his house even faster. In the meantime, the "market value" of his house has risen to about what neighbor two paid ($146,000). When neighbor one decides to sell his house, he'll walk away with a lot more cash. Obviously, this is a simplified example, but one that has been occurring over and over again in the last few years. I know that it's expensive right now to buy a house, no matter where you go. What do you do in this situation? I recommend looking for, and buying, a home that needs some work. You should look for houses that are selling at about 80% of the average market value in a neighborhood. These houses will generally need only cosmetic work, and maybe a few minor repairs, but you'll save on the price of the house and have extra equity right off the bat. Stay away from houses that need plumbing or electrical work, unless you know someone that will fix it for free. Those fixes cost big bucks, and will eat up much of the savings on the price of the house. Buy the house, make the cosmetic changes, then have it re-appraised. You'll be surprised at how much the "value" of the house has gone up. (I put value in quotes because the only real way to judge the value of a house is to sell it. An appraisal is simply an estimate of value.) This will also help you get rid of the PMI, if you didn't have the 20% downpayment, because once the balance of your mortgage falls below 80% of your appraised value, you can petition to get rid of the PMI. Houses can be investments, and like any investment it takes a work to find good value. But it can be done. About The Author Chris Mallon is the editor and publisher of the Undervalued Weekly, a free personal finance and investment newsletter dedicated to creating smarter investors. To sign up for the Undervalued Weekly, send e-mail to underval@hot-response.com, or sign-up through the website at www.dynamicinvestors.net/index7.html; chrismallon@dynamicinvestors.net
MORE RESOURCES: Jeff Bezos' secret $190M Seattle real estate empire revealed Business Insider Real Estate Transfers ~ through Nov. 23 The Bedford Citizen New Legislation Proposes to Take Wall Street Out of the Housing Market The New York Times The Top Home-Selling Advice From 2023 To Help Your Property Fly Off the Market in 2024 Realtor.com News Francisco Real Estate: Why Homeowners are Selling at a Loss The San Francisco Standard Man arrested on suspicion of crashing into parade-goers worked as local real estate agent The Bakersfield Californian RNR Real Estate Briefs – Texas & more Realty News Report Dodge County real estate transfers Fremont Tribune Eastern U.P. real estate remains stable despite shifting national trends Sault Ste. Marie Evening News Real estate transfers: Dec. 8, 2023 RiverheadLOCAL Real Estate Transfers: August 1 - 15, 2023 The Owensboro Times Real Estate Sales Include Wealth Management Center Complex, Ranch For Vets Jamestown Post Journal Real estate records, 12/10 Lincoln Journal Star How a Kitchen Refresh Can Help Close a Real Estate Deal How a team approach brings sales, success Behind The Hedges Real estate: Foreign LLC buys Pizza Hut property in Perry Township Massillon Independent McColly Real Estate Holiday Celebration 2023 | LaPorteCounty.Life LaPorteCounty Life OT Real Estate Spotlight of the Week: 4404 Fairbairn Court The Owensboro Times Massachusetts real estate transactions for Hampden, Hampshire and Franklin counties Dec. 10, 2023 edition MassLive.com PTK spotlight: 50 commercial real estate projects to know in 2024 Arizona Big Media Real Estate Transactions for Dec. 9-10 | News, Sports, Jobs Nashua Telegraph XPO buys Yellow's Real Estate For $870 Million The Real Deal I'm a Real Estate Investor: Don't Pay Off Student Loan Debt -- Buy Properties Instead GOBankingRates NJ real estate: $20M Alpine mansion for sale. See listing NorthJersey.com Routt County real estate sales surpass $13.4M from Dec. 1-7 Steamboat Pilot & Today Chad Tredway Rejoins JP Morgan Asset Management as Head of Real Estate Americas | Chief Investment Officer Chief Investment Officer Real Estate Roundup, Retail Theft Arrests The Eastsider LA A Strong 2024 Market? Get a Real Estate Coach Now | Florida Realtors Jef Conn: From Lubbock commercial real estate to Texas Chairman of the Board Texas REALTORS KLBK | KAMC | EverythingLubbock.com Charlottesville real estate investor Phaedrus Acgtblu dead in apparent homicide - The Daily Progress Bezos Leaving Behind A Massive Seattle Real Estate Portfolio As He And Lauren Sanchez Plan Move Miami Yahoo Finance Chad Tredway Rejoins J.P. Morgan as Head of Real Estate Americas, J.P. Morgan Asset Management PR Newswire Real Estate Property Transfers in Franklin for November 13, 2023 Williamson Source What's a Real-Estate Fund Worth? Depends on Who's Doing the Math The Wall Street Journal Greenwich Real Estate Inventory to Hit Zero in March 2024 Greenwich Sentinel Bay Area real estate: Where rent or mortgages hurt residents most San Francisco Chronicle Coral Springs Real Estate Market Defies Economic Predictions • Coral Springs Talk Coral Springs Talk Could Bitcoin Cause Real Estate Prices to Collapse? DataDrivenInvestor Wheeler Development exec balances careers in real estate, folk music - Crain's Grand Rapids Business Wheeler Development exec balances careers in real estate, folk music Crain's Grand Rapids Business Is Jeff Bezos shopping for real estate in Palm Beach? The New York Post thinks he is Palm Beach Daily News Pacaso, The Real Estate Marketplace, Releases Report That Identifies Fast-Growing Luxury Second Home Markets Crowdfund Insider Ares Banks $3.3 Billion to Buy Real-Estate Fund Assets - WSJ The Wall Street Journal New Castle News | Newspaper Ads | Classifieds | Real Estate for Sale | BERKSHIRE HATHAWAY Home Services The ... New Castle News Apply for the Longtime Owner Occupants Program (LOOP) | Services Philadelphia Water Department Real estate news: DoubleTree near South Coast Plaza, JWA getting a $12 million makeover - OCRegister Opinion | Real-Estate Collusion Is Finally Coming to an End The Wall Street Journal Valley real estate community steps up to support Operation Santa Claus ABC15 Arizona in Phoenix What Accreditation Shift Could Mean for Real Estate Investors Kiplinger's Personal Finance New York City Law Against Body-Size Discrimination: What the Residential Real Estate Industry Needs to Know Jackson Lewis San Francisco's Russian Hill Mansion Sells for Half Its Asking Price Amid Real Estate Shift Hoodline REAL ESTATE | VIDEO | Charming and inviting 2-story home in West Bend, WI | By Wendy Wendorf, Homestead Realty washingtoncountyinsider.com Jeff Bezos's Homes: Inside His More Than $500 Million Property Portfolio Architectural Digest Canadian Apartment Properties Real Estate Investment Trust Un stock rises Friday, outperforms market MarketWatch 2024 Real Estate Trends KTVU FOX 2 San Francisco 20 Young Leaders Transforming the Real-Estate Industry in 2023 Business Insider Stephens Real Estate celebrates completion of building remodel Iron Mountain Daily News Are Virtual Tours Still Worth It in Real Estate? Evidence from 75000 Home Sales Harvard Business School Working Knowledge |
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