RETIRE ON TRACK: Five things you need to know about mortgages
In my column last week, I wrote about how your home functions as an investment. Most homeowners have a silent partner: their mortgage holder. Unlike many overly opinionated business partners, your mortgage lender plays by a strict set of rules.
Though at first you focused most on that large monthly payment you committed to, you also have a lot of flexibility.
1. Borrowing changes your rate of return: This is why real estate can be a very attractive investment: you can plunk down as little as 10% and get the investment returns of close to 10 times that. Let’s look at how that can play out.
Let’s say you put down $20,000 on a $200,000 house and it appreciates by 10% in two years. Your gross profit will be $20,000 less two years of mortgage payments, taxes, insurance and other home expenses. Even if you’re in a high property tax area, you may have come close to living for free.
The flip side is that if that same house went down by 10%, your equity will be zero and you’ll have paid mortgage payments, taxes and upkeep, leading to a significant loss. That’s why planners often recommend renting for shorter stays. Renting is also more convenient.
As an aside: If you’re tempted to time the real estate market, my suggestion is to not go there. Most of those who predict real estate prices have much more to gain by it going up than down, so they might be tempted to underplay risks.
2. Homeownership can be a long-term hedge against inflation: Let’s think about it: rent prices can go up with inflation, but fixed-rate mortgage payments won’t.
Home prices have also tended to appreciate with inflation. Keep in mind this relationship is more predictable over the long, long term. It’s safer to assume anything can happen with home prices, both up and down, over the short or intermediate term.
3. Only borrow what you can comfortably afford: Don’t forget about your other goals, such as retirement and assisting with your kids’ educations.
Because everyone will have very different priorities, I won’t prescribe a ratio of income to monthly housing costs, other than to suggest if it’s above 30%, think extra carefully. Keeping your debt to income ratio low will keep stress levels down and make it easier for you to refinance.
4. Refinance whenever it pays off: You don’t have to stick with the same mortgage for 30 years. When interest rates drop significantly, consider refinancing.
Before you do, make sure you aren’t just extending the mortgage and adding on fees simply to get a lower monthly payment. You should be borrowing the same amount of principal and paying it off within the same time (or less) at a lower payment for refinancing to make sense.
5. Don’t automatically consolidate all your debt into your new mortgage: You probably don’t want to keep the same car for 30 years, so don’t make 30 years of payments on it. Also, consolidating credit card debt might be an appropriate or even necessary one-time event, but, if you must, don’t get back into credit card debt again.
Evan R. Guido is the founder of Aksala Wealth Advisors LLC, a 2018 Forbes Next-Gen Advisors List Member, and Financial Professional at Avantax Investment ServicesSM. Evan heads a team of retirement transition strategists for clients who consider themselves the “Millionaire Next Door.” He can be reached at 941-500-5122 or eguido@aksalawealth.com. Read more of his insights at heraldtribune.com/business. Securities offered through Avantax Investment ServicesSM, member FINRA, SIPC. Investment advisory services offered through Avantax Advisory ServicesSM, insurance services offered through an Avantax affiliated insurance agency. 8225 Natures Way, Suite 119, Lakewood Ranch, FL 34202
This article originally appeared on Sarasota Herald-Tribune: EVAN GUIDO: Here's why real estate can be a very attractive investment
