To Your Health
July, 2008 (Vol. 02, Issue 07)
Another point to keep in mind is that when you get a mortgage, it can be at a fixed rate of interest for the amount borrowed. You also can get a mortgage with an interest rate that can vary either up or down.
If rates go down, you'll have a cheaper rate, but if they go up, you'll have more interest to pay - if you can afford it. Since we can never predict the future, you want to know what you can afford and keep your rates locked in so you don't have any "surprises" in the future.
Other variations can come into play as well. Don't have the money for the down payment? Not a problem. You can borrow that, too, and get a tax deduction on the interest payment.
I would never recommend buying a home with the idea that you will hold it for a year or two, and then sell it and make a big profit so you can buy an even bigger home (and maybe sell it after a few years for an even bigger home). There are a lot of assumptions in this equation. The first one is that the value of the home will appreciate enough so you can cover all of your initial costs, plus make a profit; and that the market will be a good one for selling. There are two very big "ifs" in this scenario. What if your home doesn't appreciate and what if the market isn't a seller's market? It's a risky game to play and you might lose, as many have done in the past and will again in the future.
Real estate is not always a good investment. Homes in America have appreciated at about the same level as the inflation rate. Some areas of the country have done much better and some have done worse. Overall, the rate of growth has been around 3.5 percent per year, which is nothing to get particularly excited about. Buy a home because you want to live in it. If it does grow in value, consider yourself lucky.
Some people get very excited about how much equity they have accrued in their house. Think about that for a moment. How do you get to that money? There are only two ways: sell the home or borrow the equity. If you sell, you still need a place to live, so the equity probably will go into the down payment on a new home. If you borrow, you will pay whatever the current cost of money is. Since you bought that home, the cost of money may have gone up quite a bit. Since this is a "new" loan, the rate will be based on the current costs, not your original cost.
I could go on and on about other variations on mortgages, but I think I've covered the basic ideas and concepts. Here's the most important point: Do a little homework and become an educated consumer before you sign on any dotted line. Understand how mortgages can work for and against you. What it all boils down to is that you have options. Choose them wisely.
Stanley Greenfield, RHU, is a financial consultant and health insurance underwriter in Jacksonville Beach, Fla.