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For a short time after the housing crisis a decade ago, some homeowners thought the value of home is a place to live rather than an investment.  A home certainly has an appeal as a place to call your own, raise your family, share with your friends and feel safe and secure.  It can be more than an address; it can also be one of the largest investments homeowners have.

Most mortgages apply a portion of the payment toward the principal amount owed in order to pay off the loan by the end of the term.  This acts like a forced savings for the homeowner because as the loan is reduced, the equity grows which increases their net worth.

The other contributor to equity is appreciation.  Most homeowners don’t realize the increase in value until they sell the home or do a cash-out refinance, but the increase is real and part of their equity.  If the expected appreciation is averaged over the anticipated time for the home to be owned, the value of the equity increase can be proportioned annually or monthly.

Combining appreciation and principal reduction with leverage, it’s possible to build a case that a home is definitely an investment.  Leverage is the ability to control a larger asset with a smaller amount of cash using borrowed funds.  It has been described as using other people’s money to increase your yield and it applies to homeowners and investors alike.

The table on the picture above shows that even a modest amount of appreciation combined with the amortization of a loan can cause a substantial rate of return on the down payment and closing costs.

This example assumes a 3% acquisition costs on the home with a 4.5% mortgage rate and the resulting equity at the end of five years.  The larger down payments lower the yield because it decreases the amount of borrowed funds.

If a borrower buys a home that appreciates at 2% a year with a 3.5% down payment on a FHA loan for 30 years, the down payment and acquisition cost factored by the equity will produce a 28% return on investment each year during the five year period.

A home can be many things including an investment.  You can use this Rent vs. Own calculator to see the effect that appreciation and principal reduction can have on a home purchase in your price range.  If you have any questions, I’m a phone call away at (320) 762-7106.

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Changing Air Filters

If this were a test, would you make an “A” on air filters 101?

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It may be natural for first-time buyers to be unsure of the process of buying a home because they haven’t been through it before but even repeat buyers need to know changes that have taken place since the financial housing crisis.

The steps in the home buying process are predictable and generally follow the same pattern.  It certainly makes the move stay on schedule when you know all the different things that must be done to get to the closing.

  • In the initial interview with your real estate professional, you share the things you want and need in a home, discuss available financing and learn how your agent can represent you in the transaction.
  • The pre-approval step is essential for anyone using a mortgage to purchase a home to assure that they’re looking at the right price of homes and so they’ll know what they can qualify for and what the interest will be.
  • Even with lower than normal inventory, it is difficult to stay up-to-date with the homes currently for sale and the new one just coming on the market.  Technology has simplified this process, but the buyer needs to implement them.
  • Showings can be accommodated online through virtual tours, drive-bys and finally, a personal tour through the home.  Your real estate professional can work with you to see all the homes in the market through REALTORS®, builders or for sale by owners.
  • When a home has been identified, an offer is written and negotiation over price, condition and terms takes place.
  • A contract is a fully negotiated, written agreement.
  • Escrow is opened to deposit the earnest money from the buyer as a sign they’re acting in good faith.  The title search is also started so that clear title can be conveyed from the seller to the buyer and that the lender will have a valid lien on the property.
  • 88% of home sales involve a mortgage.  The lender will require an appraisal to be sure that the home can serve as partial collateral for the loan.  If the buyer has been pre-approved, the verifications will be updated to be certain that they’re still valid.  The entire loan package when completed, is sent to underwriting for final approval.
  • When the contract is completed, at the same time the title search and mortgage approval is being worked on, the buyer will arrange for any inspections that were called for in the contract.
  • After all contingencies have been completed, the transaction goes to settlement where all of the necessary papers are signed, and the balance of the buyer’s money is paid.  This is where title transfers from the seller to the buyer.
  • Possession occurs according to the sales contract.

One of the responsibilities of your real estate professional is to make sure that things are done in a timely manner so that the transaction will close according to the agreement on time and without unforeseen or unnecessary problems.

Even if you’re not ready to buy or start looking yet, you need to be assembling your team of professionals.  Let us know and we’ll send you our recommendations, so you can read about them on their websites.

If you have any questions, call us at (320) 762-7106; we’re happy to help.  Informed buyers lead to satisfied homeowners and that is better for everyone involved.

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When the standard deduction for married couples filing jointly was increased from $12,700 to $24,000 for 2018, there was some speculation that the bloom was off the rose of homeownership.  The thought was that if the tax benefits from being able to deduct the property taxes and interest was less than the standard deduction, that maybe, the buyer would be better off continuing to rent.

With mortgage rates as low as they have been for the past eight years, payments have been lower and so has the amount interest that was paid.  This and the fact that sales and local taxes, which include property taxes, are limited to $10,000 a year on the Itemized Deduction form have made it harder to reach the increased standard deduction.

The reality of the situation is tax benefits are only one of the components that make a home an excellent investment and it probably contributes the least of the top three benefits.  Principal reduction and appreciation build an owner’s equity in an automatic way that is like a forced savings account.

In today’s market, it is common for the total house payment to be lower than the rent a first-time home buyer is currently paying.  As a homeowner, the buyer would have additional expenses like maintenance and possibly, a HOA.

To illustrate the net effect, let’s look at a purchase price of $275,000 with 3.5% down payment on a 4.75% 30-year FHA loan.  We’ll assume the home appreciates at 3% annually and the buyer is currently paying $2,000 a month rent.

The total payment is $2,115 including principal, interest, property taxes, property and mortgage insurance. However, when you consider the monthly principal reduction, appreciation, maintenance and HOA, the net cost of housing is $1,181. It costs $819 more a month to rent than to own. In a year’s time, it would cost $9,831 more to rent than to own which is more than the down payment required to buy the home.

In seven-years, the $9,625 down payment would grow to over $58,000 in equity.  The equity build-up far exceeds the tax benefits which some people would have as an additional incentive.  Use this Rent vs. Own to see what the net cost of housing would be using a home in your price range or call me at (320) 762-7106 and I’ll do it for you.

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It may be an all too common belief that a person will have a house payment and a car payment for the rest of their lives.  However, with a plan and some determination, you can be mortgage free.

Planning for retirement is obviously important and many times, an activity plagued by procrastination.  Some homeowners’ goal is to have their home paid for by retirement, so they won’t have payments.  It makes sense to eliminate a sizable recurring expense before they quit working.

By making regular principal contributions in addition to the payments, the debt can be eliminated by the target retirement date.

Assume a homeowner refinanced their $300,000 mortgage at 4% last year for 30 years with the first payment due on May 1, 2017.  With normal amortization, the home will be paid for at the end of the term.

Additional principal contributions with each payment will save interest, build equity and of course, accelerate the payoff on the home.  An extra $250.00 a month would pay off the mortgage 7.5 years sooner.  $786.81 extra with each payment would pay off the loan in 15 years.

Having a home paid for at retirement has the apparent benefit of no house payment.  A debt-free home is also a substantial asset that could be borrowed against or sold if unanticipated events should occur.

To make some projections to pay off your own mortgage, use this use the Equity Accelerator calculator.

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No one wants to waste water or money.  For that reason, take a few minutes every other month to do the following inspections:

  1. Check to see if cutoff valves on sinks and toilets are working properly.

    Many times, builders will put individual cutoffs on supply lines to sinks and toilets.  It is reasonable to expect them to work but after some time, they can corrode which prevents opening and closing.  It is a good idea to test them occasionally before you need them in an emergency.

  2.  Fill each sink with a few inches of water to see if they drain in what you feel is a normal time.

    A slow-draining sink can be an indication of a clog that builds up around the insides of the pipe.  Common causes are food, grease, hair and soap scum.  Plunging can take care of some slow-running sinks.  After partially filling the sink with water, seal the plunger over the drain and pump it up and down a few times.

  3.   Inspect each toilet to see if they are leaking water from the tank into the bowl.

    Toilets that continue to run after being flushed can use a large amount of water in a month’s time.  Generally, the problem comes from a flapper that doesn’t seat properly.  Sometimes, the chain is keeping it from closing properly or the flapper itself may need to be replaced.

    Another issue could be that the flush valve needs to be replaced.  These can be purchased at Lowe’s or Home Depot for about $20.00 and are relatively easy to change out.  There are lots of instructional videos on the internet and it can save money if you give it a try.

 

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