After the Real Estate market imploded during 2008 – 2009, many people changed their opinion that Real Estate was the BEST investment they had and there was no need to diversify into anything else. The debate continues to rage on from the possibility that home ownership isn’t for everyone and perhaps the American dream could include just renting, to what kind of mortgage a person should consider if they are going to buy.
In today’s blog, let’s first review the past mistakes that people have made with their Real Estate purchases and finish with a good sense guide to buying Real Estate in the future.
I’ve always advised people that there are two different types of Real Estate purchases; one being their home and the other being investment property. I think many of the troubles started for Americans when people confused the two. Because Real Estate prices were rising so precipitously in the prior decade, it seemed that even one’s home was a great investment. But like any market sector that experiences great run up in values; what goes up, must come down. Remember the technology stocks in the late 90’s that imploded between 2000 and 2002? Many of those companies never regained their prior value even a decade later. The same will be said of much of the RE properties that peaked in 2007.
Your home is a place you live. The American Dream was to buy a house, pay it off, and own it outright. I remember watching the news with my husband when the concept of the interest-only loan came into play many years ago. I said to him, “This will be a house of cards, just waiting to fall.” Because I understand human behavior, I knew that unfortunately, too many people would use this inappropriately. They would stretch to buy a higher-cost home based on the fact that it was made more affordable by the lower payments of an interest-only loan. Don’t get me wrong, it’s always good to pay less interest on borrowed money. But use the lower interest to help you pay off your loan more quickly with the underlying goal still being to pay off your home!
The next big mistake was the equity line. With home values rising so quickly and interest rates dropping, why not take equity out of your home for a renovation, new car, special trip, whatever? Why not use the equity of your home as a savings account? Because you really DON’T OWN YOUR HOME! And once again, borrowing on the equity of your home, is the antithesis of the American Dream to OWN YOUR HOME outright! The excuses were endless…well I’m planning on selling this home one day anyways….so how did that work out???
Now I’m regularly asked, “Is home ownership still the way to go” and “Is now a good time to purchase a house?” The answer is a resounding YES! Interest rates are at a 50+ year historic low, and prices have bottomed out. Some people would say, “But is it too late, haven’t I missed the bottom?” The answer is, “Who cares, it’s your home and you’re going to try to pay it off and live there a long time!”
So let’s review Karen’s rules for prudent investing in Real Estate:
- Put 20% down – this shows the bank you have some skin in the game and will get you the lowest interest rates available.
- Get a fixed-rate mortgage; ignore ARMs and interest-only loans even though the rates are lower. Most people don’t have the discipline to make extra payments towards principal.
- Don’t stretch your budget for the most house you can afford the payment on. What if you (or your partner) lose your job, or unforeseen financial issues come up? Better to get something you can afford to keep even in the worst of times.
- Work towards paying your home off, even if you hope to have a different house in the future. Things don’t always work out the way we plan!
So, for those of you who aren’t homeowners yet, or aren’t underwater on your current home and looking to move…go for it and happy house hunting!