Are You Better Off Paying Your Mortgage Earlier or Investing Your Money?

Photo Credit: Rawpixel via Unsplash

Few topics cause more division among economists than the age-old debate of whether you’re better off paying off your mortgage earlier, or investing that money instead. And there’s a good reason why that debate continues; both sides make compelling arguments.

For many people, their mortgage is the largest expense they will ever incur in their lives. So if given the chance, it only makes logical sense you would want to pay it off as quickly as possible. On the other hand, a mortgage is also the cheapest money you will ever borrow, and it’s generally considered good debt. Any extra money you obtain could be definitely be put to good use elsewhere.

The reality is, however, a little less cut and clear. For some homeowners, paying off their mortgage earlier is the right answer. While for others, it would be far more advantageous to invest their money.

Advantages of paying off your mortgage earlier

  • You’ll pay less interest: Each time you make a mortgage payment, a portion is dedicated towards interest, and another towards principal (we’ll ignore other costs for now). Interest is calculated monthly by taking your remaining balance, the length of your amortization period, and the interest rate agreed upon with your lending institution.

If you have a $300,000 mortgage, at a 4% fixed rate over 30 years, your monthly payment would be around $1,432.25. By the time you finish paying off your mortgage, you would have paid a total of $515,609, of which $215,609 were interest.

If you wanted to lower the total amount you pay on interest, you don’t need to make a large lump sum to make a difference. If you were to increase your monthly mortgage payment to $1,632.25 (a $200 a month increase), you would be saving $50,298 in interest, and you’ll pay off your mortgage 6 years and 3 months earlier.

Though this is an oversimplified example, it shows how even a small increase in monthly payments makes a big difference in the long run.

  • Every additional dollar towards your principal has a guaranteed return on investment: Every additional payment you make towards your mortgage has a direct effect in lowering the amount you pay in interest. In fact, each additional payment is, in fact, an investment. And unlike stocks, bonds, and other investment vehicles, you are guaranteed to have a return on your investment.
  • Enforced discipline: It takes real commitment to invest your money wisely each month instead of spending it elsewhere.

Your monthly mortgage payments are a form of enforced discipline since you know you can’t afford to miss them. It’s far easier to set a higher monthly payment towards your mortgage and stick to it than making regular investments on your own.

Besides, once your home is completely paid off, you can dedicate a larger portion of your income towards investments, your children or grandchildren’s education, or simply cut down on your working hours.

Advantages of investing your money

  • A greater return on your investment: The biggest reason why you should invest your money instead comes down to a simple, green truth: there’s more money to be made in investments.

Suppose that instead of dedicating an additional $200 towards your monthly mortgage payment, you decide to invest it in a conservative index fund which tracks S&P 500’s index. You start your investment today with $200 and add an additional $200 each month for the next 30 years. By the end of the term, if the index fund had a modest yield of 5% per year, you will have earned $91,739 in interest, and the total value of your investment would be $163,939.

If you think that 5% per year is a little too optimistic, all we have to do is see the S&P 500 performance between December 2002 and December 2012, which averaged an annual yield of 7.10%.

  • A greater level of diversification: Real estate has historically been one of the safest vehicles of investment available, but it’s still subject to market forces and changes in government policies. The forces that affect the stock and bonds markets are not always the same that affect real estate, because the former are subject to their issuer’s economic performance, while property values could change due to local events.

By putting your extra money towards investments, you are diversifying your investment portfolio and spreading out your risk. If you are relying exclusively on the value of your home, you are in essence putting all your eggs in one basket.

  • Greater liquidity: Homes are a great investment, but it takes time to sell a home even in the best of circumstances. So if you need emergency funds now, it’s a lot easier to sell stocks and bonds than a home.

 

Misael Lizarraga is a real estate writer with a passion for teaching real estate concepts to first time buyers and investors. He runs realestatecontentguy.com and is a contributing writer for several leading real estate blogs in North America.

Posted on March 20, 2019 at 9:37 pm
Rondi duPont | Category: Blog, For Buyers, For Buyers & Sellers, For Sellers, Mortgage | Tagged , , , , , , ,

The Reality of Home Improvement: HGTV installment

Painting2On any given weekend in my house, at least a couple of hours will be spent watching the designers, craftspeople and entertainers on HGTV or its spunky sister station, the DIY Network.  The premise of these home-centered television networks is that somewhere, sandwiched between long commercial breaks for paint, faucets, flooring warehouses and something called “Slab Jacking”, you’ll find programming about real people making real decisions about their homes. Sometimes those decisions are about buying a home, while other times they may be about selling or remodeling a home.  In all of the situations, experts are brought in to help and a camera crew just happens to tag along, so the rest of us can enjoy the unfolding drama from the comfort of our couches.

Home improvement programming has been around for a long time and is generally considered reality TV, but a lot of the real life is lost between cuts. Here’s a quick guide of some of the more popular programs.

House Hunters – The formula is simple but always entertaining.  Each episode begins with someone unhappy with their living situation, so they call an agent and look at 3 properties.   After weighing the options, a home is chosen.  Of course, this show is over-simplified and leaves out the long weekends the buyer spends in their agent’s car driving from listing to listing.  What you do get is a sense of home values and styles in different regions, the humor of buyers’ reactions to homes, and the excitement new home owners feel as they take the keys to their dream home. You rarely get the type of tension home shopping can bring. The big climax of the show is when an offer is made: the narrator might say something like, “Though their offer was rejected the first time around, the other buyer ultimately backed out and they ended up getting the house for X amount.” But I don’t think they usually talk about it at all. For that kind of tension, you need to check out Property Virgins. The best part of the half hour happens in the last 30 seconds when you see how the new owner redecorates the home in their own style.

Property Virgins– Similar premise to House Hunters, except these first-time homebuyers walk through the basics. The best part about the show is the excitement (and sometimes clumsiness) of the virgin house-hunters. The worst part of this show is when would be homebuyers have unrealistic expectations for their first home.

House Hunters International – Comparable to House Hunters but everyone has accents and the kitchens are shockingly small.

Designed to Sell – Did you know that your spare bedroom filled with Grandpa’s taxidermy and the vintage 1950’s kitchen can be a turn-off to potential buyers? Valuable lessons like these are a just a few of the gems I’ve picked up on Designed to Sell.  Each episode features a home which has been racking up days on the market but no one is interested in buying.  That’s where the army of carpenters and designers step in. When they’re done, the house that looked like Grandma’s musty basement now looks like the lobby of a hip hotel, and they only spent a few hundred dollars.  I love this program for the inspiration but find it short on reality.  The listed prices of these improvements don’t seem realistic, and I often wonder if the costs include the lifetime of carpentry skills, design training, garage filled with power tools and time required to do the job. If you are looking for design ideas and hope for a home that isn’t attracting buyers, you’ll find some great ideas here, but take the true cost of those improvements with a grain of salt.

Real Estate Intervention – Being a real estate agent takes a lot of diplomacy, and this is never more important than that moment they suggest a market-friendly price to a home seller. On Real Estate Intervention, that diplomacy generally fails, sellers are unrealistic, and a stern man with a menacing mustache steps in for an intervention.  He dishes out tough love to the seller and paints a clear picture of market reality.  In a half hour he is able to change minds and make the seller feel good about the decision they made.

This Old House – This PBS staple wrote the book on home improvement programming.  With TOH you’ll trade commercials for pledge drives, but you’ll also get a more cerebral home improvement viewing experience.  TOH does take patience, as it takes a full season to complete a home improvement project instead of 30 minutes on other programs.  If you are looking for the same quality instruction in a more digestible format, you can check out the spin off, Ask This Old House.

Be warned that the home improvement bug often bites soon after watching any of these programs.  After a long HGTV bender, I find myself wandering through the paint sample aisle and making trips to home improvement stores that aren’t on my way home from the office.  Sometimes life does imitate art and the voice in the back of my head keeps saying, “They make it look so easy.”

What about you? Do you find home-improvement shows useful or do you think they set unrealistic expectations? What are your favorite home-improvement resources?

by Justin Waskow

Posted on March 18, 2019 at 9:36 pm
Rondi duPont | Category: Blog, For Buyers & Sellers, Housing Trends | Tagged , , , , , , , , ,

Considering becoming a landlord? How to evaluate whether to rent or sell your property

Over the last few years, we have seen an increase in homeowners choosing to become landlords rather than placing their homes on the market.  In deciding whether or not becoming a Landlord is right for you, there are a number of factors to consider, but primarily they fall into the following three categories:  Financial Analysis, Risk and Goals.

CalculatorThe financial analysis is probably the easiest of the three to assess.  You will need to assess if you can afford to rent your house. If you consider the likely rental rate, vacancy rate, maintenance, advertising and management costs, you can arrive at a budget.  It is important both to be reasonably correct in your assumptions and to have enough reserves to cover cash-flow needs if you’re wrong.  The vacancy rate will be determined by the price at which you market the property.  Price too high and you’re either vacant or accepting applicants that, for some reason, couldn’t compete for more competitively priced homes.  Price too low and you don’t achieve the revenue you should.  If you want to try for the higher end of an expected range, understand that the cost may be a vacant month.  It is difficult to make up for a vacant month.

Consider the other costs renting out your property could accrue. If you have a landscaped or large yard, you will likely need to hire a yard crew to manage the grounds. Other costs could increase when you rent your home, such as homeowner’s insurance and taxes on your property. Also, depending on tenant turn-over, you may need to paint and deal with maintenance issues more regularly. Renting your home is a decision you need to make with all the financial information in front of you.  You can find more information about the hidden costs of renting here.

If your analysis points to some negative cash-flow, that doesn’t necessarily mean that renting is the wrong option.  That answer needs to be weighed against the pros and cons of alternatives (i.e., selling at the price that would actually sell), and some economic guesswork about what the future holds in terms of appreciation, inflation, etc. to arrive at an expectation of how long the cash drain would exist.

Risk is a bit harder to assess.  Broadly though, it’s crucial to understand that if you decide to lease out a home, you are going into business, and every business venture has risks.  The more you know, the better you can mitigate those risks.  One of the most obvious ways of mitigating the risk is to hire a management company.  By hiring professionals, you decrease your risk and time spent managing the property (and tenants) yourself.  However, this increases the cost.  So, as you reduce your risk of litigation, you increase your risk of negative cash-flow, and vice versa… it’s a balancing act, and the risk cannot be eliminated; just managed and minimized.

In considering Goals, what do you hope to achieve by renting your property? Are you planning on moving back into your home after a period of time? Will your property investment be a part of your long-term financial planning? Are you relocating or just hoping to wait to sell? These are all great reasons to consider renting your home.

Keep in mind that renting your family home can be emotional.  Many homeowners LOVE the unique feel of their homes.  It is where their children were raised, and they care more about preserving that feel than maximizing revenue.  That’s OK, but it needs to be acknowledged and considered when establishing a correct price and preparing a cash flow analysis.  Some owners are so attached to their homes that it may be better for them to “tear off the band-aid quickly” and sell.  The alternative of slowly watching over the years as the property becomes an investment instead of a home to them may prove to be more painful than any financial benefit can offset.

In the process of considering your financial situation, the risks associated with becoming a landlord, and the goals you hope to achieve with the rental of your property, – ask yourself these questions.  Before reaching a conclusion, it’s also a good idea to familiarize yourself with the landlord-tenant-lawspecific to your state (and in some cases, separate relevant ordinances in the city and/or county that your property lies within) and to do some market research (i.e. tour other available similar rentals to see if your financial assumptions are in line with the reality of the competition across the street).  If you are overwhelmed by this process, or will be living out of the region, seek counsel with a property management professional.  Gaining experience the hard way can be costly.

J. Michael Wilson is the dedicated broker at Windermere Property Management Seattle, and has 17 years of experience managing properties in the Seattle region.

Posted on March 12, 2019 at 12:00 pm
Fort Collins | Posted in Blog | Tagged 
Posted on March 14, 2019 at 6:40 pm
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Sellers: Making the Most of your First Impressions

FrontEntrance

As the old saying goes, you only have one chance to make a first impression. If you’re selling your home, it’s true, except that there are several impressions to be made, and each one might have its own effect on the unique tastes of a prospective buyer. I’ve worked with scores of buyers, witnessed hundreds of showings, and I can summarize that experience down this: a tidy and well maintained home, priced right, listed with professional photographs, enhanced curb appeal and onsite visual appeal will sell fastest. We all know first impressions are very important, but the lasting impressions are the ones that sell your home. It’s not easy, but if you can detach a little and look at your home from a buyer’s perspective, the answers to selling it quickly may become obvious to you.

The very first impression your home will make is through its web presence, whether on Windermere.com, the MLS, Craigslist or any multitude of websites. Fair or not, the price is typically the very first thing people look at, and it will be the measurement by which your home is judged. You can always adjust to the right price later, but the impact is lost. It will take something dramatic to get a buyer to reassess the way they feel about the value of your home.

Closely following price are the listing photos. According to this recent article in the Wall Street Journal, professional photos will not only impact your first impressions, it may also make a difference in the final selling price. Great photos might even overcome those initial price objections. Does the exterior photo capture your home at its hi-res best? Does the accompanying text enhance or distract? Online, your home has only a few seconds to capture the home buyer’s attention. If it doesn’t, they’ll click the “Back” button and resume their search. The goal is to have buyers excitedly calling their agents to arrange a showing.

Another old saying is “Location, location, location,” and sure enough, the first live impression of your home is the location. Forget this one; you can’t move your home. There’s not much you can do about location, right? Actually, there is one thing you can do: price it right from the start.

Let’s move on to the first time a buyer sees your home as they pull to the curb out front. Go stand out at the curb and look at it the way you would if you were shopping for a home. Sometimes, a couple hours of labor and $100 worth of beauty bark can be worth thousands in the sales price. I’ve had buyers choose not to get out of the car when we pulled up to a home that they had once been excited to see.

Likewise, I’ve had buyers say they’ve seen enough simply by peaking into the front door. The nose trumps the eyes when it comes to the first impression when entering the house. Buyers get more caught up in the details. Once the home shopper is inside, it’s easy for them to get distracted and focus on something that seems to have nothing to do with the structure they will be buying, from a dirty dish in the sink to a teenager’s bedroom that’s been decorated in posters and/or melodrama. Do everything you can to set a positive lasting impression. The buyer may look at dozens of homes. What is your strategy to convince them to make an offer on yours?

Guest post by Eric Johnson, Director of Education

Posted on March 12, 2019 at 6:39 pm
Rondi duPont | Category: For Sellers, Fort Collins Real Estate, Housing Trends, Windsor Real Estate | Tagged , , , , , , , , , ,

Are You Better Off Paying Your Mortgage Earlier or Investing Your Money?

Photo Credit: Rawpixel via Unsplash

Few topics cause more division among economists than the age-old debate of whether you’re better off paying off your mortgage earlier, or investing that money instead. And there’s a good reason why that debate continues; both sides make compelling arguments.

For many people, their mortgage is the largest expense they will ever incur in their lives. So if given the chance, it only makes logical sense you would want to pay it off as quickly as possible. On the other hand, a mortgage is also the cheapest money you will ever borrow, and it’s generally considered good debt. Any extra money you obtain could be definitely be put to good use elsewhere.

The reality is, however, a little less cut and clear. For some homeowners, paying off their mortgage earlier is the right answer. While for others, it would be far more advantageous to invest their money.

Advantages of paying off your mortgage earlier

  • You’ll pay less interest: Each time you make a mortgage payment, a portion is dedicated towards interest, and another towards principal (we’ll ignore other costs for now). Interest is calculated monthly by taking your remaining balance, the length of your amortization period, and the interest rate agreed upon with your lending institution.

If you have a $300,000 mortgage, at a 4% fixed rate over 30 years, your monthly payment would be around $1,432.25. By the time you finish paying off your mortgage, you would have paid a total of $515,609, of which $215,609 were interest.

If you wanted to lower the total amount you pay on interest, you don’t need to make a large lump sum to make a difference. If you were to increase your monthly mortgage payment to $1,632.25 (a $200 a month increase), you would be saving $50,298 in interest, and you’ll pay off your mortgage 6 years and 3 months earlier.

Though this is an oversimplified example, it shows how even a small increase in monthly payments makes a big difference in the long run.

  • Every additional dollar towards your principal has a guaranteed return on investment: Every additional payment you make towards your mortgage has a direct effect in lowering the amount you pay in interest. In fact, each additional payment is, in fact, an investment. And unlike stocks, bonds, and other investment vehicles, you are guaranteed to have a return on your investment.
  • Enforced discipline: It takes real commitment to invest your money wisely each month instead of spending it elsewhere.

Your monthly mortgage payments are a form of enforced discipline since you know you can’t afford to miss them. It’s far easier to set a higher monthly payment towards your mortgage and stick to it than making regular investments on your own.

Besides, once your home is completely paid off, you can dedicate a larger portion of your income towards investments, your children or grandchildren’s education, or simply cut down on your working hours.

Advantages of investing your money

  • A greater return on your investment: The biggest reason why you should invest your money instead comes down to a simple, green truth: there’s more money to be made in investments.

Suppose that instead of dedicating an additional $200 towards your monthly mortgage payment, you decide to invest it in a conservative index fund which tracks S&P 500’s index. You start your investment today with $200 and add an additional $200 each month for the next 30 years. By the end of the term, if the index fund had a modest yield of 5% per year, you will have earned $91,739 in interest, and the total value of your investment would be $163,939.

If you think that 5% per year is a little too optimistic, all we have to do is see the S&P 500 performance between December 2002 and December 2012, which averaged an annual yield of 7.10%.

  • A greater level of diversification: Real estate has historically been one of the safest vehicles of investment available, but it’s still subject to market forces and changes in government policies. The forces that affect the stock and bonds markets are not always the same that affect real estate, because the former are subject to their issuer’s economic performance, while property values could change due to local events.

By putting your extra money towards investments, you are diversifying your investment portfolio and spreading out your risk. If you are relying exclusively on the value of your home, you are in essence putting all your eggs in one basket.

  • Greater liquidity: Homes are a great investment, but it takes time to sell a home even in the best of circumstances. So if you need emergency funds now, it’s a lot easier to sell stocks and bonds than a home.
Posted on March 6, 2019 at 8:00 am
Rondi duPont | Category: For Buyers & Sellers, Fort Collins Real Estate, Homeowners | Tagged , , , , , , , , ,