Purchasing a home is one of the biggest investment decisions you can make. You are plowing a lot of money and taking on a big loan for a fixed property that is not easy to sell. On the other hand, with an attractive mortgage and a good market, you can make double or triple your initial investment within 5 or 10 years which is an incredible return on your money. For that reason, you should think long and hard about making a home purchase. Here are some tips to keep in mind.
Mortgage interest rates are probably the single most important number to help you determine if now is a good time to buy a home. While rates are so low, with many people receiving mortgages below 4% and 3%, it is an incredible time to purchase a home.
For example, if you purchase a home with a $100,000 down payment and a $200,000 mortgage at 4% interest on a 15 year fixed mortgage rate, the total interest payments will be $66,287. If you purchase the same home with an 8% mortgage (as was common in the 1980s), the cost will be $144,034. The massive disparity makes the difference between a good investment and a very bad one for a home.
Another key factor is the market environment. There are several indicators that determine whether a home is a good investment based on market values. Firstly, have prices been rising faster than income growth in your region over the last few years? If so, the home prices may be too high.
Analysts often use a statistic that divides the average home price by the average family total income. If that number is over 5, the prices are probably too high. During the financial crisis in 2008, housing got to 7 or 10 times family income in some locations.
On a more micro level, look at the comparable houses in nearby areas. If the house you want is in a similar location, with similar schools, safety and features, but is much more expensive, it is a bad investment. That is because other future buyers will just get the cheaper homes in the nearby areas with the same features for less money.
Lastly, look at general economic growth in the area and country. If GDP is flat in a region but home prices are rising it is a bad time to buy. If GDP is down 1% but the home prices are down 10%, it is probably a good time to buy.
Real estate professionals often say that the key to real estate investment is three simple things, “location, location, location”. While this saying often has to do with retail stores, it can also be applied for buying homes. Does the neighborhood have good schools? Is it easy to get to the supermarket, activities, parks,fine dining, entertainment and other places to go? The safer and better climate the area is the more likely the home is to be a good investment as well.
Most of all, the home should be in a strong and dynamic community. If the residence is in a dying town where the main source of jobs is a factory that just closed, the housing prices are likely to go down. If the local economy is more diversified with financial, technology, manufacturing, agriculture and all manner of other industry jobs that are growing rapidly, the home is more likely to be a good investment. The greatest returns come when the location rapidly becomes a hot spot for a single commodity. For example, when oil was discovered in parts of North Dakota, housing prices in those areas skyrocketed as people had a lot more money to spend. However, these are also the riskiest areas in cases where the commodity price drops.
Using these tips, you can make sure that the home you are buying can optimize your investment. Too many times you hear homes referred to as “money pits”. Make sure your home purchase doesn’t fall into that categorization.
As a direct lender, Wyndham Capital will work with you to customize your financial goals. Speak to one of our professional mortgage consultants today to see what you could be saving.