Mark’s Market Update – 2/23/2023
It’s called “leverage”. The mistake that a lot of new homebuyers (and seasoned homebuyers) make is putting too much money down when they buy a home. This is often due to wanting “the lowest payment” or, to get rid of mortgage insurance.
If you buy a $400,000 home and put 20% down ($80,000) and the home appreciates 5% in one year (moving in value from $400,000 to $420,000) – your rate of return on your initial cash investment is pretty good – it’s 25%! ($20,000 gain divided by $80,000 investment = 25% ROR in the first year).
Here’s the secret, though. If you put 5% down on that same home ($20,000) – and the home appreciates 5% in one year – your initial cash investment just earned a 100% rate of return. 100%. If the home appreciates 5% the next year – then your cash investment just earned a rate of return of 200%!
Not only that – when you consider that mortgage insurance for most homeowners is a fraction of what it used to be back when (read: When your parents bought a home using mortgage insurance) – putting more money down to get rid of mortgage insurance just isn’t as good of a play as it used to be.
Here’s the secret (and why you never use a “transactional” lender – a big box bank or someone who doesn’t look at your plans each year and ask what you want to do five years down the road, or worse, “because they’re cheap”) – they are My Three Rules To help you Build Wealth:
- Put the minimum amount of money down
- That you can get approved for
- That doesn’t keep you up late at night worrying about the decision you just made
That’s it. If you do it this way – you’ll maximize your rate of return on your cash investment and keep your money available for other purposes (buying another home/investment property, other financial investments, or just keeping the money available).
In other news
FHA has decreased its monthly mortgage insurance premium from .85% to .50%. This is actually a good move – and long overdue considering how flush with cash the FHA insurance fund is right now. This makes FHA loans a more affordable AND good alternative to a conventional loan – especially if your credit scores aren’t as good as you’d like them to be.
Rates are up as a whole: Due to additional concerns that the Fed may not be close to winding down their inflation fight and may be due for additional (and larger than originally expected rate increases – mortgage rates have shifted upward by about .5% and are now closer to 6.5% to 6.75%.
As always – call me. I’ll help you build generational wealth and follow me on Instagram: @markthelender