Two Important Thoughts to Consider When Purchasing Your Next Home
Use Home Loans with Minimum Money Down
When it comes to buying a home, taking advantage of loans with minimum down payments can be a game changer. Veterans, for example, can use 0% down VA loans, which allow them to buy a home without making a down payment. VA loans are sometimes subject to the VA funding fee - the fee ranges from 0.5% to 3.3% of the loan's total value - however there are several exemptions to this including a service related disability. The cool thing about putting 0% down is that you get huge returns on your investment. If you bought a home for $500,000 and two years later you sold it for $600,000, you earned $100,000 by only paying a monthly interest on your mortgage. To elaborate this scenario, if you put 0% down and had a 6% interest rate, you would have spent almost $72,000 on your home - approximately $59,000 of that in interest and approximately $13,000 in principle. The principle is basically returned to you when you sell. So essentially $59,000 earned you $100,000 over 2 years which is about a 60% return (30% annually).
Even if you’re not a veteran, there are other options out there, like FHA loans that require as little as 3.5% down. We have a really great mortgage broker who is able to go through a pre-underwriting process with you such that when you find the home of your dreams you have a cash backed offer and a short time to closing. Essentially, you can offer cash and close in two weeks which many sellers will happily take even if you offer less than asking! If you are interested in their contact information - email us! Also, always shop around for rates! One time, on an RV purchase, we saved 2% on our interest rate and the amount of money down by $10,000 just by doing our own legwork! A lot of time other lenders will match too if you find a good rate.
The key here is to leverage these loans to keep more cash in YOUR pocket (not the banks’). Then, you can put that money to work in investments that generate higher returns than the mortgage (or other loan) interest rate.
Invest Your Money Instead of Putting It Into Your Mortgage
One of the most valuable lessons we learned was not to pour all our savings into paying down the mortgage. While putting an extra $50,000 into a $500,000 mortgage might slightly lower your monthly payments…
$500,000 mortgage @ 6% (excluding taxes & insurance) = $2,997.75
$450,000 mortgage @ 6% (excluding taxes & insurance) = $2,697.98
Monthly difference = $299.77/month
…the real power comes from investing that $50,000 elsewhere.
In our current strategy, we earn 3% dividends per month, so…
$50,000 x 3%/month dividend income = $1,500/month
This shows that putting $50,000 into a brokerage account earns $1,500/month vs. saving $299.77/month if you put that money into your mortgage. For us, we’ll invest that money and take monthly from it to pay our mortgage if need be. The key takeaway is to put your money where it can grow the most.
Additionally, many people make extra payments to their mortgage to reduce the amount of interest paid over the term of the mortgage. However, if you look at the future value of these additional payments making a modest 8% return in the stock market, you are saving less on your mortgage interest than that money could generate. For example, say you have an extra $500 monthly to pay towards this $500,000 mortgage. If you completely pay off your mortgage, this saves you nearly $200,000 in interest and brings the mortgage term from 30 years to 21 years. But, if you invested $500/month for 21 years instead at that modest 8% return in the stock market, your future value would be over $330,000. These numbers get even better when mortgage interest rates are low…like those lucky ones who are at 2.75% on their mortgage.
For us, we’d prefer to have that money to be more diverse and to have a source of funds we can easily borrow from. Also, these additional payments to your mortgage do nothing to increase the value of your home. The average real estate market grows at about 4% regardless of how much money you put into your mortgage. If you’re home appreciates to $600,000 in 2 years, it doesn’t matter that you paid an extra $12,000 to your mortgage over those 24 months. By putting the least amount of money into your mortgage, you get the greatest return on the amount of money you actually have invested in the home.
For more, see our 10 practical tips to implement while working your 9-to-5 to realize the dream of early retirement.
Will you make these changes on your next home purchase??
FINANCIAL DISCLAIMER
Do your own research! We are not providing nor are we intending to provide any sort of financial, tax or legal advice. This article simply includes practical tips that we’ve compiled based on our independent analysis, implementation, and realization of the results - which changed our lives. Everything is of course, subject to market fluctuation. Please always be informed and consult your professionals prior to making changes.
