Mortgages:
Is the death of
people. Most
people think that
their house is
their biggest
investment. Why?
Because it's their only investment!
It's kinda funny come to think of it
is that most people have all their money tied
up in their house and prepare very little in
terms of "actual" investments. This is going to
be a long one!Ok. Mortgages work such:
Let's say you mortgage a 300,000$ house at
around 4.5% (no interest rate is guaranteed
to stay the same over the years remeber that!).
You set you'r mortgage so you end up putting
a what 15,000$ down payment that's 285,000$
at 1700$/month for the next 30 years.
Mortgages are set-up so that in the first 2
years of the loan 80% of you'r monthly payment
will go into the bank's pockets and only 20%
will go to the principal of 285,000$.
So it's what 1700$/month and that's 1360$/month
and the rest of 340$ goes to the principal.
So in the first 24 months bank gets what
1360$x24 months= 32,640$ really nice! You'r
loan gets 340$x24 months= 8160$ kinda sucks!
So now you'r balance is what:
285,000$-8160$=276,840$. After those 2 years
you'r ratio of interest/principal let's say
lowers to 60% for the next 5 years ouch!
Catch my drift..... Mortgaging is probably the
dumbest thing one can do when it comes to
purchasing a home. When I buy a house I'm
going to buy it with cash so I can live
in it! Not so I can have monthly payments
to the bank hoping I can make a profit out
of selling it. Here's the fault line.
Let's say that the house's value goes up
in the next what 10 years from 300,000$
to 400,000$ which is pretty good. So the
house's value went up 10,000$ every year
(this is under very favorable conditions
when it comes to real-estate, this a very
good return. But right now 2007 is not the
real-estate year. So let's say that in those
10 years you have a remainder of 200,000$ on
your mortgage: so you sell and you turn out
what a 200,000$ profit which in those 10
years represents a 20,000$/year income.
Guess what in those 10 years lets say that
you'r spending around 1000$/month on utilities
(not to mention property tax amongst others)
that's 100,000$ on just let's say
up-keep/repairs/additions which bring
up the value. So you'r profit comes out at
actually 100,000$ and here's the kicker...INFLATION!!!!!.....haha....
you'r 100,000$ now has the purchasing power
of 70,000$ (calculated at around a 3.7% rate
of inflation over the 10 years,of course
this constatly fluctuates.)
Sucks to be you! But now you need
to..guess what..buy another house! So you take
you'r little 70,000$ profit and use it for a
down payment on now much expensive house of
400,000$ at a 6.8% interest rate prices and
rates go up because of inflation......
So you spend you'r life buying and selling
houses and making no money! That's why a house
is a really dumb way to invest!
Actually it's not an investment at all......
2 comments:
Hey! I like you're page! There are some excellent references. But my 2 Cents are...take the mortgage! Preferably on a duplex or triplex. Live in part, while you rent the rest out. Yes the mortgage is a "Liability" however it's one that you can get to work for you. Even if it's just a plain old residential mortgage on a single family home. Unless you have piles of money laying around, you need to start somewhere. Yes most investors will tell you that a personal mortgage is bad, but I'd bet most of them started out that way. If you buy a house instead of renting, you will accumulate equity. You can then use this to invest, use dividends to pay down you're mortgage some more, and use that equity to invest. Doing this it's possible to pay off you're mortgage in 5 years! Now what you're left with is a big investment loan, however as long as you're making a bigger return on you're investments, then the interest rate of the loan, you're ahead of the game and well on you're way! Unless you're still living with you're parents....then you've got it made...but it doesn't say much about you're risk tolerance.
Very good point. If you sweep through my post I mention that most people have all their money tied up in their house, now that's not very smart. They treat it as if it's their golden goose lol. But I guess you'r talking about leveraging. My next post will soon cover that. Simply put: i'd rent take the 10% golden rule put it in a RRSP since I'm 20 common sense 12% mutual funds (equity, global equity) agresssive growth let it sit there for the next 30 years and guess what that's 5 market cycles. 200$/30years=1,300,000$
Additionally as an immediate need for cash I'd maybe go into leveraging. Sorry but I just kinda swore to myself not to borrow money ever again!+ A lot of people
borrow their down payments too. It all boils down to a solid plan. Step by step on what you want to accomplish. Unfortunately most people down even consider leveraging they just sit there and wait for the house to go up in value. They might patch it up here and there but in my opinion it's not very lucrative. Calculating selling price - losses (utilities over the years, property tax over the years + repairs + additions)= gains. This does not reffer to leveraging. This is what an average joe does with his house, jumps from mortgage to mortgage. One last point if you look at the stock market in the past 15 years Real estate has had an average return of 4% when compared to equities at 13.7%. WHat does that tell you at least her in Kitchener Ontario Canada price of housing and real estate has gone up therefore it's a terible time to buy let alone borrow! But I'm no fortuneteller......
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