Interestsing
In order to fully capitalize on your house as an investment,
CHOICES
you’ll need to understand a few basic concepts:
By Steven Marshall
When a House Is Not a Home
pay much more than the remaining principal balance
When a House is More than a Home
The first concept that you’ll need to grasp is that your
of $320,000. At $3,000 per month, the total cost of the
house is not always a home. In fact, if you’re consid-
loan over 30 years will be roughly $1 million. How-
Do you really understand how your interest rage is affecting your short- and long-term financial situation? Ac-
ering your house as an investment, it is imperative
ever, in 30 years, that $400,000 house will be worth
cording to “Borrow Smart, Retire Rich” author Todd Ballenger, a few concepts use correctly can go a long way in
that you stop viewing it simply as a home. A home is
over $1 million. At an annual rate of 4 percent appre-
securing your financial future.
the experience people have living inside their houses.
ciation, that home will be worth roughly $1.3 million.
There’s a saying in the financial world that those who understand interest earn it, and those who don’t, pay it. If
They may think of holiday gatherings or time spent
Now, take for example that same $3,000 per month in-
you’re looking to build your net worth or establish some financial security, it’s time to become more knowledge-
with friends and family. Thinking of your house as
vested at a rate of 8 percent. At the end of 30 years, the
able about interest and, specifically, about how your home’s interest rate can be working for – or against – your
a home will probably conjure up emotional images,
value of the investment would be about $4.3 million.
journey to a secure long-term financial future.
something that you will want to avoid while consider-
This is a powerful example of why it’s so important to
ing your long-term financial plan. Instead, you should
If you’re like most Americans, you probably haven’t put much thought into how your interest rate will affect your
understand how interest works.
think of your house as the physical property in which
long term net worth. That’s because most consumers lose focus at the point of sale. At the time you were getting
you are investing.
Knowing the long-term results of interest rates can
a mortgage, you probably focused on loan approval rather than suitability. Most borrowers are often so con-
help you to determine where to invest your money.
sumed with getting a lender’s approval that it doesn’t occur to them to evaluate their current financial situation
A house is about appreciation, investment and return.
Talk to your mortgage professional and ask him or her
or their long-term financial goals, let alone the effect that their new mortgage will have on both. Most people
If you’re going to use your house as an investment
to help you compare the rate-of-return on each of your
have no idea how their interest rates will factor into their long-term financial plans, whether a down payment is
vehicle, you’ll need to view it as one, and not as the
potential investments. Once you do the simple math,
better invested elsewhere, or how appreciation or tax brackets can impact their investment.
cozy place where you raise your children. Remember,
you’ll be better equipped to determine which type of
67 percent of Americans have more wealth in their
In short, because they don’t understand interest, they’re probably paying it, rather than earning it.
mortgage or other investment is appropriate for you.
houses than in all other investments combined. That
Continued on page 40
means you should have no more emotional attach-
ment to your house that you do to any of your other
“Those who understand interest earn it, investments. This may sound difficult to do, but it’s
worth the effort.
and those who don’t, pay it.”
The Interest of Appreciation
Another very important concept of house ownership
as it pertains to building wealth is appreciation. Ap-
The Biggest Bank
preciation occurs when the monetary value of some-
Financial planners have not traditionally included homes in their client’s financial strategies. Instead, they focus
thing increases, and it’s also the only way that a house
on stocks, bonds and other securities to build a solid financial future. A mortgage has been seen as a necessary
can build wealth for you.
evil, rather than a component in a wealth-building plan.
If you’d like to know how interest rates and apprecia-
That myopic thinking overlooks a key component of most Americans’ net worth – the home. Even in today’s re-
tion work together in homeownership, consider this
duced housing market, the U.S. Department of Housing and Urban Development reports that 60 percent of home-
example. At $400,000 home purchased at 20 percent
owner wealth can be traced back to built up equity. Equity is a powerful investment vehicle, as proved by a Fed-
down, with an interest rate of 7 percent over 30 years
eral reserve study that shows the average homeowner’s net worth is 46 times the net worth of the average renter.
will yield a monthly payment of roughly $3,000 per
38
www.coloradohomeownermag.com
month. Over the course of 30 years, the borrower will
www.coloradohomeownermag.com
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