Tuesday, May 20, 2008

A Hedge Against the Economy

Several weeks back CNN Money Magazine predicted Rochester's housing prices to increase 2.7%, ranking it second in the country for fastest growing markets. And while that is very good news for the Rochester real estate market, there are a few things to keep in mind. First off, this is only a prediction. Second, this is a cool off of the 4 to 6% appreciation we've been seeing in recent years.

As I work with buyers, especially first time buyers, I urge them to consider shorter term financing, even if it means purchasing a less expensive property. In my opinion, that is the greatest hedge against today's uncertain economy.

Case in point, consider 137 Boardman St (www.RochestersBestHomes.com/811190 ) listed at $96,500 with property taxes of $2,285 per year. Let's suppose we come to terms with a purchase price of $93,000 and we plan to put 5% down ($4,650) which means we are financing $88,350. Let's say our interest rate is 6.125%.

For a 30 year mortgage, consider the following:

Monthly principle & interest is $536.82 (Of course, that does not include taxes of $190.42 which would make the payment $727.85) After five years, the balance of your loan will be approximately $81,500. That means, of the nearly $35,000 you send to the mortgage company over the period of 5 years, only $6,850 is used to pay down your loan.

Now, let's look at a 15 year mortgage. Sometimes you can get a better interest rate on a shorter term loan but for the sake of comparison, let's stick with the 6.125% Monthly principle & interest is $751.52 and at the end of five years, you will have paid down your loan to nearly $65,000. Instead of having $7000 in equity, you will have approximately $23,000!

Most banks also offer 20 and 10 year mortgages. Often buyers will not even inquire about a shorter term mortgage because they assume they can't afford it. In my opinion, they can't afford not to! When shopping for a mortgage, ask your lender to also provide a good faith estimate for a 20 year and 15 year mortgage and go with the shortest term mortgage you can possibly afford.
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