Saturday, February 26, 2005

Sunday Special: The American Home Bug

The great jurist Sir Edward Coke, who lived from 1552 to 1634, has explained why the term mortgage comes from the Old French words mort, “dead,” and gage, “pledge.” It seemed to him that it had to do with the doubtfulness of whether or not the mortgagor will pay the debt. If the mortgagor does not, then the land pledged to the mortgagee as security for the debt “is taken from him for ever, and so dead to him upon condition."

More than ever before, Americans are crazy about their homes. Interest rates have been at an affordable 6 percent or so for the past 18 months and buyers are taking advantage-home ownership has rarely been this affordable. Today, the American home bug is driven by your home's ability to reap sizable demand and property value appreciation, rewarding you later in life once, say, the kids are off to college. As real estate expert spencer Strauss writes, real estate
can provide you with a place to live while it's working as an investment...this investment offers several kinds of return including cash flow, equity growth from loan payoffs, equity growth from appreciation, and great tax benefits.
Like most investments, your home presents you with a number of options with which you can play around and make every dollar count. When you buy stock, you can hedge your bet with options. With homes, it is things like refinancing. Refinancing is when you apply for a secured loan intended to replace an existing loan secured by the same assets . Because of new low interest rates, you can refinance and lower monthly payments, pay off a loan or build equity faster. If interest rates may have fallen since you financed your home, by refinancing your mortgage at a lower rate, you will pay less interest over the life of your loan. If you have an adjustable-rate mortgage and want to switch to a fixed rate for a consistent mortgage payment each month, that would be the time to do so. Another option would be to reduce your loan term and increase your payment amount. This will help you build equity more quickly and may save money. Finally, you can tap into your home equity. Mortgage interest rates are often lower than consumer loans, resulting in a lower monthly payment. In addition, the interest you pay on a mortgage may be tax deductible. You can use the equity you have accumulated in your home for debt consolidation or whatever financial need strikes you at the time. It's just like dipping into a permanent insurance policy's cash value--borrow and pick a convinient way to repay.

When first mortgage rates are lower than equity loan rates, it usually makes sense for a borrower to tap equity by going through a so-called cash-out refinance. Conversely, consumers who plan to pay off their loans in a reasonable amount of time and those who don't need to borrow much money should go for an equity loan or line of credit. This could all be very tricky of course, so make sure to make the choice based on an amortization schedule congruent to your needs.
"If you've got a favorable rate on a first trust deed mortgage, something in the 6s thereabouts or low 7s, you don't want to pay off a $100,000 mortgage to take out $20,000 and raise the rate on the whole amount," said Richard West, senior vice president and division manager at San Francisco-based UnionBanCal Corp. "You're much better off borrowing $20,000 and keeping the first mortgage...Each individual has to do the math and decide which way to go."
Alternatively, lines of credit may offer more flexibility than first mortgage refinances since equity line borrowers only pay interest on what they borrow. Again, current interest rates would determine if such a tactic is the right one.

Selling your home (or buying them through foreclosures and selling them above what you paid for it--a foreclosure occurs when a homeowner is unable to make principal and/or interest payments on his or her mortgage, giving the bank the right to seize & sell the property at a deep discount) is of course where ther big bucks lie. Remember that remodeling and relocating can be expensive, or they can parlay into a terrific return on your investment if properly executed. Remodel the kitchen, bathrooms, and back deck before anything else-today's buyers put a premium on them. Keep an eye on your neighborhood as a whole--who's there now, who wants to come in in the future, and what are the latter willing to pay the former? Study and crunch the numbers. And sell NOT when your heart tells you to, but when market does. Lastly, take advantage of the major tax loopholes, like the 1031 exchange, which allows owners of Real and Personal property to sell their property and buy other like kind property without paying the Capital Gains Tax.
A 1031 exchange, also known as a Starker exchange, permits investment property owners to sell a property and defer tax payments by reinvesting the proceeds into a "like-kind" investment property or properties. A 1031 exchange is enabled by Section 1031 in the Internal Revenue Code.
Recommended Reading: Real Estate Riches; The Unofficial Guide to Real Estate Investing; the ABC's of Real Estate; Investing in Real Estate.

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