Oct. 28, 2005: Getting a handle on leverage in the mortgage lending process
Think fast: What's the best way to buy a house? A big down payment and a low mortgage payment, or the other way around? A 30-year fixed-interest loan or an adjustable? Amortizing or interest only?
They're trick questions, of course. Your answers will depend on your circumstances. But some answers are better than others.
It's reasonable to presume that homes in the West Valley are going to appreciate very well over the next year. Yes, everybody's brother insists that the market has cooled, but this is true only by comparison. Had we not lived through the inferno of the past six months, this market would seem very hot indeed. We may not hit 50 percent over the next 12 months, but 20 percent or more is very plausible.
So, assuming that the home you buy is going to gain substantially in value, should you buy with a big down payment or with as close to nothing down as possible?
You're better off using the lender's money for the home while you seek higher interest rates elsewhere. The borrowed money will cost you 6 percent or less, while your cash investments are earning 8 percent, 10 percent or more. Meanwhile, the home will gain value on a very small out-of-pocket outlay.
That's leverage, and that's the whole secret to tapping into the investment value of your home. Do you need a 30-year fixed loan? Most people move every three to five years. A five-year or seven-year fixed/adjustable loan may be the best fit for a low, fixed rate.
Amortizing or interest only? If values continue to rise, you'll accumulate equity even with an interest-only loan. If you use your lower mortgage payment to build wealth in other investments, you'll get rich twice as fast.
If you take the money you save on your residence and use it to buy rental properties, you can achieve an immense leverage of assets.
Greg Swann is the designated broker for BloodhoundRealty.com, a full-service Metropolitan Phoenix real estate brokerage. This article originally appeared in the West Valley regional sections of the Arizona Republic.
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