Ignore Stale Mortgage Advice
If you are a Millennial (or even a Gen Xer), you are likely getting a lot of mortgage advice from your Baby Boomer grandparents and parents. The fact is, though, things have changed quite since the 1980’s! Gone are the days where you spend a lifetime in the same house, living out your golden years in dreamy nostalgia, a la “Father of the Bride”. Buy and hold may work great for 401(k) mutual funds, but for the extremely mobile generations of younger workers, you likely have several moves ahead of you as you climb corporate ladders and seek out new opportunities.
So, here are some of examples of what constituted the sage advice of yesteryear and why you should avoid it like the plague.
Fixed Rate/30-year Mortgages
C’mon on now. Who really spends 30 years in the same place anymore? If you are still in the same home 5-7 years from now, you’ll be bucking the trend.
It used to be, a 30-year mortgage was the only way to get an affordable payment, while you slowly but surely build equity. But if you think you’ll be moving on…to a new city, a new job, a new state…in a few years, a 5-7 year adjustable rate mortgage may make more sense. You could save hundreds of dollars on your monthly mortgage payment, and the rate is fixed for the first 5-7 years. After that, the loan automatically converts to an ARM. But chances are, you will sell before you reach that point. If you don’t, you can always refinance into a 30-year or 15-year fixed rate before the adjustable rates kick in.
You Must Have 20% Down
We would be remiss if we didn’t say that there are certain advantages to making a larger down payment. You can avoid private mortgage insurance (PMI), get a lower rate from your lender, and save thousands in interest over the life of the loan.
However, you DO NOT have to have 20% down. It is possible to buy a home with a smaller down payment, even as low as 3% for FHA or 0% for VA loans. This is especially helpful in the Silicon Valley area, where a tiny condo could set you back $500k. Your lender can talk with you about the various options available, and you may be closer to buying a home than you think.
Chase Those Interest Rates
In the good ol’ days, a hot topic of conversation around the office coffee machine or at the neighborhood BBQ was who got the best interest rate when they bought or refinanced their home. But chasing the best rates, in the present day, could mean that you miss out on a really good rate. For instance, just a couple months ago, rates were at a 10 year high. So if you could have purchased last year, and waited until this spring, you likely are paying higher interest than those who jumped in during the Spring of 2018.
Now, rates have fallen again, and a little unexpectedly, at that, give the Fed guidance that they were going to be raising the Fed Funds rate throughout 2019-2020. We don’t know how long it will last. If you wait, you could miss the great rates we have now, because you were waiting for a better rate that never comes.
Pay Off Your Mortgage Early
The last thing you want to do is go into retirement with a mortgage still hanging over you head, right? The sooner you pay it off, the quicker you get out from under those payments, and then you can start socking money away for retirement, right?
It’s all about opportunity costs.
Let’s say you are socking every penny you can toward your mortgage, which you took out 5 years ago, with an interest rate of 3.25%. If you took that money and invested it in an S&P500 mutual fund, you could probably get a 5-10% return, or nigher. So you are actually losing money by paying off your mortgage early rather than investing it in something with a better return.
The earlier you start investing, the more you can accumulate. I read an article recently that suggested that most of the country’s millionaires started investing by the age of 25. The power of compounding is substantial. You can always pay off your mortgage later, with income from your investments, but you shouldn’t necessarily delay investing in order to pay it off early. Every situation is different, though, so contact a financial advisor to see what is best for your specific needs.
Let my team at Keystone Realtors® meet all your real estate needs. We can help you find the perfect investment property to get started, and provide advice on your investing journey. Paul Phangureh has over 16 years of experience in buying and selling in the Santa Clara and San Mateo County areas, specializing in the high-end, luxury market, as well as commercial and multi-use real estate. We can help you navigate the process of getting started with real estate investment. Visit our website at Keystonesv.com for listings and information. You can contact Paul at 650-924-2544, or email at [email protected].