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Should We Take On A New Mortgage?

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Posted On: 11/11/2015

QUESTION:

We have a home that is mortgage-free but are thinking of a new loan. Mortgage rates today are low, and there is little room for them to go anywhere but up, so if we borrow now we will have cash when rates are higher and thus an ability to buy more real estate when rates rise. What do you think?

ANSWER:

It’s certainly true that mortgage rates are low. In late-September, 30-year prime mortgages were priced at 3.86 percent according to Freddie Mac, not terribly far from the 3.31 percent seen in 2012. Logically it would seem that rates cannot go much lower but such an assumption could be wrong.

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For instance, many investors in Europe and Asia are now facing “negative interest” rates. This means if an investor deposits $100,000 they will get back less. One reason our mortgage rates are so low is that investors worldwide are bringing cash to the US where prospects for at least preserving capital are far better.

There’s no doubt that the U.S. real estate market has firmed in recent years. Home values have generally risen, foreclosures have fallen and interest rates remain remarkably low. But, as they say on Wall Street, past performance does not guarantee future results. Moreover, success is not universal; risk always remains in the marketplace. The National Association of Realtors reported that existing home values rose in 163 of 176 metro areas in the second quarter – a terrific result but one that also means values fell in 13 areas.

More importantly, metro-wide reports may not capture more localized trends. For instance, a new study by Weiss Residential Research, which looks at individual home values, shows that 23.4 percent of all residential properties actually lost value during the past year.

Meanwhile, regardless of which way home values move, your bet costs cash in the form of mortgage interest. You will likely be able to get a tax deduction, but still there’s a real out-of-pocket expense. What happens if your income declines? Or your investment does not work out?

If you have a mortgage-free home you might think of your “return” as equal to the interest you do not pay, a “savings” and unlike “income” money that is not taxable. Or, you might think of in terms of cash flow, not having to make monthly payments for principal and interest. In many households such lower monthly costs have great value.

There is no certainty with any investment option and some of those with mortgage-free homes will be elated to keep them that way while other owners will see homes as an asset which can be used to fund additional investment opportunities. Whatever choice you make, be sure to look carefully at local real estate trends, the more local the better.

© CTW Features

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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