Monthly Archives: February 2014

Rising interest rates and mortgage payment amounts

A ½% increase in interest rate may not sound like much but it is roughly equivalent to a 5% increase in price.  It becomes obvious when you compare the payments.

If you financed 100% of the cost of a $250,000 home at 4.5% interest for 30 years, the payment would be $1,266.71 per month.  If the mortgage rate went up to 5%, the payment would be $1,342.05.  If the home increased 5% in value, the $262,250 loan at the lower 4.5% rate would have payments of $1,330.05.

The two payments are close enough to justify the statement that a ½% change in interest is approximately equal to 5% change in price.

Each time interest rates go up, fewer people can qualify to buy a seller’s home.  The mortgage rules that went into effect this year require buyers to meet specific payment to income ratios.  As demand picks up for the seasonal market, most experts expect rates to increase.

Buyers will be doubly challenged in the current market because prices are rising (NAR reports 11% last year) along with the anticipated mortgage rates.  Buyers who wait will inevitably be paying more to live in the same home had they acted sooner.

Check out on how Interest Affects Price for a home in your price range.

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Remodeling cost vs. value chart for upscale homes



South    Atlantic

Miami,    FL



Resale   Value

Cost   Recouped


Resale   Value

Cost   Recouped

Change   vs 2011-12

Bathroom   Addition $67,157 $39,443 58.7% $68,751 $44,742 65.1%
Bathroom   Remodel $47,786 $28,910 60.5% $49,021 $27,882 56.9%
Deck Addition   (composite) $32,359 $20,180 62.4% $33,216 $25,169 75.8%
Garage   Addition $76,258 $43,769 57.4% $78,174 $46,800 59.9%
Garage Door   Replacement $2,632 $2,017 76.6% $2,649 $2,226 84.0%
Grand Entrance (fiberglass) $6,916 $4,434 64.1% $7,034 $4,753 67.6%
Major Kitchen   Remodel $103,317 $62,307 60.3% $104,430 $65,120 62.4%
Master Suite   Addition $209,125 $114,132 54.6% $214,779 $121,467 56.6%
Roofing   Replacement $30,305 $18,826 62.1% $30,931 $24,995 80.8%
Siding   Replacement (fiber-cement) $12,167 $10,692 87.9% $12,387 $11,157 90.1%
Siding   Replacement (foam-backed vinyl) $12,825 $9,813 76.5% $13,218 $10,976 83.0%
Window   Replacement (vinyl) $12,624 $9,266 73.4% $12,869 $10,108 78.5%
Window   Replacement (wood) $15,849 $11,113 70.1% $16,055 $13,346 83.1%


Real estate ownership advantages

A certificate of deposit will generate a cash flow based on the interest rate that it pays which is the only way it generates a return for the investor.

An investment in a stock that doesn’t pay dividends, would need to be worth more than you paid for it to earn a profit.  On the other hand, a stock that paid dividends could make the investor a profit even if it sold for the same price that he paid for it.

Investors can profit four different ways with an investment in rental real estate.

1. Cash flows that result from having a surplus after collecting the rent and paying the expenses.

2. Equity build-up results from a portion of each monthly payment reducing the unpaid balance.

3. Tax benefits can result from the depreciation allowed on the property and the preferential long-term capital gains tax rate.

4. Appreciation benefits the investor when the value of the property increases.

The most conservative investors in real estate make decisions to purchase a rental property based on its ability to generate a cash flow and reduce the mortgage through normal amortization.  If the property can offer an acceptable rate of return compared to other available investments, the tax benefits and possible appreciation become an added bonus.

With increased rents and low mortgage rates for investors, rental property can offer significantly higher returns than many of the available alternatives.  Contact me for more information-; you may be amazed about what is available in the market.

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