real estate investing

With historical low mortgage rate, it might be a good time to buy a house or move up. Why would i say that when many economists are predicting further decline in home price?

The cost of owning or holding a house is determined mainly by the mortgage rate, and not by the price of the home. With the current rate at around 5% for 30 years fixed mortgage loan, the monthly payment is affordable for most people. Nobody can predict the top. Nor anyone can predict the bottom. If you can predict the future with certainty, just buy or sell the real estate derivatives offered from CME. For most investors like you and me, we don't really know the future.

Lets look at the math here. When I bought my first home in 1997, the rate was 8%. Lets compared the monthly payment for a loan of 5% and another loan of 8%.

The monthly payment for a 30 years fixed loan of $100,000 at 8% is $733.76, and the monthly payment for the corresponding 30 years fixed loan at 5% is only $536.82. A loan amount of 75,000 at 8% will give a monthly payment of $550.32. What does it mean?

Lets assume it is a 100% loan for buying a house to simplify the argument here. Suppose the house price will drop another 25% and the interest rate will increase to 8% 2 years from now, your monthly payment to buy a home now is still lower than the monthly payment if you will buy it as 25% lower price 2 years later.

Of course this is a simplified argument. Investing is dynamic, meaning adjustment should be made when environment favors proper adjustments. Real estate investing requires proper adjustments such as cash out, refinance and pyramiding. Consultation with financial experts in this area will help you building wealth with real properties.