Should You Trade a Low Mortgage Rate for a Higher-Value Home?
An article that explores the benefits of upgrading to a more valuable home, even if it means a higher mortgage interest rate. The article highlights how solely focusing on a low mortgage rate can lead to missing out on greater appreciation in the value of the home. While it's important to find the best interest rate, the article suggests considering other factors such as location, property condition, and market conditions to make a smart investment decision that will pay off in the long run.
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If you're currently having thoughts of selling and moving to something that better fits your needs, you're likely happy with your current low-rate mortgage and finding it difficult to increase not only your payment amount for a higher value home, but also the increase in your monthly payment and how much of that goes to interest.
Is there any upside to leaving behind a mortgage that is around or below 4% to upgrade to your next home with a much higher rate?
While it's understandable to want to save money on interest payments over the life of your loan, there are other important factors to consider. Specifically, by focusing solely on getting a low mortgage rate, you could be missing out on the potential for greater appreciation in the value of your home.
An example of a common situation might be a homeowner with a $200,000 balance on a house that has a market value of $300,000 with a roughly 3% mortgage who would like to upgrade. In this example, moving up to what they really want might mean looking in the $400,000 and higher range. Unless they intend to pay cash or bring a large down payment, this could mean an increase to their monthly payment of several hundred dollars or more, much of which goes to pay interest.
This can cause anyone to delay or forget their vision of a new and better home for at least two reasons: either they no longer qualify to make the payment on a more expensive house, or they can't justify it.
For those who now don't qualify for a mortgage to buy their next home, they may allow some time to see their current home appreciate while saving more money for a down payment, making home improvements that will increase the value of their home, and paying down debt.
While they wait, there is reduced competition among buyers. This creates an opportunity for those buyers who can justify the increased interest payment.
Consider how much equity you've gained through appreciation alone over recent years. How much more appreciation will accumulate in a more expensive home?
If the intention is to keep a low interest rate, are you missing the opportunity to have greater appreciation in a higher-value home?
Historically, real estate has been one of the most reliable long-term investments available. While there are certainly short-term fluctuations in the housing market, over time, real estate values tend to increase. According to data from the Federal Housing Finance Agency, home prices in the U.S. have risen by an average of 3.4% per year since 1991.
However, in recent years, the rate of appreciation has slowed down somewhat. In 2020, home prices increased by just 5.4%, which was lower than the 6.4% increase seen in 2019. Despite the deceleration in appreciation, though, real estate still represents a strong investment opportunity.
The key is to strike a balance between a low mortgage rate and the potential for home value appreciation. This means that while you should certainly shop around for the best interest rate, you should also be thinking about the long-term value of the property you're considering. Here are a few factors to keep in mind:
Location: Homes in desirable areas are likely to appreciate more quickly than those in less popular areas. When you're shopping for a home, consider factors like school districts, access to public transportation, and nearby amenities.
Property condition: A well-maintained home is likely to hold its value better than one that requires extensive repairs or upgrades. Be sure to have a thorough home inspection done before you buy to identify any potential issues.
Market conditions: While no one can predict exactly how the housing market will perform in the future, it's important to pay attention to current trends. If home prices are already high in your area, you may want to hold off on buying until the market cools down a bit.
In short, while a low mortgage rate is certainly an important factor to consider, it's not the only one. By keeping an eye on the potential for home value appreciation, you can make a smart investment decision that will pay off in the long run.
https://www.vexillumrealty.com/2023/04/26/should-you-trade-a-low-mortgage-rate-for-a-higher-value-home/
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