The Only Rational Part of the Home-Buying Process

By Mary McLean at our sister office Dallas McLean Realty* 

The only true rational and quantifiable piece of the home-buying process is financial.

History of the Interest Rate

Fifty years ago, the only real variable in mainstream mortgages was the interest rate. At that time, all loans were for 30 years, and second mortgages, which are commonplace today, were considered questionable by both sides. Money was truly a commodity, sold by price alone — like cotton or pig iron (crude iron).

The Scaling of Rates

As time has made us more sophisticated, the real cost of money has become tied to the theoretical risk of the loan. Specifically, the scaling of rates allowed people with lower credit and smaller downpayments to achieve the American dream of homeownership, but at the cost of paying more. Today, there are multiple loan programs available for the poor to middle class that subsidize downpayments, interest rates, etc.

Tax Deductibility of Mortgages

Mortgage payments are mostly tax deductible; however, the part that goes toward principal deduction is ‘forced savings’, meaning you owe progressively less against your home every month and are thus building equity. For everyone who buys a home, the purchase is partially subsidized by the deduction of interest and real estate taxes at closing.

Look to the Professionals

It is recommended that you try not to learn the real estate mortgage market, but rather find someone that you instinctively trust and run with them. Talk to your agent, banker, tax consultant, friends and at least two to three mortgage brokers.

We prohibit our agents from getting fees from lenders, so that they are fully and constantly aware that their service and loyalty are to and for their real estate clients. Be cautious when dealing with agents who also place loans.

Our Final Word

Most importantly, don’t let this sometimes tedious and dry part of the home-buying process dampen the fun and excitement for you of buying a home. 

Posted March 17, 2017 

  
The Economics of House Vs. Land Value

 

By Mary McLean at our sister office Dallas McLean Realty* 

When one buys a home, one is really buying two main components:  

      1.  The House, and

      2.  The Land or Lot.

All other things being equal, it is better to buy a home in which the lot (as opposed to the house) represents the higher percentage of the total value.

Two Basic Tenets of Real Estate

      1.  Lots appreciate in value.

      2.  Houses depreciate in value.

Lot values realistically run from 20% to 90% of the total value of a property. Discounting inflation, the cap on the value of a house is what it would cost to replace it.

Depreciation is the loss in value over time due to wear and tear, evidenced by the fact that most people would rather have a new home than a used one. Conversely, appreciation is the increase in value over time.

An Example

There are two homes with the value of $250,000. Property #1 has a house value of $200,000 and a lot value of $50,000, while Property #2 has a house value of $50,000 and a lot value of $200,000.

Property #1 clearly has a much nicer structure on it, while Property #2 has a much better location.

The change in house vs. land value over time demonstrates why it is better to put more money into the lot as opposed to the house.

If the houses on Properties #1 & #2 depreciate by 10% over a 5-year period, the overall value of Property #1 depreciates by $20,000 (10% of $200,000), while Property #2 depreciates by $5,000 (10% of $50,000). 

A 10% increase in their respective lot values over 5 years would reverse the math above. Specifically, Property #1's lot appreciates by $5,000, while Property #2's lot appreciates by $20,000.

If you combine both assumptions above, Property #1's net loss totals $15,000, while Property #2's net gain is $15,000 over 5 years. The following details the changes in house and lot values for both properties over a 5-year period.

                           Property #1       Property #2

House Value          $20,000               $  5,000

Lot Value               $  5,000               $20,000

Net Gain/Loss       $15,000               $15,000

If you assume a 5-year time period, the total value of Property #2 increases by $30,000 more than that of Property #1.

Net Difference of $30,000 over 5 years = $6,000 annually, or $500 per month

A Parting Thought

The question then arises: Is it worth $500 monthly to own Property #1 rather than Property #2 for a 5-year period or whatever time frame one assumes.

Posted December 18, 2016

 

* To contact Mary McLean, visit the website for Dallas McLean Realty at www.keystodallas.com.