Hey, your scratch-off ticket hits big and you win $8,750. Instead of spending it away, you decide to invest the money. Three alternatives are on your mind: purchase a certificate of deposit, invest in a mutual fund or use it as a down payment on a $250,000 home.
Let’s compare these three alternatives by looking at the gained equity each one provides three years from now.
Today’s market supports a rate of 1.3 percent for a certificate of deposit. We will assume a 5 percent rate on a mutual fund and we will assume at least a 3 percent appreciation rate on the home over three years.
Your certificate of deposit would only be worth $9,096 in three years and your mutual fund would be worth $10,129 in the same time span. However, when we look at the $250,000 home, the equity gained would be $45,204 which is four times higher than the CD or the mutual fund.
A major reason for the difference is the buyer benefits from the leverage: the use of borrowed funds to increase the results. Your $8,750 down payment is controlling your $250,000 investment. The appreciation is determined by current market value and not based on your invested cash. An additional benefit is that your loan balance will consistently decrease through amortization and will lower in five years than the original borrowed amount.
Other factors you may want to consider are maintenance and expenses for living in the home but will those really add up to $45,204 over five years? If you purchase in a popular neighborhood with a good median sales price your investment could gain you even more equity due to market uptake. But before you get too excited, visit with a trusted mortgage professional and get pre-approved. This will give you extra negotiation leverage. Contact me if you need a referral!
Use the Your Best Investment calculator to make your own projections.
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