Making Your Best Investment

making your best investmentOn occasion, buyers who are prepared and qualify to buy a home decide to take a step back and wait to commit to the purchase of a home. When their focus moves from buying a home, they start considering using their down payment money for other things.

They begin to think about other large purchases such as a new car, motorcycle or even a jet ski. Making these purchases could negatively affect their ability to qualify for a mortgage loan by increasing their debt to loan ratio. It’s amazing how many people say they would like to buy a home, but don’t have the down payment money or good credit or their income is not sufficient to qualify.

Instead of letting that burning hole money go, consider investing it for two years until you are ready to buy. Let us take a look at dropping the money into a CD (certificate of deposit) that earns 2 percent or in the stock market that could bring a 5 percent return.

Assume you were purchasing a $295,000 home on an FHA loan with 3.5 percent down payment.  You could grow the $10,325 to $10,742 in a CD which isn’t a big increase but at least it is safe and secure, and it will be available when you’re ready.

If you invested same amount in a safe stock or mutual fund that earned 5 percent, it would grow to $11,383 over the same two-year period.  It earns more but there is more risk involved.

Based on the table above, if you invested the down payment amount in purchasing a home that appreciates at 3 percent a year, the equity would be $38,871 two years from now.  The dramatic increase is due to leverage, being able to control a large asset with a small amount of cash.  The appreciation is based on the purchase price of the home and not the down payment amount.There is also the principal reduction with each payment that is made to consider.Experiment and make your own best projections with Your Best Investment table above. If you would like to talk about the investment of buying a home, feel free to contact me today!Want Some Insider Information on Fairfax VA homes for sale? Get a FREE Market Snapshot Report of Your Northern Virginia Home’s Value, or  Search All Northern Virginia Homes For Sale. Put that data you need at the tips of your fingers!

Your Best Investment

 

CD

Stock Market

Home

Cash to Invest

$10,325

$10,325

$10,325

Wealth Position

$10,742

$11,383

$38,871

Profit Taxed as

Ordinary Income

Long-term capital gains

§121 exclusion applies

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