There are times when the things we don’t do cost us more than the things we do. If you had a certificate of deposit that you put money into and it was earning 2 percent when you had a chance to take advantage of an 8 percent earnings, the difference between these percentages cost you money.
If you have a down payment and good credit, purchasing a home now by locking in low 30-year mortgage interest rate would be lowest cost to you. If you wait for three years to purchase, chances are the interest rate would rise and so would the purchase price of the home.
But if we want to assume the interest rate and price will remain constant, let’s look at what the opportunity costs might be if you did nothing…
If you invest your money into a certificate of deposit at a 2 percent rate, in a couple of years your investment of $8,750 would grow to $9,104. You will have earned $354, but will pay ordinary income tax on the interest earned.
If you had invested your money in the stock market and it increased by 7 percent in the same two years, your profit would be $1,268. But again, this is subject to long-term capital gains tax.
Now if this same investment was put towards purchasing a home, and that home increased in value by 3 percent a year, your equity would be $31,938 – an increase of $23,188. You would not be paying taxes until the home is sold, and may even have a delay in them due to your principal residence exclusion.
Your home’s value will increase due to appreciation and your unpaid loan balance will decrease due to amortization. The dramatic difference in growth in the equity of the home is effected by leverage: the use of borrowed funds controlling the asset.
Your home is your place where you feel safe and secure – where you enjoy time with family and friends – and it can be a good investment. Difficulties arise in measuring the opportunity costs of intangibles, but not with money.
Use my graphic below to help you make your own projections with Your Best Investment.
If you are looking to take advantage of Your Best Investment let me send you a list of Fairfax Homes for Sale that will meet your desires. Don’t miss your opportunity!