Amortization… One of the Most Important Reasons to Buy Real Estate

I did a presentation yesterday, and a bunch of real estate agents talked to me after mentioning that they are having a hard time getting buyers to make a move right now. I understand. There are a lot of things making people nervous: so much in the media, prices are high, rates are high, and people are scared that real estate prices are going to crash.

It makes me ask the question: who is your expert in the industry? Who are you listening to?

Looking at Real Estate Objectively

It leads me to some of the most objective things about owning real estate. One of the things that doesn’t get the attention it deserves (but is very important) is that amortization on a mortgage means that you are paying a little bit off every month. What does that actually look like? What does it mean to people.

Let’s break it down. I assumed a $700,000 purchase with 10% down and a 7% interest rate, which means you have a $630,000 mortgage. In 2 years, you’ve paid off about $13,000 – which doesn’t seem like a lot.

But it gets more interesting with time because interest is front-loaded on these mortgages. In 5 years, you pay off just shy of $40,000 of your mortgage. In 10 years, you’ve paid $90,000 – and now these numbers are really starting to make sense.

So, if you buy a house today and you see no appreciation whatsoever, you are still ahead because you’ve paid off almost $100,000 of your mortgage during this time. Then, the real magic starts to happen. Stick it out and pay off the mortgage, and eventually you have no monthly payment and a house to live in. This is where everything starts to come together and retirement gets much easier.

Amortization Adds Up

Don’t forget about the amortization. Yes, I understand that the market feels challenging right now. But from my perspective, there are a lot of reasons to believe that prices are right where they should be. I don’t see a crash coming. Even if you buy and things crashed, you only lose money if you sell.

For example, if you bought in 2006, then by 2009 you could have lost 50% of the value of the house – and that sucks! There’s no question about it. But then fast forward 5 – 7 years and you see that all of the prices came back up and over that time you were amortizing the mortgage away. That’s where real estate makes sense.

Focusing on the Long Term Perspective

If you focus on the long term perspective, real estate is always a great investment. If you think that you are going to be moving in a few years, then you probably should be renting right now. If you are in a location where you think you will be for a while, then there is no question that you should be buying.

It’s so simple, but at the same time so hard for people to think long-term.

Do you have questions about your options for financing a home purchase? I’m here to help! Reach out any time.