A MORTGAGE WITHIN YOUR BUDGETby Edy Laraque, B.Eng., MBA
Licensed Mortgage Broker
Economy and Real Estate MarketThe two main characteristics of the U.S. economy today are low inflation and low interest rates. Low inflation keeps consumer spending high, increases importation of low cost goods, stimulates production and employment. However, our low inflation economy keeps salary low, because most wages are indexed with inflation (cost of living increases). In South Florida, workers must accept the lowest wages in the Nation, and they can not expect wage increases as the cost of living remain relatively low and stable.
Low Interest rates make real estate investments more attractive than most security savings (CD, Savings accounts…). Large demands for real estate investments far exceed the supply of properties for sale. The imbalance is the major cause of the tremendous cost increases of the real estate properties, with more than 110% increase in South Florida during the annual period of July 1, 2003 to June 30, 2004. Because of our low interest rate economy, real estate investment is one of the most attractive activities for capital gain. The Loan-to-Value ratio of the mortgage loans shall decrease rapidly and make cash-out refinancing very attractive.
The Wisdom of the Debt RatioHome ownership and real estate investments are highly recommended. Today, home ownership is at the highest level in the Nation. But because of our low inflation economy, revenues from wages are not expecting to grow. And consumers, while investing in real estate, shall avoid making long term investments "over budget" based on potential future earnings. The "debt ratio" (rate of total real estate expenses over the revenues) of the consumer is of prime importance.
It is recommended that revenues available after all debt expenses (principal, interests, taxes, insurance, credit cards, car loans, student loans…) be enough to cover all living expenses and allow savings to cover the unexpected. Examples of unexpected expenses are a family loss, a new birth, a car accident, a change in employment, and an increase of gasoline costs. Too often, consumers use credit cards to cover the unexpected and keep increasing their indebtedness. High debt ratio is one of the main causes of irregular mortgage payments and of foreclosures, even of bankruptcies.
Budget all your Expenses and SavingsIt is ill advised that a customer use all his savings to close the real estate transaction, and plans to use all his monthly revenues to cover the "scheduled" expenses. Without reserve, the property may fall in disrepair due to lack of preventive maintenance. In the volatile and changing labor market, loosing the job will be a tragedy. Make sure your loan commitment will not bring you to bankruptcy. You most avoid to deplete all your reserves and to accept total payments that exceed your financing capability. Ignoring the wisdom of the "Debt" ratio may destroy your dream in the future. You want to increase your wealth by gaining capital through real investments. To be successful in the real estate business in our low inflation rate and low interest rate economy, make mortgage loans (and all loan) within your budget. And note that wise and successful investors always hold cash reserves to respond to the unexpected.