Should you Really Sell Your Home with a 2.6% Interest Rate Mortgage on it?
Wait...should I ever sell my house if my interest rate is only 2.6% ??
If you bought or refinanced your home a few years ago, when mortgage rates
were historically low, you might be staring at your mortgage statement thinking:
“If I sell my home, I would lose this incredible interest rate. Should I ever consider
selling my house now?” It’s a valid question.
An interest rate in the 2%-3% range is a gem in today’s market and probably
for the foreseeable future. For context, mortgage rates have soared upwards in
recent years, often sitting above 6% or even 7%. Though there may be some
downward trajectory in our near future on these rates, they may not get down
into the 2% or 3% range again in our lifetimes.
So what does this mean? I will give you a thought on a way of taking advantage
of this great rate that you have, with a real life example to help illustrate:
I recently helped a new client put their home on the market for rent.
They came to us because they had tried to sell their house for many months, but in this
climate they were not able to sell it for what they wanted to get. So we looked at
what they could do in the rental market versus their expenses. We realized we
could probably get them about $1,000/month free and clear, above all of their
expenses on the property (including mortgage, taxes, insurance, maintenance,
etc). This $1,000 net cash flow is only there because the interest rate on their
mortgage is so low (2.6%).
They figure they have about $150,000 of equity in the property. So if they make
$1,000/month (or $12,000/year), that’s an 8% return on investment, just on their
cash flow.
But then there’s also some “hidden” cash flow as well - which is the loan pay
down of their mortgage - another $700/month (or $8,400/year). So if you add the
loan pay down ($8,400) plus net cash flow ($12,000) you get $20,400/year return
on investment - or 13.6% return on the $150,000 equity. Not bad considering real
estate is also taxed differently than other income, which makes it an even more
attractive return.
But then you also have to factor in the growth (appreciation) of the property
itself! This is a key part of any real estate investment. Let’s say their property is
worth $600,000, and it increases in value of an average of 3% per year. That’s
$18,000 the first year - and that number compounds year after year.
So in their case - we are going to turn the failed sale attempt into a big win.
So my advice is this: if you have a home locked into a fixed interest rate in the
2%-3% range, take a hard look at how much equity you have in the property and
try to determine what your “return on equity” might be for that property if you
rented it out.
Do that analysis before you sell it and say goodbye to that historically low interest loan!
Also realize - year after year, your rental amount should increase on average.
Imagine 10 years from now when that homeowner is still paying that same
mortgage amount but the rental income has increased by 50%. This means at that
time they will be cash flowing much more! The gap of income versus expenses
will just continue to widen from here on out. They are going to be very glad they
didn’t throw away that mortgage. As it turns out, this will likely be an important
part of their retirement income.
