Before you spend a dollar in real estate

Posted: Sep 22, 2006 12:00 AM

A Quick Announcement….

Please be aware that the last Sunday in September is Gold Mother’s Day where we take time out to honor the families – especially the mothers – of those who made the ultimate sacrifice in service to our country. God Bless the Mothers who gave the best and the bravest!

Now, Before you spend a dollar on real estate…..

You need to know what you haven't been told: the right move will make you wealthy, the wrong move will give you warts, figuratively speaking. Why didn't anyone tell you? Because: (a) there isn't any money in it to tell you, (b) your parents probably didn't know, and (c) if they did know, you probably wouldn't have listened anyway. Investing in real estate, much like the stock market or the commodity market or buying antique cars, is an art not a science, so my words on the subject will only be found in textbooks generally written by me. Up to now I have only written one, which is yours for the asking. But let's begin with this column.

The first point I will make was actually brought to prominence by my friend and radio partner, Hugh Hewitt, when he constantly drove home the point that your house is your bank. It is a great point, because if managed right, your house can become the "Bank of First Choice" for you and you will always be welcome there.

In your quest to buy your first house, do not skip any of the steps that will lead you to the right place, as it will be the bedrock of your financial plan and will help shape your financial future. Begin by getting pre-qualified. If you talk with any real estate agent or broker, they will tell you the need for a qualification letter to go along with the offer and at that time they will help you get one. Too late! Being pre-qualified is not for the seller’s benefit (knowing you are capable to buy the house), nor the realtor's benefit (knowing you can get the financing). It is for YOUR benefit. You will learn what you can afford, the different types of programs available, and when we do a pre-qualification, we also tell you what you can't afford. We do that to help you conquer "the kid in the candy store syndrome". Believe me, it's real.

Next, do not believe that using a Realtor is a bad idea. A good Realtor will show you as many places as you need to see, tell you not only the pros and cons of the house but also the area, and really won't push you into a house above your means. Why? Because if you are pre-qualified, you will know the limits.

I love to play golf and have learned the worse thing I can do on a drive is to bend or slide my right leg. Instead, I need to turn my hip. I bring this up because I have a rule when buying a house. The worst thing you can do is buy above your means and try to tailor a loan that will help you get there. I may be able to get off a decent shot once in a while if I slide my right leg, but the vast majority of the time it isn't going to work out well. The same holds true if you try to make the wrong loan fit the house.


Once you have found "the house", one of the most important decisions you will ever make needs to be made: What type of loan to go with. Under the heading of "you can't teach an old dog new tricks", your decision will be one you are likely to repeat every time you are in the position to buy a piece of real estate. It will determine how big your bank will be in the short run, and quite possibly in the long run. So it is time to weigh the pros and cons of the two types of approaches: lowest possible payment or quickest possible amortization.

Those who opt for the lowest possible payment do so for generally one of two reasons: it is all they can afford comfortably for the house of their dreams, or they choose to invest their money into investment vehicles other than their house. I respect the latter reason and want to discuss the first reason. The difference between a 30-year fixed and a 15-year fixed in payments is usually about 25% to 33%, with a 20-year only about 15% to 20% higher than a 30-year fixed. That is the closest relationship between the 30-year fixed and the 15 or 20 year fixed. I have written many columns on this so I will simply show the main reason you shouldn't take a 30-year: when a 15-year loan is finished, you will still owe 70%+ on your 30-year. When a 20-year is finished you will still owe 50%+ on your 30-year.

The quickest possible payment is elected by people who are willing to sacrifice a little on their "dream house" to build a strong financial future. They take a 15 or 20 year loan knowing that their friends might have a better or bigger house to start because they took a different approach, but in the long run, the 15 or 20 year loan will amortize quicker (reduce the balance of the mortgage), and they will end up with more equity in their house to use as they see fit in a shorter time. These are the folks whose bank will be growing.

This is just the beginning of many articles I intend to write about the need to understand that when you enter the real estate arena it is a step that you can use to bring you into a financial position you probably only thought happened in dreams and movies. Be wise, take your time to understand each step and the ramifications thereof, and feel free to write and ask questions. It is the easiest way to obtain wealth without winning a lottery. If you buy right and get the right loan, it actually might be better than winning the lottery if you take the tax consequences of each.

Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom. Roger is the President and founder of Manhattan West Mortgage.