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PEOPLE, PLEASE LISTEN TO ME: Right mortgages, then you need to face up to the fact that
now the housing market is full of more dan- you really can’t afford to own just yet.
ger than I have seen in years. The warning Beware the dangers of tapping equity. As the
signs of a slowdown are beginning to trickle Federal Funds interest rate increases, so do interest
in, yet I sense many of you aren’t paying rates on HELOCs. Over the past year, the average
attention. You actually think the housing good HELOC rate has risen about 2 percentage points to
times will keep rolling. 6. 5 percent. That means someone repaying a $50,000
Get real—right now. HELOC over 15 years is going to be stuck paying an
I still think owning a home is one of the best extra $53 or so a month—an increase of more than
long-term investments, but the short term is not $600 a year. And every time Greenspan bumps up
going to look so pretty. And that’s got me worried, the Federal Funds rate you can bet the HELOC will
because I see so many people jumping into buying move in lockstep.
investment real estate, or taking out adjustable-rate If you really need to tap your home equity, con-
interest-only mortgages, or using a home equity line sider a home equity loan (HEL) rather than a
of credit (HELOC). Your timing could not be worse. HELOC. An HEL is a traditional second mort-
Even Federal Reserve Chairman Alan Greenspan, gage where the interest rate doesn’t budge. The
who more than any other single individual has trade-off is that you immediately start owing pay-
spurred the incredible real estate boom by keeping ments on the loan. With a HELOC you make pay-
interest rates low, is now on record as saying that the ments only on the money you have actually
housing times are a-changin’. In late August he made withdrawn from the line of credit. But if you know
this observation: “House turnover will decline from you need the money for a project, such as a major
currently historic levels, while home price increases renovation, the HEL is the safer bet.
will slow, and prices could even decrease.” Don’t take out a HEL or a HELOC for frivolous
That means you need to deal with the new real- expenses, such as a sports car or five-star blowout
ity of real estate. Here’s some advice. vacation. Those are expenses that you pay for with
Don’t be lured into an interest-only mortgage. “free” cash. If you don’t have the cash, you don’t buy
I know mortgage lenders are pitching these loans as the car or take the trip.
the great solution to rising home prices. But they are Now is too late to get in on the investing game.
the great ticking time bomb, if you ask me. Real estate has been one of the hottest investment
The spiel from the lender sounds great: Your trends of the past few years. People have been buying
mortgage payments will be lower in the early years properties they have no intention of ever living in.
of the loan because you don’t have to pay any prin- The goal is to sell the property in a few months, or a
cipal. You’re on the hook for interest only, and that year, at a fat profit. With home values in some areas
means your monthly bill could be about 20 percent jumping 20 percent or more in a year, the allure of
or so lower than if you had a traditional mortgage. “flipping” is obvious.
But the lender doesn’t spend a lot of time But if you are diving into real estate investing
explaining the downside: Once the interest-only right now you could get soaked. The most recent
period is over you need to start paying off the prin- sales data show the average condo price falling a bit.
cipal—and in a hurry. For example, with a 30-year And the average time on the market for a condo to
mortgage, if you paid only interest for 10 years, you sell is increasing. That’s a sign of a slowdown. If you
would be stuck repaying the principal over the next buy now, you’d better not expect a quick fat return.
20 years. All you’ve done is delay your principal And you need to understand the potential costs
payments. There’s no free lunch. So you will be star- of owning investment property if your plan for a fast
ing at much higher payments in years 11 to 30 because flip doesn’t pan out. Will you be able to rent it out
you are cramming your principal payments into 20 quickly? Will the rent cover your mortgage cost? Do
years rather than spreading them out over 30 years. you want to be a landlord? And remember that when
And don’t listen to the smooth talk that this will you do sell you’re probably going to fork over 6 per-
be no problem because you’ll be earning so much cent to the real estate agent. With the outlook point-
more down the line or your home will appreciate ing to more modest appreciation, that 6 percent
enough that you can refinance before the principal could be a hefty chunk out of any profit.
payments kick in. Maybe you will … but maybe you So please, my friends, be careful. As I said up top,
won’t. And you shouldn’t be taking on any sort of real estate remains a terrific long-term investment—
risk with your largest investment—your home. as a place for you and your family to live that will
What if home values don’t appreciate as fast as you most probably appreciate in line with inflation over
expect, and you don’t have a lot of equity that makes the long term. Make all your real estate decisions
refinancing possible? based on that realistic outlook.
Does your mortgage have a
KIE TH LATHROP
Interest-only loans are downright risky. If the Yes, the past was great for home values. But it’s
only way you can afford a home is with one of these the future that matters. So please be careful. C
NOVEMBER 2005 The Costco Connection 15