Another Way to Look at Financing…
Pay attention to Ben Bernake’s words and what the Fed is going to do if you are thinking about purchasing a home.
Why? you ask. What does the Fed have to do with my buying a home in Tucson Arizona?
The Fed determines the monetary supply and if we are in for inflationary ride, you may be wise to consider not paying all cash for your property but rather instead take a loan putting 20% down because you will be paying off that 30 year loan with cheaper dollars.
If you can get 4.75% or 5% money, and if we run into inflation in a few years, you still have 80% of that amount you originally were going to use to pay cash for a house, squirreled away and now you can hopefully put it into an investment where you will make more than 5%. And to boot, you will have the interest deduction.
History illustrates that inflation is always with us. Think about ten years ago and the price of an automobile, the price of a pound of hamburger, and the price of home. What are the percentage increases? And yes, it’s true you have had increases in your own paycheck, but that kept you even with inflation.
The Bureau of Labor Statistics at it’s website :
http://www.bls.gov/data/inflation_calculator.htm
has a calculator which will calculate the dollar value in terms of today’s dollar. It’s fun (and frightening) to play with it to see how much of your dollar has been eroded by inflation over the years. $1.00 in 1942, the year I was born, is equal to $13.32 today. $1.00 in 1964 when my daughter was born is now equal to $7.04, and that same $1.00 in 1968 when my son was born is now equal to $6.27.
Humor me with this little exercise. In 2000, you hypothetically purchased a property for $200,000 and financed the entire property at 5% interest for 30 years.
The monthly payment would have been $1,073.64 principle and interest only.
Now, ten years later, the inflationary index (using the calculator) places that home’s value at $253,556.33 in dollars today, and that same $1,073.64 principle and interest payment with inflation is equal to $1361.14 in today’s dollars. That is a 21% increase in 10 years.
So if Bernake wants to curb deflationary pressures by trying to increase inflation through bond buying, some type of inflation may be in the offing. Think about how you want to finance property and consult with your tax accountant and your financial advisor.
Resources:
Articles RE: FOMC meeting
http://blogs.barrons.com/stockstowatchtoday/2010/09/22/et-qe-two-bernanke-bonds-say-yes/
http://www.ibtimes.com/articles/63876/20100920/what-to-expect-at-the-fomc-meeting.htm
http://finance.yahoo.com/news/Gold-Prices-Pop-After-FOMC-tsmf-3153566242.html?x=0
http://caps.fool.com/Blogs/peter-schiff-video-blog-/449832