If you're in the market for a new home you may be wondering how you can afford it when prices seem to be out of control. San Francisco housing prices showed a 9% increase since this time last year, according to Zillow, and Palm Springs prices increased by 2.9%. Don't let this news completely disway you as you may have more resources than you think to buy into this market.
Along with housing prices the stock market also increased in value significantly. The S&P 500 is up 16.7% since one year ago. You may have stocks that have participated in this market that could potentially be used as a down payment on a new house. If you sell your stocks this could be a taxable event so it's prudent to discuss with your tax advisor. In some circumstances you can leverage one half of your investment portfolio, without selling, for the purpose of a property purchase. This is called margin lending. Interactive Brokers has one of the lowest margin lending rates in the industry^1. Alternatively, if you have a 401k, you may be eligible to lend up to $50,000 from the plan for the purpose of house purchase. This depends on your plan and also keep in mind that the amount becomes taxable should you leave your job, something worth avoiding, if possible.
Interest rates remain low. The average 30-year mortgage rate is around 4.5%, which is almost at a 5-year high. Lending is still very affordable. A down payment on a house purchase that’s lower than 20% could mean adding a private mortgage insurance payment (PMI), but this could be eliminated once your equity reaches a certain threshold. A two million dollar house, with an $1.6 million mortgage, means a $8,107 payment, plus roughly $22,000 in annual taxes and insurance. In order to qualify for this type of mortgage, you would need a household income of at least $422,000^2 based on the higher, front-end debt to income ratio^3. The average San Francisco house price is $1.32 million^4.
It's understandable that you may want to own your home, even if housing prices appear to be monstrous. Keep in mind, however, that even if you can afford the purchase, don’t lose sight of the opportunity cost from leaving your dollars out of other investments. Maintaining a diversified portfolio reduces risk and increases return over the long-run. You might miss out if all of your wealth is tied up in your house.
At Eureka Wealth Management, I help my clients determine if they can afford their dream house and how to best leverage their resources to make the purchase. I custodian with Interactive Brokers which provides lending solutions from your investments and I work with your tax advisor to determine the consequences for selling stocks. I also review insurances and the titling of your new house to make sure that it’s passed down per your wishes. Call me for a free, initial consultation at (760) 537-0791 or online at eurekawealthmanagement.com.