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How to Invest in 2012? Buy a House, but Don’t Overlook the Details

24.01.2012
Head buried in the sand? Money buried in your yard? Only one of those options is financially fatal today.

An expert with the University of Alabama at Birmingham says interest rates are so low that buying a $1,000 two-month CD from the bank will only earn you 83 cents more than if you buried the same amount in your yard for two months. Andreas Rauterkus, Ph.D., assistant professor of finance with the UAB School of Business, says the best thing to do with your money in 2012 is buy a house.

“First-time home-buyer rates are around 3.8 percent for a 30-year mortgage, so if you can afford a $1,000 mortgage payment monthly for 30 years then you can buy a $250,000 home right now,” says Rauterkus. “It won’t get you much in New York City, but you can get quite a house for that in Birmingham and other affordable areas across the country.”

The biggest mistake people make is not doing their homework, says Lary Cowart, Ph.D., assistant professor of real estate and finance at the UAB School of Business. A certified real estate appraiser, he says the primary change in real estate during recent years is price, which has gone down. Cowart says people will research the obvious factors — school systems, convenience and neighborhood — but ignore details about the property and the transaction that lead to big problems.

“Not enough people take time to study things that will affect the transaction and rely on others to do the homework for them,” says Cowart. “Even smart people can buy a house and not realize it needs work. So suddenly they need $12,000 for a new roof, but they’ve spent all their money buying the house.”

Buyers, especially inexperienced ones, should be prepared to ask the right questions of the owner and every service provider, and to exercise their right to inspect the property thoroughly, he says.

If you qualify for a home loan, Cowart advises against waiting for the house of your dreams to drop in price; once the housing prices hit bottom, interest rates rise. And each time the interest rates rise, you lose money.

“Holding out to try and find the lowest price is not a good strategy because if the house were to go down 10 percent but the interest rate goes up 1 percent you are not gaining anything,” said Cowart. “If rates go up 1 percent, say from 4 to 5 percent, that is a 25 percent increase in the interest rate; so the mortgage payment goes up by more than 10 percent and the amount of house that can be purchased goes down by more than 10 percent. People fail to realize that and it is another little thing that will cost them big over the 30-year life of the loan.”

Kevin Storr | Newswise Science News
Further information:
http://www.uab.edu

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