Posted By Alan Donald @ Mar 10th 2011 12:38pm In: Personal Finance

Cramped Quarters? Still Renting? Invest Your TAX REFUND Smartly!

Is Your Home Too Small for Your Family?This is the time of the year when most employed people file their taxes and may receive a refund from Uncle Sam. For many people, this refund just goes into their general bank account, and before they know, it's gone (again!).

IF YOU ARE RENTING: A wiser investment would be to look at purchasing a home using your refund as downpayment. Consider the current situation:

  • Prices are low, and there are GREAT DEALS out there...
  • Mortgage interest rates are VERY LOW and most probably will start climbing up when higher inflation hits us (have you seen the price of gas lately?)
  • If you buy a primary residence, next year Uncle Sam will send you an EVEN BIGGER tax refund, after you deduct the interest paid on your mortgage
  • Owning a home will force you to save for the future - painlessly (you have to live somewhere, why not pay your own mortgage instead of your landlord's?)

IF YOU ALREADY OWN you home, but it became small for your needs and you are feeling cramped for space - this is the time to upgrade/upsize - GRAB THE OPPORTUNITY! While it is not the best moment to sell your existing home (yes, you may lose some "potential equity" on the sale, depending on how much you still owe), it is a great moment to buy, and you will make up much more than you lose if you are buying a larger/more expensive home.

Consider this example:


  1. Your existing home 4 years ago was worth $200,000. In today's market it is worth $150,000 (a $50K equity "loss").
  2. Real estate will appreciate 3%-4% per year (which is a sustainable rate - if it appreciates faster than that, the effect of this example will be more pronounced). This is very likely, since real estate is a cyclical market with 7-10 year cycles.
  • SCENARIO 1: Keep Current Home: To "recover" the $50,000 in equity that you "lost", it would take you between 8 and 10 years.
  • SCENARIO 2: Sell current home and buy a larger one for $300,000: Now it will take you only 4-5 years to "recover" your $50K loss on the sale of your first home. Plus, you now own a higher quality asset, which will increase your net worth faster! In addition, since we currently have a higher inventory in higher priced homes, you may get a disproportionately larger discount buying your new home than the one you had to concede selling your old one - giving you instant equity!
  • SCENARIO 3 (renters): Keep renting: Sorry, you will get NO increase in your net worth from your home!

The implications are clear:

  • In a buyer's market, it is a great idea to upsize or upgrade your home! 
  • If you are looking to downsize, it is not the ideal moment in terms of money...
  • If you are renting - YOUR LANDLORD loves you! Stop paying his/her mortgage - buy now!

Ready to buy/upsize/upgrade? Contact us online or give us a call at 843-416-1434.



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