Believe it or not, there’s a nice way to measure the “investment value” of your home – and you can do it via the bond market.  Jeff Brown from US News and World Report has written an interesting piece on how to quantify your home as an investment – and it’ really worth the read!

Find out more from Jeff Brown at US News and World Report here…

Many homeowners look upon their homes as a valuable asset they can utilize for retirement through downsizing or a loan.  They count on building equity in the traditional way, by  paying off the debt month-after-month and enjoying some price appreciation.

“There’s another option: making extra principal payments on the mortgage to reduce the debt faster. Every dollar used to pay down the loan earns a “yield” equal to the loan rate, since it saves you from having to pay that amount of interest.” – Jeff Brown, US News and World Report

“If your loan charges 4 percent, prepayments earn 4 percent, a lot more than you’d get in bank savings or a 10-year Treasury note, now yielding a paltry 1.8 percent.”

“A very conservative investor who is averse to debt may find paying off his or her mortgage is the right choice,” says Eric Meermann, a planner with Palisades Hudson Financial Group in Scarsdale, New York. “If the alternative is sticking your money in a money market or savings account, you’re better off paying (the mortgage off) early.”

Brown uses the example of a homeowner with a $300,000 mortgage for 30 years at 4 percent would pay $1,432 a month in principal and interest.

By adding about $150 a month in prepayments, the loan could be paid off five years early, reducing total interest charges by about $40,500. Without the prepayments, the homeowner would still owe nearly $78,000 after 25 years.

With that said,  although today’s bond yields make mortgage prepayments appealing, stocks returns could beat prepayment yields substantially.  Index funds tracking the Standard & Poor’s 500 index are up nearly 8 percent this year, and averaged 6.7 percent a year over the past decade.

That’s generally much better than you’re likely to do with a mortgage prepayment.

While Americans have traditionally thought of the home as a rock-solid investment, many homeowners suffered deeply from the home-price plunge in the Great Recession, when millions ended up owing more than their home was worth.

So you can lose money investing in your home, though there’s less chance of ending up underwater if prepayments have trimmed the debt.

 

In most of the country, housing markets are a lot stronger than they were in the years after the financial crisis. But although a nationwide price collapse is very rare, they do occur here and there from time to time, so assess your local market before committing more money to your home.

 

The views expressed are my own and do not necessarily reflect those of American Financial Network, Inc