If you’re mortgage free, you should think again

Commentary: If you have managed to shed the burden of a mortgage, you can still leverage your money to be working for you.

By AARON HAROW
Tel Aviv apartment 311 (photo credit: Courtesy)
Tel Aviv apartment 311
(photo credit: Courtesy)
For many people, the idea of becoming mortgage free is the ultimate quest. After all, who would not jump at the chance of shedding your most costly monthly outlay? Combine that with the prospect of cashing out on your property, and it is no wonder that ridding yourself of your mortgage is considered a utopia.
However, equity and investments, even when tied up in the relative safety of property, never stands still. The truth is, if you have managed to shed the burden of a mortgage, you can still leverage your money to be working for you. Although it may seem counterintuitive, one of the best ways to do this is to consider remortgaging.
Traditionally, remortgaging is viewed as a financial tactic for those looking to restructure existing mortgage payments. And for anyone currently tied to a lengthy mortgage plan, there are plenty of advantages in doing so.
For a start, there is a good chance that you will find a deal with better interest rates compared to when you first agreed to your payment plan, especially as your credit rating will most likely have improved since then. However, the real saving comes in shortening the amount of time to pay off your mortgage by acquiring equity in your home. Switching from a 30-year plan to a 20-year mortgage will make a significant difference to your interest payments.
However, remortgaging should be viewed as equally advantageous for those who are lucky or astute enough to be free from the shackles of a mortgage. After all, if you have 100 percent ownership of a property, then you are quite literally sitting on a significant sum of money, part of which can and should be released to be invested wisely.
Moreover, if it is a home that is steadily increasing in value, even at a slow pace, then you should have particular peace of mind over the risk in relinquishing part of your equity, safe in the knowledge that the remainder of it is continuing to grow. The actual process of remortgaging should not be too much of a headache.
Although negotiating your original mortgage may have proven to be a torturous process, you can expect a much easier ride the second time. If you have consistently been making regular repayments over the years, then banks will most likely be keen to lend with confidence.
All of which leaves you with the question of how to invest your newf-ound capital? For most Israelis in this position, the possibility of purchasing another property may well appear fanciful. Property prices continue to climb, and although home values are not spiking at the rate that they did during 2009-2010, they remain on a steady upward curve.
During 2012, the average Israeli home increased in value by 6.7 percent and shows no sign of changing direction any time soon. Even if a bargain can be found, there is little prospect of yielding impressive returns. Gross rental returns on Tel Aviv apartments are moderate at best, currently standing at an average of 3.3% annually. These modest figures are particularly striking in the face of a general decline in mortgage interest rates in Israel since 2003, which fell from an average of 6.7% in January 2003 to 2.31% in June 2010. However, purchasing an additional property is not entirely out of reach, so long as you are prepared to look further afield. Increasingly affordable and attractive investment opportunities can be found in the United States, especially in the “second tier” of large cities.
Compared to Israel, the American property market has experienced dramatically different fortunes over the past few years, with the property crash dragging prices to rock bottom in 2007- 2009. However, the green shoots of recovery are poised to sow the seeds of a gradual increase in prices.
This is especially true for cities such as Pittsburgh, Houston and Columbus, which were not ravaged by the extremities of the crash and have begun to recover already. Sustainable industries or attractive employment opportunities in these locations allowed property prices to retain some stability. The energy industry remains king in Houston, while government and academia continue to dominate in Columbus. Meanwhile, Pittsburgh has successfully transformed itself from a steel city to a hub of intellectual capital.
The cost of property in these cities is eminently more affordable than in Israel. The average cost of a Pittsburgh property last year was $168,612, although single-family homes can be purchased for much less. As an investment, you can typically expect impressive returns of at least 12%, an altogether more attractive proposition than your typical Tel Aviv home.
Making all of this a profitable reality requires a change of mind-set. Rather than viewing a mortgage as a burdensome weight to be discarded as quickly as possible, considering remortgaging as a sound financial move can open up a world of investment opportunities.
Meanwhile, the realization that property investment in the US is no longer prohibitive to Israelis, but in fact potentially lucrative, is the best way to make the most of this new investment opportunity.
aaron@bhregroup.com Aaron Harow is a partner at BRHE Group LLC, a real-estate company that specializes in investments in the US and Israel.