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Real Estate Home Mortgages/Best Type of Mortgage to Get

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QUESTION: My wife and I will be purchasing a new home in the next few months and need some advice on what type of mortgage to get. I will be getting a 5% down, conventional loan and am debating on whether to get a 30-year fixed rate or an ARM (5/1, 7/1, 10/1). I realize many people will say that the interest rates are so low right now that I should go for the 30-year fixed. My only hesitation in doing so is that I donít believe this will be the last home we will buy. I know we will be living in this home for at least 5 years but beyond that, I canít say for certain. The thought has crossed my mind to turn this home into a rental property once we decide to move again but am not sure if I want to be a landlord or pay a property management company. Another thought crossed my mind that if we do have a child while in this home, we may want to stay put longer.

In any case, I need some honest feedback/advice on whether it is worth it to roll the dice on an ARM or play it safe with a 30-year fixed given the information above? I have been told that because the interest rate is lower in the beginning on an ARM, that more is applied to the principal in the early years of the mortgage as opposed to a 30-year fixed where most of the payment in the early years goes towards interest. Letís say we donít decide to move away after 5 years or do turn it into a rental, better to take the chance with the ARM and refi to a fixed rate later if necessary? Or would we save more money in the long run by going with a fixed rate from the get-go? Which AR do we go with if we go that route (5/1, 7/1, or 10/1)? I appreciate your feedback on this. Thank-you.

ANSWER: Mike,
I wouuld strongly urge you to go with a 30 year fixed as the market is very volatile right now and there are no indicators for a long term reduction in rates; actually quite the opposite. As the FED winds up it's tapering you will most likely find a spike in rates and there is growing sentiment to get rid of the GSE's (Fannie Mae, Freddie Mac and FHA) - again, that will put upward pressure on rates, because guess whose money they will using? You guessed it, the banks and of course the banks are all about ROI (return on investment).
Especially if you have any thought of turning the home into an investment property down the road, because rates are higher and LTV's lower for investment property mortgage loans.
Hope this helps.

p.s. an ARM is a great product if you are only going to stay in a home for a fixed amount of time; but if you are not sure, it could really hurt down the road (just talk to some of the folks that lost their homes between 2007 and 2010, due to their ARM's adjusting upward).

All the best,
Al

---------- FOLLOW-UP ----------

QUESTION: I sincerely appreciate the feedback Al. I do understand that the 30-year-fixed loan would offer the stability of a fixed, predictable payment, and that interest rates are surely to rise in the coming years. However, I am still on the fence as to whether this is the best option. I could always get a 7/1 or 10/1 ARM I suppose. Here are my thoughts and questions.

Wouldn't it be better to take a 5/1 ARM which will save me around $220 per month on my mortgage and apply that savings as extra payments toward the principal of the loan over the initial 5-year fixed rate period? I'm thinking that will enable me to pay down the principal faster while simultaneously eliminating the PMI at a faster rate as well. Also, even if the rate adjusts, I feel like with a lower principal and the rate adjustment cap, it may still benefit me more to do the ARM?

I've looked at an amortization schedule online that compared the 5/1 ARM and 30-year fixed loans that I have been looking at. While the 30-year-fixed resulted in more savings if the loan is carried to the full 30-year term, the 5/1 ARM saved more money on the total cost of the mortgage through year 20. It was only in year 21 that the fixed-rate began to have a lower overall cost. How realistic is it that I or anyone carries there loan to a full 30-year term?

That is why this decision is difficult for me. Since you are a loan officer, if you wouldn't mind, would you be able to run the same comparison I did with your current 5/1 ARM and 30-year-fixed rate with 5% down on a $265,000 loan? I'm curious if you see the same thing I do with the cost comparison of the two loans.

Again, thank-you for your assistance. It is greatly appreciated.

Answer
To be honest I get very few requests to run amortization schedules; but I understand that there are many online that you can work with.
I've been slammed and I try to answer questions on this board to help folks out.
Anything more and someone would have to be a client.
Hope this helps a little.

p.s.
If you are thinking of keeping the home a long time, the solution is 30 year fixed;however if you are more concerned about current cash flow or are not certain that you will keep over an extended period of time - then I would suggest the ARM program.

All the best,
- Al
About Real Estate Home Mortgages
This topic answers questions related to purchasing a home, owning a home, home ownership, mortgage education, mortgage applications, and mortgage needs whether buying a first home or refinancing a current loan. Issues related to home ownership, home equity, mortgage education, refinacing options, home improvment finacing, first time home loans, home equity loans, vactation home loans, and mortgages for investment homes are dealt with here also. Though not the primary focus of this topic, Home Equity Lines of Credits (HELOCS), reverse mortgages, and calculating home equity may also be asked. If you do not see your home mortgae, home finacing, or home equity question answered in this area then please ask a question here

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Al Rodenburg

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Risk Management Consultant. see: Identity Theft Solutions and Life Events Plans.

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As a person who has worked with individuals who have experienced identity theft and major life events, I am pleased to be part of Harvard Risk Management Corporation.

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CMPS Institute; Houston Northwest Chamber of Commerce - Committee Chair; WCR - Womens Council of Realtors; HAR - Houston Association of Realtors; Houston Northwest Business Networking Group (founder); The Woodlands Area Chamber of Commerce

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Certified Mortgage Planning Specialist (CMPS Institute) ; University of Illinois - at Chicago; Florida State University; Principia College; Lake Forest School of Management; Roosevelt University; Salt Lake CC

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Al has a diverse national clientele.

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