Buying my first home...

[Boogie711]

Hey everyone - not that it's a big deal for you all, but I'm about to purchase our first home. It's a nice house on a big lot in the middle of the city, backing unto the forest, so we're pretty happy with it.

Anyway, here's my dilemna... mortgage rates are so low right now (albeit rising.) I can lock in for 5 years at 5.35%, or 10 years at 6.3%.

Considering the average rate for the last decade or so is closer to 8%, I would think longer is better... on the other hand, the overall picture says rates may decline.

Here's your chance to pontificate from afar... any thoughts?

 

[beir]

Hmmm, sounds like some sort of ARM loan?...I'd go with a 15 or 30 year fixed mortgage myself. Rates are going to continue to climb and who wants to deal with that...are you only planning on living in the home for 5 or 10 years?

But congrats on the first home. My wife and I bought our first about 2 and a half years ago. It's nerve racking but well worth it.

Hey everyone - not that it's a big deal for you all, but I'm about to purchase our first home. It's a nice house on a big lot in the middle of the city, backing unto the forest, so we're pretty happy with it.

Anyway, here's my dilemna... mortgage rates are so low right now (albeit rising.) I can lock in for 5 years at 5.35%, or 10 years at 6.3%.

Considering the average rate for the last decade or so is closer to 8%, I would think longer is better... on the other hand, the overall picture says rates may decline.

Here's your chance to pontificate from afar... any thoughts?

 

[lamont]

Hey everyone - not that it's a big deal for you all, but I'm about to purchase our first home. It's a nice house on a big lot in the middle of the city, backing unto the forest, so we're pretty happy with it.

Anyway, here's my dilemna... mortgage rates are so low right now (albeit rising.) I can lock in for 5 years at 5.35%, or 10 years at 6.3%.

Considering the average rate for the last decade or so is closer to 8%, I would think longer is better... on the other hand, the overall picture says rates may decline.

Here's your chance to pontificate from afar... any thoughts?

Inflation is going up -- just look at the price of gasoline. That inflation is showing up in higher PPI (producer price index) numbers and should start showing up in core CPI (consumer price index) numbers eventually. Those inflationary pressures generate risk for higher interest rates. There is risk that china and japan may decide to stop buying our treasury debt and pushing our interest rates lower -- they're engaging in a lot of buying right now in order to prop up our currency and keep the american consumer buying their stuff (increase demand for their goods). Then the fed funds rate is at historically low levels and the fed has announced that it will start increasing rates. I don't see much that could lower rates unless we start to see significant deflationary pressures again (e.g. the stock market collapses again, the economy falls apart and demand dries up, etc).

Personally I would lock it in for 10 years. I wouldn't be surprised if in a year or two we had 8% long-term interest rates or higher.

 

[Quarrior]

The real estate market tends to go in 10 to 12 year cycles. Therefore, so do the interest rates. Nationally we are coming to the end of the Sellers market cycle, meaning house prices will level off soon. In fact over the next 10 - 12 years, housing will actually reduce in price/value a bit. Really depends on the area you and how over priced the houses are in your area.

As for which type of loan to get, that really depends how long you plan to live in the house. If you plan to keep it at least 10 years but no longer, then go for the 10 year ARM, same for 5 years. 5 year ARMs are just to risky for my taste.

Now, there are many who will say getting a 15 year mortgage is better than getting a 30 year mortgage because you pay off your home that much faster and save all that interest. This is true, but the down side is you are locked into a higher house payment for 15 years.

A better way is to get a 30 year mortgage and pay it off in 12 to 15 years. It can be done simply and if you have a financial emergency, you have the extra cash available.

Here's how it works. First, either use the net to create an amotization table for the loan or ask your lender for one.

Next, every month when you send in your payment, send in the following months principle.

Do this every month and you'll be amazed how fast you pay off that mortgage. I even do this with an ARM.

Brian

 

[ianr33]

If you expect to be living there for many years I would go for a fixed rate mortgage as it seems most likely that interest rates are going to rise over the next few years.

If everybody is wrong and interest rates were to actually drop then you can always refinance.

And if you want to pay it off early just pour all the MegaBuck profits from the SpringStraps into your house payment

 

[Groundhog246]

What's an ARM (we're in Canada, product might be named something else or not exist here). I've also never seen a 15, 20 or 30 year offering up here (at least not in many years). 1% on $100,000 is $1000 a year, compounded it's over $5000 extra over the first 5 years and quite a bit more over 10 years. When we first bought our current house about 7 years issue was much the same, went with a 5 year and renewed with another 5 year. And rates are still about the same or lower. Dong it again right now, I'd be tempted to go even shorter or consider something like Manulife's plan, where your bank account, a line of credit, credit cards and mortage are rolled into a package. When you get paid, it's all applied to your balance and as you spend you draw against it. Of course if interest rates bloom, your rates go up. But that bank balance you carry "just in case" is working for you at the loan rate, not the 1% they pay in a savings account. I believe NAtional Bank has just introduced a similar plan.

 

[Quarrior]

Ah,the differences in financial markets in differnt countries. This can be a very confusing subject.

The term ARM means, Adjustable Rate Mortgage. Example: 5/1 ARM means, the rate is locked for 5 years then can move up at maximum of 1% per year thereafter. Sometimes it will even go down. There is usually a ceiling with these loans, generally the interest rate cannot increase more than 5% to 7% over the life of the loan. Consequently, a 5% loan on a 5/1 ARM could end up at 12% in year 12 of the loan. It is advisable to watch your interest rate when you have this type of loan and switch it to a fixed rate loan when the interest rates are favorable. Generally, the ARM is used when the fixed rate loans do not have a favorable interest rate.

We also have various fixed rate mortgages, but as you see in my earlier post, there is no advantage to taking a fixed rate loan shorter than 30 years.

What's an ARM (we're in Canada, product might be named something else or not exist here). I've also never seen a 15, 20 or 30 year offering up here (at least not in many years). 1% on $100,000 is $1000 a year, compounded it's over $5000 extra over the first 5 years and quite a bit more over 10 years. When we first bought our current house about 7 years issue was much the same, went with a 5 year and renewed with another 5 year. And rates are still about the same or lower. Dong it again right now, I'd be tempted to go even shorter or consider something like Manulife's plan, where your bank account, a line of credit, credit cards and mortage are rolled into a package. When you get paid, it's all applied to your balance and as you spend you draw against it. Of course if interest rates bloom, your rates go up. But that bank balance you carry "just in case" is working for you at the loan rate, not the 1% they pay in a savings account. I believe NAtional Bank has just introduced a similar plan.

 

[ianr33]

We also have various fixed rate mortgages, but as you see in my earlier post, there is no advantage to taking a fixed rate loan shorter than 30 years.

The advantage is that the interest rate will be less on the shorter loan.The disadvantage is that you are locked into the higher payments. I refinanced with a 15 year mortgage. I can afford the payments,why would I choose to pay more interest than I need to??

 

[JohnF]

I advised my son to go as short as possible to get the very lowest rate and then to just watch the market. The rate seldom jumps dramatically overnight so he should have plenty of warning of a pending increase (with a little help from Dad who's in the real estate business) and can then lock in for a tiny service fee if the indicators are for a long term high interest rate. Currently the smart borrowers are taking 6 months or a year max (floating, open or fixed rate) and getting rates in the 3-4% range. For a $100 (or less) renewal fee they can lock in to whatever term they want at any time.

JF

 

[Quarrior]

The advantage is that the interest rate will be less on the shorter loan.The disadvantage is that you are locked into the higher payments. I refinanced with a 15 year mortgage. I can afford the payments,why would I choose to pay more interest than I need to??

Good question. Go to Bankrate.com and play with the amortization program and see how it works out. Actually, you'll find my method does not result in more interest and may in fact pay off the loan faster theyrby saving your interest.

Brian