Buying a house... What's the best mortgage

Oh man. Some of your choices are scary -- to me anyway.

1) Don't listen to that IDIOT of a lender. Sure he'd like you to take an interest-only loan -- more money for the lender. IF you take that loan, then chances are you'll refinance in 10 years and hopefully by then take out a 30-year fixed loan. That then means 40 years of paying interest to the bank. Helps no one but the bank. If you can't afford a $455,000 house, then don't take a loan for one. Get a cheaper house. Seriously. Don't do an interest-only loan. Very very bad idea except for the most savvy of investors who would take the difference and invest it to make a ton more and then put those earnings on the house. You want to make payments for 10 years and then discover you have NO equity whatsoever (other than your downpayment)? DON'T DO IT!!! MOST people do refinance within 10 years, and even I did that, BUT I only did it to get rid of the PMI. You're going to put 20% down so you will have no PMI -- that is EXCELLENT!!! Most people refinance because they want to use their house as a checking account, and that's a bad idea. MOST people in the US don't know sound financial advice from a hole in the ground. Lenders are sharks. Whatever hurts them the most helps you the most. Do that.

2) Go with the lower rate. ESPECIALLY if you plan to stay in the house for a long time. That way you build equity quicker, you'll pay less in the long run, and if you ever have an emergency down the road, you can refinance then. Don't PLAN for bad things to happen while taking an interest-only loan. Financial suicide (again, unless you are of the most savvy of investors) who can AND WILL turn the extra you're saving each month into serious liquid money in 10 years.

Do anything other than an interest-only loan. Don't do an ARM either. Fixed loan brother. Looks like with a house that expensive you're talking a 30-year fixed loan instead of 15 years. I don't know what your household income is, but it would have to be pretty high to do a 15-year loan on that house comfortably. I'd go with a 30-year fixed rate loan, the lower the rate the better.

Agree with FPW. Stay away from the interest only loan. That has the potential for big trouble.

Get a fixed rate mortgage.

flagpole willie is correct. Definately without a doubt DO NOT DO THE INTEREST ONLY LOAN. The old adage of when it sounds too good to be true, it probably is, applies here. You can, of course, pay off principle early, but no one - NO ONE - ever does. I would only add that if you think you are going to be there a long time - say over 5 to 6 years, it pays to buy the point, and go with the lower rate, BUT if you may move in the next 5 years or so, don't waste money on the point, b/c you won't make it back by the time you sell your house.

I'm feeling the same way... I just wanted to see what people thought. That said, it is worth to pay a point to lower the interest rate? Did you do this?

We're going to stay in the house a minimum 5 years, more than likely longer.

nj billy wrote:

flagpole willie is correct. Definately without a doubt DO NOT DO THE INTEREST ONLY LOAN. The old adage of when it sounds too good to be true, it probably is, applies here. You can, of course, pay off principle early, but no one - NO ONE - ever does. I would only add that if you think you are going to be there a long time - say over 5 to 6 years, it pays to buy the point, and go with the lower rate, BUT if you may move in the next 5 years or so, don't waste money on the point, b/c you won't make it back by the time you sell your house.

This is exactly right. GREAT responses so far. My faith has been restored.

If I had to pick, I'd take one from near the top of this list, but with fees under $1000.

http://bankrate.com/brm/rate/mtg_ratehome.asp?params=455200,CA,4&points=1&product=1&sort=4&pType=f&refi=0&svyList=

Personally, though, I think you have to be crazy to buy a house right now unless you are absolutely sure that you will stay in it for a very, very long time. Otherwise, odds are that it will depreciate to the point that you lose most of your equity by the time you want to move -- at which point you may no longer have enough money for a down payment. Keep in mind, that you have to pay the realtor about 5% of the sales price when you sell, too -- not to mention the other fees associated with the transactions of buying and selling.

Housing inventories are sky high and getting higher, defaults are accelerating, FAST, and prices are just beginning to fall.

I decided to sell my house and rent, at least until this all shakes out -- no sooner than fall of 2008, IMO.

Buying a house wrote:

I'm feeling the same way... I just wanted to see what people thought. That said, it is worth to pay a point to lower the interest rate? Did you do this?

We're going to stay in the house a minimum 5 years, more than likely longer.

Like njbilly said, if you're going to be in it more than 5-6 years, then pay the points -- I guess it's just one point. I did NOT pay points when I got my initial loan because I knew that within 3-5 years I would be refinancing to get rid of the PMI. Fortunately my house increased in value enough in 3 years for me to be able to refinance, get a better rate (the rates went down a lot then) and get rid of the PMI. I did not pay points then either.

Let's try some math:

One point on a $455,000 loan is $4,550.

The difference between the amount you will pay per month for a 5.75% loan vs. a 6.15% loan is about $500 per month.

2,655.26 for 5.75 loan

2,727.95 for a 6.0 loan

Difference of $72.69 a month, or 5.22 years.

Soooo, if you plan to be in the house more than 5.22 years, then it is a good idea to pay the point and take the lower rate. There's a good argument though that let's say you're going to stay in it from just 7-8 years that you NOT pay the point and use the $72.69 extra per month to invest. A little bit of just a choice there, but for sure more than 8 years and on, you should go with the point and the lower rate.

I'm in the S.F. bay area so I'm not worried about losing money. It might slow to 1-3% a year but in the Silicon Valley the bubble wont burst, people make too much money here. Even after the dot com bubble blew up prices rose! Even if we break even or perhaps do lose a little the tax benifit is worth it. My wife and I paid nearly $15,000 in takes over what they took out of our checks (both taking 0 exemptions). We make enough for the government to rape us but not enough for a mortgage payment to be easy. I'd rather build equity then hand it to the government.

Good advice about the interest only...thanks guys!

Oops -- that $500 a month is noth supposed to be there. The difference is the $72.69 a month I mentioned later in the post.

Buying a house wrote:

I'm in the S.F. bay area so I'm not worried about losing money. It might slow to 1-3% a year but in the Silicon Valley the bubble wont burst, people make too much money here. Even after the dot com bubble blew up prices rose! Even if we break even or perhaps do lose a little the tax benifit is worth it. My wife and I paid nearly $15,000 in takes over what they took out of our checks (both taking 0 exemptions). We make enough for the government to rape us but not enough for a mortgage payment to be easy. I'd rather build equity then hand it to the government.

Good advice about the interest only...thanks guys!

The other thing you've got going for you is that assuming you pay that house off someday, when you retire you can sell it and move somewhere else where the prices aren't nearly as high. I have a buddy who lives in the Bay Area. He bought a house many many years ago for way under $200,000. It's now worth over one million dollars. He has no ties to the area other than his current job. When he retires (in just about 5 years), he plans to sell the house and move somewhere where he can buy a much nicer home for about $300,000 or less even, banking more than $700,000. Very very nice.

I don't own a house but hope to buy in the fall . . .

what is a point?

Try the above link; choose your state & other info; choose the 0-point/0-cost option then sort by APR.

Once you have a series of lenders (6.25% 0/0 seems the lowest), you can then contact THOSE lenders to talk about points, if you so desire.

Mortgages are a commodity: everyone has the same thing; it's all about how skinny the provider is willing to cut the margin.

ONLINE mortgages are the way to go! (During the boom, I re-fied 4 times--at zero cost, mind you--from my first mortgage of 7.25% to my current 5.125%). Heck, give PRICELINE a try!

Well, it sounds like you've made up your mind and you can afford to weather the storm, but I'll just say that I disagree with your assessment of the downside risk in SF. I have been following housing very closely for a fairly long time, and I wouldn't be the least bit surprised to see prices correct 10% in the next 6 months to a year. That would still leave prices more than twice what they were in the early 2000s.

?? wrote:

I don't own a house but hope to buy in the fall . . .

what is a point?

A point is 1% of the amount of the loan.

Do NOT do the interest only. A shitload of people are folding right now because of that. Get a 15 year fixed rate. dont do a ARM or balloon. They are going to try to get you on some sub prime rate and you will be in foreclosure before next year..

Derby Derby Derby wrote:

Do NOT do the interest only. A shitload of people are folding right now because of that. Get a 15 year fixed rate. dont do a ARM or balloon. They are going to try to get you on some sub prime rate and you will be in foreclosure before next year..

15-year fixed rate is definitely the best option if they have enough money to do that. If not though, 30-year fixed is a good plan -- especially in the SF Bay Area where the housing prices are so high.

We just bought our first house a few months ago and wen through this. A 3o year fixed rate is the way to go. If you look at all of the stats about people losing their house it is because they were on a variable rate. We were also able to get down payment assistance from the seller that was tied into our loan. There are a lot of great programs out there and if you want to put a bit of work into a house the government reposetion homes are the way to go. We bought one, paid $20,000 less than appraisal and just had to put a new garage door opener on the garage door. Plus we got a one year warranty out of the seller

Good Luck!

I got a 5/1 ARM a couple of years ago at 5.3% and it was the right decision for me then and is still the right decision today.

Most first time buyers stsy in their first home 5 years or less. If you think you fit the profile get the mortgage that will cost you the least over 5 years. If you are in your home for life, lock in a 30 year loan because money is still pretty cheap right now.

I could have locked a 30 year fixed at 5.5% a couple of years back but I'd have paid all that extra interest and moved at 5 years anyway.

In short, the best loan is not the cheapest over 5 years, 15 years or 30 years, its the cheapest over the period you'll be paying it.