Now that our interest rates have pretty much doubled in the last eight months, inflation hasn’t yet been controlled and we face supply shortages with infant formula and other necessities, the question is how should I finance my housing purchase?
If you look at the current rates, you will find the 7/1 year ARM (adjustable rate mortgage) is lower than the 15- or 30-year fixed and just maybe more beneficial in lowering your monthly cost. Generally the penalties for breaking a fixed mortgage (could be upwards of $10,000 during the first three years) vs. a variable mortgage can be considerably less as it all depends on your lender’s terms and conditions and how long you will be in your home.
If you believe you will be moving within that seven-year period, then the ARM will be your best choice. Another possibility is that you just may believe that you will be able to pay off your mortgage in that seven-year period, then again that will be your most logical and cost-effective decision. Even though the lower rate stays fixed for seven years, it is based on a 30-year payout. The remaining 23 years will have a rate adjustment annually or there will be a final balloon payment on your 84th installment unless you refinance. This is a calculated risk as no one knows or can predict what rates might be after that seven-year period.
More important, your lender might have a capped, top fixed rate, thereby providing some safety in the actual long-term costs of one’s mortgage. In the 1980s-1990s variable rates had been consistently lower than fixed rates as a form of financing. Now that rates have increased dramatically over the last eight months, you will find a greater difference between fixed and variable rates, whereby the variable rate of a 5/1 and 7/1 ARM will be more desirable in lowering the monthly mortgage costs. However, one must again weigh the long-term risks as the rate will adjust at the end of the term and/or the balloon payment will be due. Also, if refinancing before the end of the term, one must consider what penalties will accrue in doing so.
One must take into consideration the length of time you will be living in your home to determine what type of mortgage should be considered. Do you have or will you have children, and if so will you stay put until they are out of college? If not and you decide to commit to a variable rate mortgage, will you consider moving before the end of the term of your variable rate mortgage? How safe and secure is your job and/or business in our new Covid-19 pandemic-affected world? Will your income be stable, possibly decrease or potentially increase? There are many crucial questions to be asked before making that most critical decision to commit to a fixed or variable rate mortgage when considering purchasing your home.
Maybe renting for a few more years will be a more prudent decision after analyzing and comparing the costs. Squirreling away more money to save for a larger future down payment will help in decreasing the overall costs. Over the long run, however, owning your home has been the only and single best asset that most consumers have possessed as a forced savings in building their wealth. Paying your monthly mortgage over time creates equity slowly but surely.
Unless you are an amazing, expert and proficient stock trader and have a crystal ball as to earning money in the stock market, which as of this writing on Monday, June 13, is way, way down, a home as opposed to gambling in the market or renting has always been a better path to increasing one’s long-term wealth. Having that security and comfort in knowing you are in control, having somewhat fixed financing costs as opposed to what rent might be in the future, and being your own landlord if and when you and only you decide to consider moving goes a long way in being confident about home ownership.
How you will determine the path to pursue financing your purchase will require much thought and planning. If you need any assistance or want to discuss your specific “needs and wants,” you can always feel free to reach out to me.
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Philip A. Raices is the owner/Broker of Turn Key Real Estate at 3 Grace Ave Suite 180 in Great Neck. He has 40 years of experience in the Real Estate industry and has earned designations as a Graduate of the Realtor Institute (G.R.I.) and also as a Certified International Property Specialist (C.I.P.S) as well as the new “Green Industry” Certification for eco-friendly construction and upgrades. For a “FREE” 15 minute consultation, a value analysis of your home, or to answer any of your questions or concerns he can be reached by cell: (516) 647-4289 or by email: [email protected] Just email or snail mail (regular mail) him with your ideas or suggestions on future columns with your name, email and cell number and he will call or email you back.