Other Talk "Otterville" plus Religion/Politics

Mortgage Question

Old 01-12-05, 09:22 AM
  #1  
DVD Talk Hero
Thread Starter
 
Join Date: Nov 1999
Posts: 36,980
Mortgage Question

I am buying my first home. I am putting down 20% and am looking for a loan on the rest. The balance of the loan will be $108,800. The question is what is the best loan to get? I am currently looking at a fixed 15 year or interest only 5 year.

Rates quoted to me:
1. 15 year fixed rate at 5%. Monthly payment- 860.38
2. Interest only : 5- 1 (five years fixed) at 5%. Monthly payment 453.33

Givens:
I can afford the 860.38 payment. I don't currently plan on living in this house for more than five years (of course that could change, but I don't think it will). I'm not sure what other information is useful. Please ask if you need more.


Math:
After five years with interest only, I would pay a total of $27,199.80, all interest. With a regular loan, I'd pay $51,622.80 with interest of $23,941.12 and principal of $27,681.68. Basically if I can invest the difference in payments and get a return above 5% AND sell the house at or before 5 years, I come up ahead?


Anything I'm not thinking about?
Venusian is offline  
Old 01-12-05, 09:40 AM
  #2  
DVD Talk Hall of Fame
 
Duran's Avatar
 
Join Date: Jul 1999
Location: Columbia, MD
Posts: 8,177
If you're not planning on being in the house over 5 years, why not get a 5 or 7 year ARM? The teaser rate on that should be lower than on a 15 year fixed - in the low 4s, I'd expect.
Duran is offline  
Old 01-12-05, 09:54 AM
  #3  
DVD Talk Legend
 
Nick Danger's Avatar
 
Join Date: Mar 2001
Location: Albuquerque
Posts: 21,563
Is $860 your monthly payment, or only principal and interest? A bunch of other stuff is included in your mortgage payment, such as taxes and insurance. Make sure you can afford the real bill.

Big picture: Depending on where you live, real estate prices are going up as fast as they did in Tokyo in the 1980s. A lot of Japanese got wiped out when they bet they could make a quick turnaround. Leave youself some margin.

If you can buy a house for $108K, you probably aren't living in one of those areas. Unless you're talking about a 600 sq ft condo.
Nick Danger is offline  
Old 01-12-05, 09:58 AM
  #4  
Moderator
 
heimerSWT's Avatar
 
Join Date: Jan 2000
Location: Texas
Posts: 6,658
Originally Posted by Nick Danger
If you can buy a house for $108K, you probably aren't living in one of those areas. Unless you're talking about a 600 sq ft condo.
The $108k is after the 20% down payment. If my fuzzy math still works, I think that makes the selling price $130,560.
heimerSWT is offline  
Old 01-12-05, 10:05 AM
  #5  
Mod Emeritus
 
Join Date: Feb 1999
Location: Gone to the islands - 'til we meet again.
Posts: 19,053
Originally Posted by Venusian
...
Anything I'm not thinking about?
Not that I can think of right off. Personally, I would go with option 1.
Dead is offline  
Old 01-12-05, 10:24 AM
  #6  
DVD Talk Platinum Edition
 
Join Date: Jan 2003
Location: Tennessee, USA
Posts: 3,515
Alot can happen in five years. Plans can change. What if you end up staying in the house for 10 years? Look at how much more interest you would pay in 10 years. I would go with the fixed rate conventional loan.
taa455 is offline  
Old 01-12-05, 10:26 AM
  #7  
DVD Talk God
 
kvrdave's Avatar
 
Join Date: Aug 1999
Location: Pacific NW
Posts: 86,200
For those that remember what rates have been, I tend to still think anything under 9% is okay. Having said that, I would be all over the 15 year loan. Lots of people do ARMs and for many it works out, and for some it doesnt, because plans change. You're still talking about 5% which I still think is incredible. That is very cheap money. Call the difference in rate an insurance policy.

Personally, I don't like the interest only plan, but you might have a better threshold for risk than I do. I prefer to get something paid off.
kvrdave is offline  
Old 01-12-05, 10:48 AM
  #8  
DVD Talk Legend
 
Nick Danger's Avatar
 
Join Date: Mar 2001
Location: Albuquerque
Posts: 21,563
Kvrdave is right. When I was a kid, my father was paying 5% on his mortgage when inflation was 14%. I vowed to lock in 5% if I ever got a chance. I'm thrilled to pieces to have a low interest mortgage. Someday, Asian investors might stop buying US bonds. Someday, interest rates will go up again.
Nick Danger is offline  
Old 01-12-05, 10:48 AM
  #9  
DVD Talk Hero
Thread Starter
 
Join Date: Nov 1999
Posts: 36,980
the 860 is only the loan payment, not insurance and taxes. with those it will probably be 1000. i can still afford it.

I think i'm going to go with the 15 year fixed. even if i move out in 5 years, there is a good chance i could find people to rent the house to. i could be the kvrdave of the southeast.
Venusian is offline  
Old 01-12-05, 10:57 AM
  #10  
DVD Talk God
 
kvrdave's Avatar
 
Join Date: Aug 1999
Location: Pacific NW
Posts: 86,200
How much different is the rate for a 30 year? I generally say to go for the 15 year, but if the rate isn't much different, you can go with the 30 and pay more when you can and drop to the normal payment if things get tight. I have done that on one loan I have because I like the flexibility. But hell, I have so many loans that I must just like the variety
kvrdave is offline  
Old 01-12-05, 11:25 AM
  #11  
DVD Talk Ultimate Edition
 
Join Date: Jan 2000
Location: Chicago
Posts: 4,171
Originally Posted by heimerSWT
The $108k is after the 20% down payment. If my fuzzy math still works, I think that makes the selling price $130,560.

which is a 650 sqft condo
ANDREMIKE is offline  
Old 01-12-05, 11:28 AM
  #12  
DVD Talk Hero
Thread Starter
 
Join Date: Nov 1999
Posts: 36,980
136,000 purchase price.

it is an 1800 sqft all brick home
Venusian is offline  
Old 01-12-05, 11:36 AM
  #13  
DVD Talk God
 
kvrdave's Avatar
 
Join Date: Aug 1999
Location: Pacific NW
Posts: 86,200
Originally Posted by ANDREMIKE
which is a 650 sqft condo

Actually, here, it would get you a 1300 sq. ft. house on 1.8 acres next to a creek. And you'd have about $40,000 left over
kvrdave is offline  
Old 01-12-05, 11:45 AM
  #14  
DVD Talk Legend
 
kenbuzz's Avatar
 
Join Date: Jun 2000
Location: Bloomington, IN
Posts: 20,755
Hey, it's simple.

If you're planning to be out of it in a short while, the choice that makes the most sense is the one that gets you the most money back for the smallest invesment. All of your principal payments go directly to the bottom line anyway, so you want to do two things (a) minimize your interest payments, and (b) maximize the "leverage" you're getting on your principal payments through the appreciation you expect your property to see.

If I were you, I would go for the lowest interest rate with the longest term. This would minimize your monthly interest, and minimize the principal you have to tie up in the house. If the choices are a 5% 15 year conventional loan or a 5% 5-1 30 year ARM, the ARM wins because the rates are the same for the first 5 years and your principal payment is minimized.

Look at it this way. You are putting 20% down and borrowing the other 80%. If the house appreciates any, that appreciation goes straight into your pocket dollar for dollar. Even if the house doubles in value, you still only owe the original 80% and have made a 5-for-1 return on your investment (100% appreciation on only 20% down). The appreciation you'll see in the house's value is not related in any way to the amount you owe or are paying off, therefore, to get the most bang for the buck, you want to put as little down and pay as little monthly as possible. You make your money off of the leverage that the bank's 80% gains you... don't dilute your return by putting more of your own money into this. Use the extra money you're not using for a P&I payment and invest it somewhere else, or use it to pay down any non-deductable debt you may have.

I put 10% down on a $150K house 8 years ago. After 8 years, I sold it for $255K. Of that, $5K was due to principal payments and the other $100K was appreciation. I cleared $105K on a house that I only spent $20K on, that over 400% profit, even though the house's net appreciation during that time was only 65%. Leverage, baby.... that's the way to go!

Last edited by kenbuzz; 01-12-05 at 11:50 AM.
kenbuzz is offline  
Old 01-12-05, 12:12 PM
  #15  
DVD Talk Legend
 
kenbuzz's Avatar
 
Join Date: Jun 2000
Location: Bloomington, IN
Posts: 20,755
Originally Posted by Venusian
I think i'm going to go with the 15 year fixed. even if i move out in 5 years, there is a good chance i could find people to rent the house to. i could be the kvrdave of the southeast.
If the interest rate on the fixed and variable loans are the same, I still say go with the ARM. You can always make extra principal payments and pay it off as if it were a 15 year fixed (even though that violates the Law of Leverage), and it give you the flexibility of making a normal payment during those months when the cash flow is a little crimped.
kenbuzz is offline  
Old 01-12-05, 12:15 PM
  #16  
DVD Talk Legend
 
Heat's Avatar
 
Join Date: Dec 2000
Location: Central Illinois
Posts: 16,701
Originally Posted by Venusian
the 860 is only the loan payment, not insurance and taxes. with those it will probably be 1000. i can still afford it...
Will probably be closer to $1,100 to $1,150.

By the way, don't escrow if you can at all avoid it, it's much better to keep the money yourself and pay the bills yourself. And I also think that the 15 year fixed rate loan is your best option.
Heat is offline  
Old 01-12-05, 12:25 PM
  #17  
DVD Talk Hero
Thread Starter
 
Join Date: Nov 1999
Posts: 36,980
I want to avoid escrow as well but it looks like most lenders require it or charge a fee. Taxes are about 1000 and insurance has been quoted at 550. that's where i get the 1000 from
Venusian is offline  
Old 01-12-05, 12:26 PM
  #18  
DVD Talk God
 
kvrdave's Avatar
 
Join Date: Aug 1999
Location: Pacific NW
Posts: 86,200
That's my experience. If you want to do it yourself, the rate goes up. This past year my mortgage company didn't pay my taxes either. Pretty stupid.
kvrdave is offline  
Old 01-12-05, 12:32 PM
  #19  
Moderator
 
wendersfan's Avatar
 
Join Date: Jun 2002
Location: Nuova Repubblica di SalÚ
Posts: 32,264
Originally Posted by Venusian
136,000 purchase price.

it is an 1800 sqft all brick home
I think people forget you don't exactly live in midtown Manhattan...

I say go with the 15 year. Better safe than sorry.
wendersfan is offline  
Old 01-12-05, 12:43 PM
  #20  
DVD Talk Legend
 
Heat's Avatar
 
Join Date: Dec 2000
Location: Central Illinois
Posts: 16,701
Originally Posted by Venusian
I want to avoid escrow as well but it looks like most lenders require it or charge a fee. Taxes are about 1000 and insurance has been quoted at 550. that's where i get the 1000 from
My house is worth ~ $120,000, my taxes are ~ $2,600 per year (and insurance also right at $550).

When I refinanced in July '03 into a 15 year fixed rate mortgage, I could either go with 4.675% without escrow, or 4.625% with escrow. I went without escrow, paying the extra 0.05%. But, I keep my tax and insurance money in a relatively "safe" mutual fund (OAKBX), I've made a little extra cash from holding onto it myself, maybe $150 or so this past year.
Heat is offline  
Old 01-12-05, 01:06 PM
  #21  
DVD Talk Ultimate Edition
 
Join Date: Jan 2000
Location: Chicago
Posts: 4,171
Why do you think you want to move out in 5 years? If its not really the house you want then why not go for the house you do want and finance over 30 years. You could probably get a 180K house with a 30 year mortgage for the price your paying on the 15 year or arm.
ANDREMIKE is offline  
Old 01-12-05, 01:46 PM
  #22  
DVD Talk Hero
Thread Starter
 
Join Date: Nov 1999
Posts: 36,980
Moving out would probably be because I'm leaving this town
Venusian is offline  
Old 01-12-05, 01:54 PM
  #23  
DVD Talk Ultimate Edition
 
SoSpacey's Avatar
 
Join Date: Feb 2000
Location: Jersey
Posts: 4,238
i need to move. houses in this area are out of control.

my taxes alone are 9k a year and going up.
SoSpacey is offline  
Old 01-12-05, 01:55 PM
  #24  
Moderator
 
heimerSWT's Avatar
 
Join Date: Jan 2000
Location: Texas
Posts: 6,658
Can you give us an MLS or listing link? I'm curious about the details of the home. If you aren't locked into it yet, I would understand if you don't want to share the info.
heimerSWT is offline  
Old 01-12-05, 02:05 PM
  #25  
DVD Talk Hero
Thread Starter
 
Join Date: Nov 1999
Posts: 36,980
I have the contract but haven't closed.

What kind of details do you want? The MLS listing will give you the street address. I'm usually not paranoid about stuff like that, but I'd still rather be careful.
Venusian is offline  

Thread Tools
Search this Thread

Archive Advertising Cookie Policy Privacy Statement Terms of Service

Copyright © 2018 MH Sub I, LLC dba Internet Brands. All rights reserved. Use of this site indicates your consent to the Terms of Use.