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Personal Finances / Buying or Selling a Home


Subject:  Re: Buying a new home, what type of loan? Date:  3/26/2013  12:48 PM
Author:  CCinOC Number:  125002 of 128887

You might consider "buying short/paying long." That is, buy the short term sack of money (5 year ARM) but make the payment equivalent to a 30 year FRM or, as Dave said, bank the FRM-ARM payment differential in an instrument whose yield is higher than the interest rate on the ARM.

If rates are higher at the time your fixed rate converts to an ARM, simply take the money you've accumulated in your account--to borrow Dave's language, let's call it your Mortgage Freedom Account--and pay down the mortgage balance, thereby mitigating payment shock.

The practical reality is, if you select a 30 year FRM, you're stuck with the payment. If you select an ARM, you've got flexibility and you won't be paying for a 30 year rate guarantee you're likely to never use.

Some posters here are staunch 30 year FRM proponents. I've been advocating the "buy short/pay long" strategy for as long as I've been posting here. Indeed, all the borrowers for whom I originated 6-month LIBOR loans many years ago are still loving that loan. I check in with them periodically; they're saving the interest rate differential precisely as Dave describes. I can't drag them out of their ARMs--not that I'd want to--to today's 30 year FRM rates, even as low as they are.
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