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Author: jakeburns100 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 127815  
Subject: Getting ready to buy new... Date: 3/19/2002 11:52 PM
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We are considering buying a new house in a new development. We've owned the home we are currently in for 5 years having refinanced it 4 years ago (bought for 180K, now have a loan for 169K). I've been reading older posts trying to get a sense of where to start (since we've "found" a house, or a floor plan, safe to say that we've already started!) and I think we should start by looking at loans. So...

Vital Stats:

1) Married (me age 43, wife age 40, 2 kids, gross income of $11.5K/month.
2) Have owned current home 5 years, owned previous home 2 years (our first).
3) Good credit so far as I'm aware (but realize I need to check this out).
4) Have done a little checking and think that our current home should be very "sellable". Looked at county records for sales of houses in our subdivision and guestimate ours should fetch @$210K.
5) Guestimating that house we want (with extras) will cost @ $300K.
6) We've been maxing out retirement plans (401K, 403, ESOP, money pension plan) for @ 8 years. Also, have @ $6500 in mutual funds and @6K in savings.

Additional observations:

1) Clearly, we'll need to sell the current house to buy the new house.
2) While I think we could scrape together a 10% down payment...I know we could do the 5%.
3) Using current loan (which I believe is financed at 7.375%) as a rough guide, I calculate that we could be looking at a monthly payment of $2,445 (the upper limit, I hope) if we go with something along the lines of a straight 30-year, fixed rate, 5% down mortgage (assuming the 7.375% rate).
4) While I've worked with a mortgage broker in the past (same guy twice), I don't think I'll use him again. Got the feeling he was moving paper--once he had me, it was difficult to get to him for information. That being said, I hold out hope that I can find a better one...of course, I feel the same way about finding a good mechanic for the '88 Volvo 240 and that hasn't happened...yet! Bottom line here is that I think I need to be better educated so I can make the most of whate ever professionals I ask to the party.

My questions:

1) How can I learn more about "combo" loans? From what I read, it seems as though a 80-15-5 deal might help to avoid the PMI. As I understand it (and don't hang me if I get this wrong--pretty fair chance of that!), I take out 2 loans and each has a different interest rate. The overall rate is higher than a traditional 5% down, finance 95% loan, but the monthly payments are cheaper and or, there are better tax advantages because PMI is not deductable...

2) The sales person at the new development tells us that our house could be built in 6 months (from when we sign initial contract I think). Any advice on the timing? With both of us working, and withtwo elementary school kids, we'd like to avoid moving into an apartment, but...

3) While I think we will be able to sell, any thoughts on the contingency plan the developer offers? Essentially, they have selected two realtors to work with. We would choose one, have them come in and give us a bottom dollar figure on the house and then let them try to sell it for the best price we could get. If they don't sell it in time, they buy it for the low figure.

Thinking maybe I answered my own question on that last one...seems as though we must sell the house and at my projected sales price ($210K) to have enough to make the down payment...

As I suggested, we've done the easy part (the fantasy is working well), now we need to do the hard part...thanks.--Jake
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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39226 of 127815
Subject: Re: Getting ready to buy new... Date: 3/20/2002 12:25 AM
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Hi Jake,

Additional observations:
1) Clearly, we'll need to sell the current house to buy the new house.


Not at all true. With even just decent credit you could easily qualify for an 80-20 combo, thus nothing down... but if you DO have 5% you get the better overall interest rates.

2) While I think we could scrape together a 10% down payment...I know we could do the 5%.

You're IN!

3) Using current loan (which I believe is financed at 7.375%) as a rough guide, I calculate that we could be looking at a monthly payment of $2,445 (the upper limit, I hope) if we go with something along the lines of a straight 30-year, fixed rate, 5% down mortgage (assuming the 7.375% rate).

Well... you just had 3 consecutive episodes of financing (I'm assuming a 30 fixed each time) where you threw away good money month after month because you paid the higher rate on a 30 fixed rather than a more realistically termed 3, 5, or 7 year ARM. I might guess that the tossed away extra interest probably ran in the thousands... possibly ten-thousands ove those last 3 loans.

ESPECIALLY in your mid-40's, I'd strongly recommend considering taking the lower rated ARM and stuffing every last dime you can into your retirement accounts. NOW is the time to pour on the fuel!

4) While I've worked with a mortgage broker in the past (same guy twice), I don't think I'll use him again. Got the feeling he was moving paper--once he had me, it was difficult to get to him for information. That being said, I hold out hope that I can find a better one...of course, I feel the same way about finding a good mechanic for the '88 Volvo 240 and that hasn't happened...yet! Bottom line here is that I think I need to be better educated so I can make the most of whate ever professionals I ask to the party.

You've come to the right group, IMO!

My questions:
1) How can I learn more about "combo" loans? From what I read, it seems as though a 80-15-5 deal might help to avoid the PMI. As I understand it (and don't hang me if I get this wrong--pretty fair chance of that!), I take out 2 loans and each has a different interest rate. The overall rate is higher than a traditional 5% down, finance 95% loan, but the monthly payments are cheaper and or, there are better tax advantages because PMI is not deductable...


You COULD either pop "Combo Loans" into the search engine, or click the "FAQ's" on the right-side panel here... but you've pretty much got the concept wired!

2) The sales person at the new development tells us that our house could be built in 6 months (from when we sign initial contract I think). Any advice on the timing? With both of us working, and withtwo elementary school kids, we'd like to avoid moving into an apartment, but...

Whatever they tell you, add 30-45 days. Put your home up for sale with the contingency that you'll need to rent it back through the closing of your new home... there ARE folks who will buy it that way!

3) While I think we will be able to sell, any thoughts on the contingency plan the developer offers? Essentially, they have selected two realtors to work with. We would choose one, have them come in and give us a bottom dollar figure on the house and then let them try to sell it for the best price we could get. If they don't sell it in time, they buy it for the low figure.

Not a bad contingency... be sure (as though you wouldn't duh!) to get the best bottom-line value you can... and work the 'rent-back from buyer' option aggressively. If they get the low-value low enough they have no incentive to get it moved in advance.

Thinking maybe I answered my own question on that last one...seems as though we must sell the house and at my projected sales price ($210K) to have enough to make the down payment...

5% of $300k is $15,000. Make sure you negotiate that the builder pays all finance closing costs. (With A-Paper deals that will be capped by the lender at 3% of the first mortgage... so if you're maxing your 1st at 80% to avoid PMI, that means 3% of 80%... or 2.4% of the total sales' price.) Now's the time to get this on the table and in the agreements... with builders it's very difficult to negotiate this after they've struck the contract.

As I suggested, we've done the easy part (the fantasy is working well), now we need to do the hard part...thanks.--Jake

Watching it get build is pretty fun too! Surf back and check out RayVT's photo documentary on the build-out of his new home. It's positively inspirational!

Best to you!
Dave Donhoff
Foolish Mortgage Broker

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Author: CatherineCoy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39227 of 127815
Subject: Re: Getting ready to buy new... Date: 3/20/2002 12:28 AM
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Hi Jake ~

You have a comprehensive knowledge of combo loans already, so you must be a regular lurker. :-)

I take out 2 loans and each has a different interest rate. The overall rate is higher than a traditional 5% down, finance 95% loan, but the monthly payments are cheaper or there are better tax advantages because PMI is not deductable...

Correctomundo! What you have referred to as the "overall rate" we refer to as the "blended" interest rate. Combo loans are available in different terms; that is, the 1st TD can be an FRM (fixed rate mortgage) or an ARM (adjustable rate mortgage) and the second can be an FRM, an ARM or a HELOC--a regular alphabet soup of loans!

I always try to find the narrowest interest rate spread between the 1st and the 2nd that I possibly can. My personal best is .75, but that was just a fluke--the guy at the lock desk was quitting and he gave me a deal since he had no one to answer to! A typical rate differential is 1.25--1.50.

The most important questions to ask yourself regarding rate and term are "how long do I anticipate holding this loan?" and "what is my tolerance for interest rate risk?"

I recommend the Mortgage Professor's site for discussions about ARM vs. FRM, points, etc. Lots of questions answered there in the Professor's inimitable no-nonsense style.

www.mtgprofessor.com

Catherine Coy
Mortgage Broker


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Author: johnmoni Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39233 of 127815
Subject: Re: Getting ready to buy new... Date: 3/20/2002 8:07 AM
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"What you have referred to as the "overall rate" we refer to as the "blended" interest rate. Combo loans are available in different terms; that is, the 1st TD can be an FRM (fixed rate mortgage) or an ARM (adjustable rate mortgage) and the second can be an FRM, an ARM or a HELOC--a regular alphabet soup of loans!"

Can anyone give me a "20 words or less" explanation of the "combo" loan concept. I have traditionally used a straight "plain vanilla" 30 year fixed. The brief discussion above makes it seem very confusing, which immediately makes me weary. It seems interesting, but I'm skeptical - what are the advantages of this type of financing? Any thoughts?
johnmoni

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Author: jakeburns100 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39235 of 127815
Subject: Re: Getting ready to buy new... Date: 3/20/2002 8:16 AM
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Dave,

Thanks for the timely reply...I may need to quit my job so I can take full advantage of all The Fool has to offer! Better cogitate on that brillian idea for a while...could be a flaw in my thinking...

Questions:

1) Though I've entered "combo loans" in the Fool search engine and in google, I'm not finding the information I need. The likely reason is that I'm too dumb to parse, but since you are there...How does the combo loan work? Lets say I have a $300K house and I go with a 80-15-5:
a) 5% is $15K and that is our down payment.
b) We finance 15% of $300K at (for sake of argument) 6.5% and the remaining 80% ($245K) at 7.5%--right?
c) What are the durations of those two loans? Can they both be 30 year fixed? Can I mix an ARM and a fixed? Would I want to?

2) Can you recommend either an on-line calculator that could help me figure the monthly payments under varying conditions (optimal for a lazy guy like me) or a reference that gives me the formula(s). I'm as good as the next hack at torturing Excel!

3) WRT the contingency offer being made by the builder, I'm (naturally?) suspect. Here is my fear: The realtor has no incentive to sell my property while I still own it. He/she could set the price too high and then ignore their responsibility to market my property until I have to sell it to them. They buy it for rock-bottom price, then get into gear and sell it for "rock-bottom + something" Lets say that rock-bottom is $180K (what I paid) and that "something" is $30K. Good faith notwithstanding, the realtor has @ $15,300 more incentive to buy the house from me at rock-bottom. My (likely distorted) distorted logic is this:
a) If the realtor sells my propert for $210K while I own it, she gets a $14,700 commission (at 7%).
b) If the realtor doesn't sell while I still own, but buys it from me at $180K and then sells for $210K, they make $30,000--right?
c) The difference between the commission they make if the house sells while I own and the profit they make if they own and sell the house is $30k - $14,700 or $15,300.

Thanks for the other tips--no need for me to comment given my propensity to confuse!

Finally, I did look at RayVT's post some time back--pretty cool. However, I'm confused about the white stuff on the ground...is that some kind of extended concrete slab or what?!? As displaced northerners (by choice), my wife and have undergone years of therapy to remove all memory of snow from our consciousness ;)--Jake

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Author: jakeburns100 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39236 of 127815
Subject: Re: Getting ready to buy new... Date: 3/20/2002 8:25 AM
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Catherine,

Thanks for the information. I did stumble on to the Mortgage Professor's site--good stuff!

As for my "comprehensive knowledge", I fear that this is not an ailment I suffer from. Words are part of my day job and I'm able to use them to cover up my considerable ignorance!

I especially appreciated your experience on the spread. In a reply to Dave, I asked about the details of the combo loan, I'll certainly use your insights to guide me. As I said (I think), I intend to use a mortgage broker, but want to come to that relationship as informed as possible. Now I know to look for a spread ranging from .75 (fantasy) to 1.5.

Still in the "looking for advice mode", I'd say that we intend to hold this next house for at least 11 years (youngest off to college). As for interest rate risk tolerance, I'd think that deference to the experts ought to be my guide. Assuming that I go with an ARM in part or whole (if using a combo loan), I think I want to give myself enough of a window for rates to fluctuate so that I can watch them go back up (the current direction) and then lock in on a fixed rate once they come back down...right?

Thanks again.--Jake

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Author: CatherineCoy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39244 of 127815
Subject: Re: Getting ready to buy new... Date: 3/20/2002 10:14 AM
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As for interest rate risk tolerance, I'd think that deference to the experts ought to be my guide. Assuming that I go with an ARM in part or whole (if using a combo loan), I think I want to give myself enough of a window for rates to fluctuate so that I can watch them go back up (the current direction) and then lock in on a fixed rate once they come back down...right?


That damn crystal ball of mine is still in the shop! So I can't advise you whether to get a fixed or adjustable. But I can say: the term on the 2nd must generally be shorter than the term on the 1st. That is, I have never seen a 30 year FRM 1st combined with a 30 year FRM 2nd. If anyone has ever seen this, I'd sure like to know about it.

Here are just some of the combinations that can be used:

30 year FRM with 30-due-in-15 balloon
30 year FRM with 30-due-in-20 balloon
30 year FRM with 15 year FRM
30 year FRM with 20 year FRM
30 year FRM with 3/1, 5/1, 7/1 ARM
30 year FRM with HELOC
3/1, 5/1, 7/1 ARM with HELOC
3/1, 5/1, 7/1 ARM with 30-due-in-15 balloon
3/1, 5/1, 7/1 ARM with 30-due-in-20 balloon
Etc. ...

Catherine Coy
Mortgage Broker




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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39252 of 127815
Subject: Re: Getting ready to buy new... Date: 3/20/2002 11:28 AM
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Hi johnmoni,

Can anyone give me a "20 words or less" explanation of the "combo" loan concept. I have traditionally used a straight "plain vanilla" 30 year fixed.

OK, here we go;

1 Loan + PMI = BAD!
2 Loans, No PMI = GOOD!
(7 words, 2 numbers,3 symbols, 3 punctuations! I've got more left!)

30 Year Fixed = Most Expensive,
True Statistics Of 5-8 Year Refi/Sale = 30 Fixed Wasteful & Riskiest!
(13 words, 4 numbers, 3 symbols, 4 punctuations... I WIN!!!)

Dave Donhoff
Foolish Mortgage Gamester
(I'll buy a vowel please!)

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39253 of 127815
Subject: Re: Getting ready to buy new... Date: 3/20/2002 11:44 AM
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Hi Jake,

1) Though I've entered "combo loans" in the Fool search engine and in google, I'm not finding the information I need. The likely reason is that I'm too dumb to parse, but since you are there...How does the combo loan work? Lets say I have a $300K house and I go with a 80-15-5:

If you were too dumb you wouldn't be here!!! But self-deprecating humour CAN endear you as a Fool if you don't overdo it ;~)

a) 5% is $15K and that is our down payment.

That would be correcket, sir!

b) We finance 15% of $300K at (for sake of argument) 6.5% and the remaining 80% ($245K) at 7.5%--right?

... as rain! (Well, rates may vary... a 15% Loan-To-Value HELOC might currently come in at Prime Plus 0% - 1 7/8%... depending on the lender, which depends on which 1st you choose, which depends on a bunch of other schtuff.)

c) What are the durations of those two loans? Can they both be 30 year fixed? Can I mix an ARM and a fixed? Would I want to?

It depends on your choices, yes, yes, maybe!

2) Can you recommend either an on-line calculator that could help me figure the monthly payments under varying conditions (optimal for a lazy guy like me) or a reference that gives me the formula(s). I'm as good as the next hack at torturing Excel!

Excel has a built in ammortization formula. I've got so many "pro" tools I'm rather lazy with Excel... so to 'splain it I'd have to fire it up & stumble through from scratch like I do each time I use it for ammorts... but trust me when I say ANYBODY can run an ammortization calculation in Excel.

If you're as lazy as me and have lightening quick broadband, you could use this instead;
http://www.interest.com/hugh/calc/

You will doscover, however, that there aren't any calculators that help with the considerations of STRATEGY, in comparing future scenarios... still gotta use the carbonic processor for that.

3) WRT the contingency offer being made by the builder, I'm (naturally?) suspect. Here is my fear: The realtor has no incentive to sell my property while I still own it. He/she could set the price too high and then ignore their responsibility to market my property until I have to sell it to them. They buy it for rock-bottom price, then get into gear and sell it for "rock-bottom + something" Lets say that rock-bottom is $180K (what I paid) and that "something" is $30K. Good faith notwithstanding, the realtor has @ $15,300 more incentive to buy the house from me at rock-bottom. My (likely distorted) distorted logic is this:
a) If the realtor sells my propert for $210K while I own it, she gets a $14,700 commission (at 7%).
b) If the realtor doesn't sell while I still own, but buys it from me at $180K and then sells for $210K, they make $30,000--right?
c) The difference between the commission they make if the house sells while I own and the profit they make if they own and sell the house is $30k - $14,700 or $15,300.


Indeed, you see the conundrum! There is no free lunch... in order to assume the risks of the market they make it worthwhile by making sure they either profit quickly because folks knock down your door to buy, or they profit handsomely by the spread... or both!

If your market is anything better than slow (likely,) it might make sense NOT to take the "guaranteed sale" and just amrket it yourself (with the MLS, through a relitter, if you choose.)

Thanks for the other tips--no need for me to comment given my propensity to confuse!
Finally, I did look at RayVT's post some time back--pretty cool. However, I'm confused about the white stuff on the ground...is that some kind of extended concrete slab or what?!? As displaced northerners (by choice), my wife and have undergone years of therapy to remove all memory of snow from our consciousness ;)--Jake


No, it's special reflective coating required by community standards. It's been decreed that we've selfishly accepted WAY too much moonlight, and since it originally came from the Sun and we're receiving it as a 3rd party benefit, undisclosed, we're now required to send it back into space!

Hope that helps!

Dave Donhoff
Foolish Mortgage SpaceMonkey

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Author: HousefellonmySis Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39255 of 127815
Subject: Re: Getting ready to buy new... Date: 3/20/2002 11:50 AM
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Hey SpaceMonkey Dave,

You're on fire today....looks liek a good day to ask Dave some questions gang...he's on a roll!!!

Kathy...with 2 less Rec's in her pocket this morning.



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Author: scrim67 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39256 of 127815
Subject: Re: Getting ready to buy new... Date: 3/20/2002 11:53 AM
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I bought a new home in a new development two years ago and did an 80-10-10.

I paid 300k and resales in my area are going from 360k-400k already!!! (we are in monmouth county, nj which has the 2nd highest appreciation of homes in the nation last year) so I made a good decision WHERE i bought.

I think the only mistake I made is going for a 10/1 ARM instead of a 3, 5, or 7 ARM. I don't see many even talk of 10/1 ARM's on this board. Before I started reading these boards I thought I should take the 10 yr arm because in my mind I wouldn't be selling my home for around 10yrs but now realize this way of thinking is flawed.

We cannot refinance without a 2% penalty until march 2003 so after another year we may try and refi.

our current rate is 7.5% on the 10/1 arm.

any thoughts or feedback would be welcomed.

scrim

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Author: johnmoni Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39261 of 127815
Subject: Re: Getting ready to buy new... Date: 3/20/2002 12:07 PM
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"1 Loan + PMI = BAD!"
Only if you put less than 20% down.

"True Statistics Of 5-8 Year Refi/Sale = 30 Fixed Wasteful & Riskiest!"
Not everybody sells in 5-8 years, however. I bought in '96, and we will stay until we retire (excellent school system, not interesetd in a "mcmansion") - at least 15 years? I know others in the same situation (at least 50% of the original owners in my parents development are still in their homes over 30 years later. Some second owners have been there 20+ years.)
Thanks for the reply,
johnmoni

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Author: johnmoni Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39263 of 127815
Subject: Re: Getting ready to buy new... Date: 3/20/2002 12:11 PM
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"any thoughts or feedback would be welcomed."

We're in Monmouth County also, and my/our 1996 purchase has (according to similar resales) also appreciated significantly. I'm still a traditionalist though - our 30 year fixed at 6.375% is a no-worry, consistent number for us. Though the "combos" do sound interesting.
johnmoni

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Author: CatherineCoy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39265 of 127815
Subject: Re: Getting ready to buy new... Date: 3/20/2002 12:14 PM
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I think the only mistake I made is going for a 10/1 ARM instead of a 3, 5, or 7 ARM. I don't see many even talk of 10/1 ARM's on this board.

You won't hear me talking about 'em because every 10/1 I've ever seen has been "out of the money" meaning that there's no benefit to getting one over a 30 year FRM because they cost almost the same or, in many cases, more. I've never seen an advantage over 3, 5 or 7 ARMs.

Here's an example taken from a lender's rate sheet today:

10/1 ARM
30 day lock
coupon = 7.875
rebate = .375

30 year FRM
30 day lock
coupon = 6.875
rebate = .125

I don't know why this lender would even take up space on their rate sheet to offer a 10/1 ARM.

Catherine Coy
Mortgage Broker

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Author: CatherineCoy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39266 of 127815
Subject: Re: Getting ready to buy new... Date: 3/20/2002 12:19 PM
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I'm still a traditionalist though - our 30 year fixed at 6.375% is a no-worry, consistent number for us.


Many people place great value on a no-worry approach, and there's nothing wrong with that. I quantify it for my borrowers so that they know what "no worry" is costing them over another approach. Sometimes they're appalled; sometimes they're OK with it.

Catherine Coy
Mortgage Broker

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39268 of 127815
Subject: Re: Getting ready to buy new... Date: 3/20/2002 12:29 PM
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johnmoni:

<<<<"True Statistics Of 5-8 Year Refi/Sale = 30 Fixed Wasteful & Riskiest!">>>>

"Not everybody sells in 5-8 years, however. I bought in '96, and we will stay until we retire (excellent school system, not interesetd in a "mcmansion") - at least 15 years? I know others in the same situation (at least 50% of the original owners in my parents development are still in their homes over 30 years later. Some second owners have been there 20+ years.)"

You are ignoring the refinance part of Dave's statement. Have you refinanced the original loan from your '96 purchase? Maybe more than once?

There are always statistical outliers, but this is more a probability issue. For example, someone will win the NJ lottery (if not this week then sometime), but the odds of anyone person winning at any given time are astronomical. Same issue WRT to actual term of a specific loan.

Dave has better data than I have seen, because mine was much older, but the even in the older data the time frame was between 10-12 years.

Regards, JAFO



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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39273 of 127815
Subject: Re: Getting ready to buy new... Date: 3/20/2002 1:11 PM
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Hi scrim,

We cannot refinance without a 2% penalty until march 2003 so after another year we may try and refi.our current rate is 7.5% on the 10/1 arm. any thoughts or feedback would be welcomed.

Well, my initial response was, "7 1/2% ain't all THAT bad for another year or so..."

Then I started scheming...

Here's a possibl;e strategy to slice off some interest without any costs... but it depends on a few things;
1) Your current LTV being not too high,
2) Fed Prime rates staying stable for the next year or so (highly likely,)

Strategy;
Take a no-cost HELOC for your maximum allowed 20% paydown allowance on your 1st mortgage. You should be able to get anywhere from Prime Only (4 3/4% today,) to Prime plus 1, maybe.

DO NOT take the HELOC as cashout... but merely to pay down the existing ARM. Since the ARM is re-calculated each anniversary, IF you can get this done in time you should eliminate a chunk of interest at 7 1/2% and replace it with the same amount of loan at 4 3/4%, maybe slightly more.

Kinda a lot of work for a small amount of savings... but I certainly know of a LOT of Fools who'll do much more to save much less.

Maybe you could find a loan broker to set you up with this at no current fees in return for the refi when the prepay expires in a year or so.

Cheers,
Dave Donhoff
Strategic Mortgage Fool


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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39276 of 127815
Subject: Re: Getting ready to buy new... Date: 3/20/2002 1:22 PM
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Hi johnmoni,

"True Statistics Of 5-8 Year Refi/Sale = 30 Fixed Wasteful & Riskiest!"

Not everybody sells in 5-8 years, however. I bought in '96, and we will stay until we retire (excellent school system, not interesetd in a "mcmansion") - at least 15 years? I know others in the same situation (at least 50% of the original owners in my parents development are still in their homes over 30 years later. Some second owners have been there 20+ years.)

STAYING in your home has no bearing on your likelihood of REFINANCING for many reasons other than interest rates.
* Kids arriving life
* Family departing life
* School/College costs
* Business Opps
* Home improvements/additions
* Troubled family
* Etc. Etc. Etc... Life Happens...

I've cited ad nauseum a survey done by the Mortgage Bankers Association based on over 45 years of data from FreddieMac and FannieMae that showed that, for homeowners 45 years old & under, with 30 year mortgages;
1) over 80% refi's or sold prior to end of 5th year,
2) over 90% did so prior to e/o 8th year.

I doubt your folks neighbors are any different than the American population as a whole... and I'd suspect even your folks aren't.

FACT: The 30 year fixed loan is the most expensive, interest-wise, AND the riskiest in terms of leaving it prior to realizing the benefits bought with the higher premium.

Buying a 30 year fixed for "security" is identical to buying a lottery ticket for "Wealth."

Sure, SOMEBODY has to win... but do you REALLY feel that lucky?
(Well... do you?)

Cheers,
Dave Donhoff
Statistical Mortgage Fool

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Author: scrim67 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39278 of 127815
Subject: Re: Getting ready to buy new... Date: 3/20/2002 1:34 PM
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thanx for the feedback but we already took out an HELOC at prime minus 1/4 and paid off our 2nd mortgage at 9% and also paid down our credit card bills.

our current rate on our HELOC is 4.25% which is pretty low.

thanx for the feedback.

scrim

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Author: trifona One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39281 of 127815
Subject: Re: Getting ready to buy new... Date: 3/20/2002 1:48 PM
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I paid 300k and resales in my area are going from 360k-400k already!!! (we are in monmouth county, nj which has the 2nd highest appreciation of homes in the nation last year) so I made a good decision WHERE i bought.

Way to go bro! I hope that we are as lucky, we signed a contract on new construction in Nov' 01 for May/June '02 delivery in Chester County, PA. During this interim period, new contracts are going for about 8% or $18k more than when we signed. The next couple of years are going to get quite interesting in our development.


trifona



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Author: johnmoni Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39289 of 127815
Subject: Re: Getting ready to buy new... Date: 3/20/2002 3:06 PM
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"FACT: The 30 year fixed loan is the most expensive, interest-wise, AND the riskiest in terms of leaving it prior to realizing the benefits bought with the higher premium."

I'll obviously never be able to challenge your stats - you know the market well. But how about another view. Why not take a 30 year fixed for a lower payment, and then pay it like a 15 (or whatever shorter term) to realize a savings? If you ever come up against "life's events", you can always revert back to the lower payment, but if you don't, the extra payments will reduce total interest paid over time. It seems to me, on the surface that the various nuances associated with managing the combo loans, may be too sophisticated for the average borrower. Are there any stats regarding for the number of refi's, how many went from traditional fixed to the combo's? Are that many people really financing this way?? Interesting discussion.

I'm not sure that I agree that a refinance is the right way to go for every one of life's "speedbumps." I believe in the "BEST credit is your own cash" phillosophy. Now obviously, only the wealthiest could save enough cash for every possible contingency, but whatever the happened to the idea of saving for a rainy day?? Any thoughts
johnmoni

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39293 of 127815
Subject: Re: Getting ready to buy new... Date: 3/20/2002 3:45 PM
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Hi johnmoni,

Why not take a 30 year fixed for a lower payment, and then pay it like a 15 (or whatever shorter term) to realize a savings? If you ever come up against "life's events", you can always revert back to the lower payment, but if you don't, the extra payments will reduce total interest paid over time.

Well, you would still unnecessarily be paying the higher interest rate on your funds TODAY! This is money your pissing away to the lender (are you surprised to hear a broker say THAT!) when you COULD be stuffing it away in YOUR retirement accounts. If you want the safety you're trying to get by the above example, there are better products than the 30 fixed... for example, the Option ARMs.

It seems to me, on the surface that the various nuances associated with managing the combo loans, may be too sophisticated for the average borrower.

Combo loans aren't any more sophisticated to manage than cutting 2 checks (for net-less money) on your mortgage instead of one larger (with less tax deductibility) one.

CHOOSING the best loan IS quite sophisticated, however... which is why I have a job! Just like auto mechanistry, you have 3 choices;
1) you can continue to drive a 1967 VW Beetle because any idiot can rebuild the engine,
2) You can make it a professional study yourself to master auto mechanics and maintenance for a modern vehicle, or,
3) You can do the little things, and have a professional handle the complicated issues.

Are there any stats regarding for the number of refi's, how many went from traditional fixed to the combo's?

I expect the answer is yes... but I've not dived in to the quagmire that deeply.

Are that many people really financing this way??

By "this way" if you mean "avoiding PMI and strategically using better loan terms," my experience is YES!

Welcome to a great board! Surf some of our FAQ's and you may find more provocative stuff!

Cheers,
Dave Donhoff
Mortgage Fool
(rebuilt my own first car at 18... a '55 P.O.S. Bug!)

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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39305 of 127815
Subject: Re: Getting ready to buy new... Date: 3/20/2002 4:22 PM
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dwdonhoff...

I've cited ad nauseum a survey done by the Mortgage Bankers Association based on over 45 years of data from FreddieMac and FannieMae that showed that, for homeowners 45 years old & under, with 30 year mortgages;
1) over 80% refi's or sold prior to end of 5th year,
2) over 90% did so prior to e/o 8th year.


But you don't cite how many of these refinances were to get OUT of Adjustable Rate products. With rates approaching 40 year lows recently, I wonder how valid this type of survey would be going forward?

Do you have a link to this study?

I know you use this study to promote your theory of fixed rate mortgages just being the worst thing one could do with their money this side of just burning it. I also believe that you don't make more on a 5/1 than a 30yr or 15yr Fixed, so your repeated enthusiasm for this product has to be based on conviction of the rightness of your position. However, strength of conviction or persistancy in the promotion of that position does not validate it.

However, when you repeatedly refer to fixed rate products as "risky", I am forced to come out of my shell to refute that statement. You steadfastly refuse to acknowledge that there can be any harmful impact on Fools from a rapidly rising interest rate environment by using ARMs. One just has to look at the rise in interest rates that happened in the 70s and 80s and the resultant pain all those with ARMs experienced to get a feel for the negative side.

To believe it can't happen again is to be naive. To promote it is something else.

I'm not saying that 5/1 doesn't have a place in some financial plans, neither am I saying that fixed rates don't. I am urging some objectivity in the promotion of either.

PosFCF


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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39328 of 127815
Subject: Re: Getting ready to buy new... Date: 3/20/2002 5:18 PM
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Hi PosFCF,

But you don't cite how many of these refinances were to get OUT of Adjustable Rate products. With rates approaching 40 year lows recently, I wonder how valid this type of survey would be going forward?

Actually, in prior posts I had said the report I saw did NOT split out ARM refis versus Fixeds... merely that they were 30 year Fannie & Freddie loans over the last 45 years of data.

Do you have a link to this study?

Nope, it's locked away behind the data mill of the Mortg. Bankers Assoc., and apparently even if you have access you have to grind the data yourself for these analyses. Again, I was shown a report from a banker a while back regarding this study. I have no links to back it up, but anecdotally we've had a lot of confirmation from lender's hedgers and portfolio managers.

I know you use this study to promote your theory of fixed rate mortgages just being the worst thing one could do with their money this side of just burning it.

Not true at all. Fixed programs DO have their place... it's just that, financially, it's a MUCH smaller place.

Emotionally, the concept of 30 years of safety is VERY appealing, and as such has it's own value for people that prefer to decide based on that. Nothing wrong with that at all!

I also believe that you don't make more on a 5/1 than a 30yr or 15yr Fixed, so your repeated enthusiasm for this product has to be based on conviction of the rightness of your position. However, strength of conviction or persistancy in the promotion of that position does not validate it.

You're absolutely correct! Which is exactly why we've hammered this out so intensely in the past on these boards. We're constantly attempting to squeeze the emotional from the rational and financial.

However, when you repeatedly refer to fixed rate products as "risky", I am forced to come out of my shell to refute that statement. You steadfastly refuse to acknowledge that there can be any harmful impact on Fools from a rapidly rising interest rate environment by using ARMs. One just has to look at the rise in interest rates that happened in the 70s and 80s and the resultant pain all those with ARMs experienced to get a feel for the negative side.

Welcome out of your shell!

Actually, we've delved heavily into the probabilities of the downside of higher rate costs after the initial fixed period ends in ARMS. When looking at statistical deviations in our historical 30 year bond and 30 year fixed loan data, there ARE some chances of being better off with a flat 30 fixed for a straight 30 years... but the ODDS are actually in favor of using a rolling ARM strategy such that you're poised to recapture a down trend (as they do return cyclically.)

Regardless of the above... whether the studies I saw were true, or the studies JAFO is familiar with (10-12 year loan-life expectancies) is true, paying the 30 fixed premium in funds that would otherwise accrue to your retirement accounts with an 80-90% chance of wasting those funds IS risky!

To believe it can't happen again is to be naive. To promote it is something else.

You're absolutely right, I openly state we WILL cycle up and down again, and anyone promoting that we won't is ignorant of market dynamics!

I'm not saying that 5/1 doesn't have a place in some financial plans, neither am I saying that fixed rates don't. I am urging some objectivity in the promotion of either.

Great call! I believe we have pretty good objectivity here, thanks to the open-source nature of these discussions. Of course, your challenge has allowed me to once again review some of the issues we've beat to death before (at one time other Fools were BEGGING us to shut the 'ell up, much as between Trifona & Catherine of late.)

Some of the principles we all grumblingly settled on;
1) One size does not fit all,
2) Nobody can perfectly predict the future, but
3) Statistics can bracket the predictabilities,
4) People choose often for non-financial reasons,
5) Financially, people have different profiles making #1 play again!

Cheers,
Dave Donhoff
Foolish Mortgage Freedom Strategist


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Author: jakeburns100 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39386 of 127815
Subject: Re: Getting ready to buy new... Date: 3/20/2002 11:41 PM
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Dave (AKA SpaceMonkey),

This is good stuff...thanks!

I'm sorry, but I'm not just ANYBODY...I'm afraid that Excel didn't respond well when I typed in "ammortization" (my help guy comes back with "I don't know what you mean") and I don't understand the language they use to explain "PV", "FV", etc. One year of accounting in high school would have been time better spent if we'd used real world examples...

So, I went to Hugh's website and used the Generic Loan Amortization calculator. I'm uncertain as to whether or not I'm doing this right, but I calculated a 80-15-5 by doing the following:

1)
a) First, I input the numbers to take out 45K (15% of my $300K house) on a 5-year loan at 6.275%. This comes to 875.74/month for 60 months.

b) Then, I calculated a monthly payment of $1761.03/month on a loan of $240K (360 months at 8%).

c) Working under this approach, we pay @$2,637/month for 5 years and then $1761 for 25 more years.

Is the logic I'm using correct? Is there a better calculator for doing this?

WRT the interest rates, you said (parenthetically): "Well, rates may vary... a 15% Loan-To-Value HELOC might currently come in at Prime Plus 0% - 1 7/8%... depending on the lender, which depends on which 1st you choose, which depends on a bunch of other schtuff." I get the first part and how the rate may vary from Prime Plus 0% -1 7/8, but what do you mean when you say this "..depends on a bunch of other schtuff."?


You also wrote, "You will doscover, however, that there aren't any calculators that help with the considerations of STRATEGY, in comparing future scenarios... still gotta use the carbonic processor for that." I know this has to do with the ARM part of the equation, but could you provide an illustrative example? Seems appropriate to inject here that I wouldn't be put off at all if you told me to pound sand here...

WRT the contingency offer being made by the builder, You validated my concern in writing: "Indeed, you see the conundrum! There is no free lunch... in order to assume the risks of the market they make it worthwhile by making sure they either profit quickly because folks knock down your door to buy, or they profit handsomely by the spread... or both! If your market is anything better than slow (likely,) it might make sense NOT to take the "guaranteed sale" and just amrket it yourself (with the MLS, through a relitter, if you choose.)"

I think we'll try to sell the house (through a realtor) independent of the other deal.

As for your explanation of the reflective coating on RayVT's dream house..."No, it's special reflective coating required by community standards. It's been decreed that we've selfishly accepted WAY too much moonlight, and since it originally came from the Sun and we're receiving it as a 3rd party benefit, undisclosed, we're now required to send it back into space!"

Aw heck, I'm in trouble with the neighborhood association again! I've been parking my car on our "SRC"--I thought it was a "parking pad" for the second car!

Thanks again!--Jake


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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39395 of 127815
Subject: Re: Getting ready to buy new... Date: 3/21/2002 12:57 AM
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<<Why not take a 30 year fixed for a lower payment, and then pay it like a 15 (or whatever shorter term) to realize a savings?>>

1) Mortgage money is the cheapest money you can get. What is the advantage of paying it off quickly?
2) The "savings" merely increases your net worth on paper---you don't get any benefit until you sell or refi your house. And what's the point of paying the loan down if you are going to take money out by refi'ing?
3) A 5/1 ARM is cheaper than a 30yrfixed. In my case, even if the rates max out at the 5th year, it will take about 7 1/2 years for the cross-over point. And that's worst case.

<<the various nuances associated with managing the combo loans, may be too sophisticated for the average borrower>>
Nope. Two loans, two payment books. No different from adding another car loan.


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Author: johnmoni Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39399 of 127815
Subject: Re: Getting ready to buy new... Date: 3/21/2002 6:07 AM
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"1) Mortgage money is the cheapest money you can get. What is the advantage of paying it off quickly?"

I hear you on that point - and it makes good sense. But . . . to me, the cheapest $ is still to minimize (ideally pay cash) interest payments.
johnmoni

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39431 of 127815
Subject: Re: Getting ready to buy new... Date: 3/21/2002 12:21 PM
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Hi Jake,

c) Working under this approach, we pay @$2,637/month for 5 years and then $1761 for 25 more years.
Is the logic I'm using correct? Is there a better calculator for doing this?


Works perfectly if you want to pay off the 2nd that quickly. You could also run it with a 30 year term for the 2nd to get the picture for minimums throughout.

WRT the interest rates, you said (parenthetically): "Well, rates may vary... a 15% Loan-To-Value HELOC might currently come in at Prime Plus 0% - 1 7/8%... depending on the lender, which depends on which 1st you choose, which depends on a bunch of other schtuff." I get the first part and how the rate may vary from Prime Plus 0% -1 7/8, but what do you mean when you say this "..depends on a bunch of other schtuff."?

What type of first loan you get, and at what rates, depend on your financing and investment strategies, age, professional outcomes, family plans, credit history & quality, etc.

You also wrote, "You will doscover, however, that there aren't any calculators that help with the considerations of STRATEGY, in comparing future scenarios... still gotta use the carbonic processor for that." I know this has to do with the ARM part of the equation, but could you provide an illustrative example? Seems appropriate to inject here that I wouldn't be put off at all if you told me to pound sand here...

See above paragraph... you really need to either explore the options with someone who eats & breathes these issues, or try to take a stab at it on your own (I recommend the assisted route.)

Cheers,
Dave Donhoff
Foolish Mortgage Broker

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39462 of 127815
Subject: Re: Getting ready to buy new... Date: 3/21/2002 8:37 PM
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<< to me, the cheapest $ is still to minimize interest payments.>>

Yes. but....

You need to look at your entire financial situation, not just the house/mortgage in isolation.

If you *never* will have to borrow money for anything---no car loans, no credit cards, no nothing-----not just now, but in the forseeable future under any circumstance---then it probably makes sense to pay off your house. But it doesn't make any kind of sense to pay down 6% money (actually 4.3% after taxes) and keep or take on new 9% money -- e.g., car loan(s).

Ray

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Author: johnmoni Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39483 of 127815
Subject: Re: Getting ready to buy new... Date: 3/22/2002 7:58 AM
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"If you *never* will have to borrow money for anything---no car loans, no credit cards, no nothing-----not just now, but in the forseeable future under any circumstance---then it probably makes sense to pay off your house. But it doesn't make any kind of sense to pay down 6% money (actually 4.3% after taxes) and keep or take on new 9% money -- e.g., car loan(s)."

Point well taken.

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Author: rsprang Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39519 of 127815
Subject: Re: Getting ready to buy new... Date: 3/22/2002 5:21 PM
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FACT: The 30 year fixed loan is the most expensive, interest-wise, AND the riskiest in terms of leaving it prior to realizing the benefits bought with the higher premium."

A 30 year loan is SOMETIMES more expensive. At the time I got my mortgage, the best adjustable rates were about 1/2% higher than the fixed rate 15 year mortgage I got. Most of the time, adjustable rates will be lower, but not always, in my experience.


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