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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: of 127236  
Subject: Re: A race against Mortgage Rates Date: 12/30/2001 9:37 PM
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Hi BigTymer2,

This is my first post here.

WELCOME ABOARD!!!

I will hopefully be buying a house within the next 1-2 years. I live at home with my parents and pay no rent and have NO major bills. I was just wondering how to figure out the best time to buy.

1) Can't stand sharing bathroom with little sister anymore,
2) Dad cuts off your side of the breakfast table & changes the locks,
3) Mom starts asking if you'll be recieving YOUR social security checks at this same address also...

Considering the current lending rates for a 30-year mortgage... Will saving say 5,000 dollars in 6 months lower my final cost of purchasing a home?

The answer is "Yes," regardless of where rates are at the time you're ready to buy.

How many percentage points would the mortgage rate have to go up in order to cancel out the hard work I had done saving up that amount of money. I suspect the rates are going up...so this is why I am concerned.

Savings are gold (or so Ben Franklin tells me!) WHere rates are won't hurt nor help the power of your savings account... just the existing balances will (so make it big as you can, baby!)

I was also wondering if anyone had a preference in the length of the mortgage they choose. For the following 2 cases... Would it be best to get the 30-year mortgage and pay it off at a 15-year pace? Or is it better to choose the 15-year mortgage? What are the most significant advantages of each? (I fully intend on getting a fixed yearly rate mortgage)

May I assume you are fairly young? Still a long way from the end of your investment growing phase of life?

If so, the BEST (IMHO) strategy is to get a 30 year loan, fixed the initial 5 years (because the odds are HUGELY stacked that you will either move or refi before the end of your 5th year) at a much cheaper interest rate than the 30 year fixed.

If you have the option, get it set up as an "interest only" loan, and pay what you WOULD have normally paid for a 30 year fixed and toward regular loan principal into your retirement accounts until they're full, then into stable, long-term market investment funds. If you're NOT allowed the interest-only option, do the above, except with just the leftovers you would have paid for the 30 year fixed.

Your real estate will appreciate in the initial 5 years, and rates will either go up or down or be the roughly same place they are today. If at the same place or lower after 5 years... just don't change anything (unless REALLY lower, which is unlikely... but in which case you'd refi down) and keep stuffing money into your retirement accounts and investments.

If rates have risen, refi either into another 30 year loan fixed for 5 years, OR 3 YEARS (depending on realistic timeframes at that point.)

If rates have gone through the roof, instead of the above loans you'd be strategic to take what is known as an "Option ARM Loan" which alows you to pay minimal interest-only while rates are high, then more if you choose as rates drop back down (and the adjustability drops rapidly when rates drop.)

Unless you are independently wealthy and see no need to ever easily access your own capital, I would NOT recommend accelerating the payoff of your principal (instead, stick the extra money in your investment accounts.) There are opponents to this concept who may drop in here with their opinions... but it really all comes down to where YOU believe you're going to get;

A) The best financial usage of your money, and
B) The best emotional state from your risk/reward profile.

Welcome to our boards!
Dave Donhoff
Foolish Mortgage Broker
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