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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 127262  
Subject: Re: First time buyer - several questions (long) Date: 1/2/2002 12:16 PM
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Hi Mike,

I said;
My "go to" recommendation is the 5/1 ARM (a 30 year loan fixed the first 5 years,) and you can learn more about that by searching using "Mortgage Freedom Account" as keywords.

You said;
I did some reading about this last night and today, and again, while I think I understand the math and statistics that back it up, I guess I'm just more than a little uncomfortable with the adjustable side of it. I'd like to think that the house we buy this year will be the house we live in for the next 30 years or more. Our friends who are looking for a new house after less than 4 years tend to suggest that might not be a wise bet, whereas my parents who have lived in the same house for 16 years and are only looking to move now for what I would call "ease of living" reasons tend to suggest we might make it happen that way. Still, that's only a sample of two.


Your making a very common reasoning error... ESPECIALLY among younger homeowner-hopefuls; You're imagining the only reason you might not have a loan longer than 5 years would be if you MOVED!

The truth is that many MANY more people refinance to a new loan in the same home they continue to live in than folks who stay in the same loan.

I don't know about your folks... but I know that even MY folks, who've been in the same home for almost 30 years, have refinanced several times (long before I was in the business.)

Anecdotal stories aside... the cold, hard statistics say the odds of YOU (if you're under 45 years old and in a 30 year mortgage) staying with your same LOAN (not your home) longer than 8 years (that's quite a short time!) is LESS THAN 10%

You said you're a little uncomfortable with the adjustable side of a 5/1 ARM plan... but the reality of the world is that there's better than 80% odds you'll never see the adjustable period... and if you did, it's easily remedied with another refi (which would cost far less than the money you'd saved by using the ARM instead of the fixed.)

When you take a 30 Year Fixed, you pay a significant premium for the "safety" each and every month, from the very first month... even if you never use the full 30 years. IF YOU DO NOT use the full 30 years, the premium is wasted.

Again, cold, hard statistics collected from almost 45 years of up and down markets show that well over 90% of the people who pay for the "safety" end up flushing their hard-earned money down the toilet...

WHY? "Life Happens!"

Some people move unexpectedly (more than ever predict... but that's why they call it unexpectedly.)

Also, people need access to their capital. Why? Zillions of reasons;
1) Home additions & repairs,
2) Sick kids, parents or inlaws,
3) Drops in income, or worse, unexpected unemployment,
4) Business OPPORTUNITY (takes $ to make $.)
5) Weddings, graduations, babies,
6) (you can fire up the imagination from here.)

Here's an interesting little exercise to try if you're game...

Figure what your folks paid in interest over the last 16 years. Then figure what they WOULD HAVE paid had they financed with a 5/1 ARM at the then prevailing rates, and refinanced twice up to now. Whack them for $3,500 closing costs each refi, just to be more accurate.

You'll likely see they STILL ended up wasting a significant sum of their hard-earned money on "safety" premium they never used.

Hope all this makes sense. I like stacking the odds IN my clients' favor.

Cheers,
Dave Donhoff
Foolish Mortgage Broker
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