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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 127715  
Subject: Re: locking a mortgage rate Date: 4/24/2013 11:28 AM
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We got a release from the landfill poperty and bought another house that is perfect for us.

If you haven't closed, you haven't bought anything yet. You've only signed a contract to buy a house.

We will only be living at the said property for a maximum of 4 years.

Wow. Given that in most markets, housing is unlikely to do more than keep up with inflation (if that), that's a pretty short time to recover your transaction costs.

Getting a fixed rate will give us the option to rent it in case we have to.
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With a 15 yr fixed loan, 20% down I get a 2.5% rate which seems pretty good to me.


Getting an ARM doesn't take away the option of renting it out. It just will eat into your cash flow and profits if interest rates increase and you haven't refi'd into a fixed rate loan in the mean time. And getting a 15 year fixed rate loan, instead of a 30 year fixed rate loan will do the same thing until you actually get the 15 year loan paid off, especially if you compare it to PenFed's 5/5 ARM, which starts at 2.5% and can only adjust every 5 years. If you are really thinking about the possibility of 'having' to rent it out in 4 years or less, getting a 15 year fixed loan will be more costly than the 5/5 ARM for at least the first 6 years of 'having' to rent.

Additionally, if you are going to be moving out of the area, costs to manage the property long distance will also eat into your cash flow and profits. Combined with the cash flow requirements for a 15 year fixed loan, the losses could be pretty substantial.

That said, why would you 'have' to rent it out? You've already committed to this purchase, so you've already committed to transaction costs when you sell. Therefore, you should have figured that into the cost of buying for only 4 years when making your decision to buy vs. rent from a financial standpoint. And if the house has decreased in value in the next 4 years, it's likely that rents will have also dropped, making renting an even less profitable/more costly option. So, renting out a house that has lost value is only likely to spread your loss out over time, instead of having to take the hit all at once when you sell.

This is not a cheap home. So, putting down 20% will cost us a good chunk of money. With a 15 yr fixed loan, 20% down I get a 2.5% rate which seems pretty good to me.

Do you have any other emergency cash, or will the 10% take all of your cssh? What other costs (closing, furnishings, improvements, updates, etc.) will you need/want to spend? Do you have enough cash for those, if you put 10% down? If not, do you need to look at putting even less down?

What is it going to cost you, both in current cash flow, and when you sell, to borrow the additional money? How does that compare to gains that you may get if you leave the money in the market? You should answer these questions with the understanding that if you put 10% or less down, the possibility of having to bring money to the table if you sell in 4 years or less is greatly increased.

I am not sure if we should let that much money sit in the equity.

Then why are you buying, especially for such a short term? Sustainable appreciation for housing is at about the rate of inflation. If you get more appreciation than that, it's likely to result in losses down the road, as we've seen in the past. You may get lucky and realize gains. Or you may not. But if you want an 'investment' for your money, you shouldn't be buying a house to live in, because a house to live in is precisely that - a place to live.

I will have to take money out of the stock market to put down 20%. I have the cash for 10%.

Pulling money out of the stock market when it's near record highs isn't necessarily a bad thing. What goal did you put the money in the stock market to begin with? To buy a house? To save for retirement? To save for education for kids? Any other particular goal? How will taking the money out the market now change you reaching that goal? If you didn't have a goal, then why are you concerned about pulling money out of the market to make a down payment?

Any ideas?

In your situation, sounds like renting would have been a better option from a financial perspective. However, that ship has already sailed, and you are stuck making the best of the sub-optimal financial decision you have already made.

Now that you have committed to buying, a 30 year fixed loan will give you the best option to rent the house out if you 'have' to. A good option might be the PenFed 3.125% 30 year fixed mortgage that Rayvt talked about in the post after yours.

If you are stuck on getting a 2.5% rate, I would suggest looking at the PenFed 5/5 ARM that is currently at 2% instead of a 15 year fixed rate, as the 5/5 will will have lower payments for the first 10 years, which should give you enough time to get out of 'having' to rent the house out.

AJ
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