This is not related to investing, but I know someone who is planning to move and has recently found a house she likes. She has a child about to enter 7th grade, and plans to live in this area until he finishes high school, then move out of state. I was wondering what kind of mortgage is best for her, more for the short term, to keep her payment low. She has impeccable credit and a high FICO score. She will not be in this house longer than 7 years no matter what happens, as she has property in the south. She just wants to stay here until her son graduates. Principal paydown doesn’t mean anything to her. She wants to keep her payments reasonable. I am not looking for a mortgage here, I am requesting advice on the type of mortgage to best suit her needs, considering her circumstances. Her main concern is keeping her payment reasonable. Any opinions are much appreciated.
i would probably do a 7:1 arm loan if she wants to build equity in the house. Otherwise i would do an interest only loan. This would make payments cheaper as the first few years payments primarily go toward interset anyways. After 7 years the house should go up in value enough that she wont have any problem selling it for some kind of profit.
Thanks Black, much appreciated.
Great response from “Black95gt”
In addition, if she is doing a 100% loan or not putting more than 20% down, it would be beneficial to split the mortgage into two, with 80% on the first, and the rest on the second. This is to avoid paying MI.
Also, because she is definitely going to stay for 7 years, it would probably be beneficial for her to have a pre-payment penalty on the loan as well. (Soft prepay: she can sell home anytime but has to wait a specified amount of time before refinancing. Hard prepay: she has to wait a specified amount of time before selling or refinancing). This feature allows for better interest rates.
Hope that is helpful, too.
It sounds to me like she’s a perfect candidate for a Pay Option ARM - she could just make the minimum payment each month since she’s not concerned about principal reduction. This kind of loan would be the cheapest way for her to live in the home.
You say no more than 7 years - she may do well then with a 5:1 Pay Option ARM - then if she needed to stay a little longer, she could refi into an interest only or something at that point, no sweat.
Thanks again for the great responses, especially the pre pay part. Much appreciated, Tony