i’m looking to refinance my home. as of now i believe im going to sell after i’ve live there for 2 years. after discussing with a mortgage broker he mentioned this:
old school of thought - get 30 yr fixed and pay off the home so that it’s owned free and clear (probably paid off in 19 or so years)
new school of thought - get 30 yr ARM with 5 yr fixed, paying just interest (i hope i have that right). have lower payments so that you can invest elswhere. he also added he believed that I probably woudlnt have the same mortgage after 5 years anyway. he feels that you should never pay off the mortgage completely (have some equity maybe 20%) and use the cash to make some investments.
what do you guys think? anyone have any input regarding some routes i should choose and why?
as mentioed above i’ll prob sell after two years…however maybe i would do a 1031 if another deal came along in the next 4-6 months…there’s even a possiblity i might stay there for 2+ years. there’s no definite at this pont which makes this a tough situation…i guess i’m looking for an option which gives the most room for choosing the above.
If you are certain you will dispose of the property and payoff the mortgage within 5-7 years I would suggest a 5/1 or 7/1 ARM. These are fixed for the first 5-7 years then convert to a one year adjustable afterwards. I suggest this because these loans usually have slightly lower interest rates than 30yr fixed. Regarding interest only, well they do lower your monthly payments but not by much since principal is the smallest portion of said payment. I consider them more risky as you are buying no new equity with your payments.
I tend to agree with your broker regarding never fully paying off your mortgage. These are the cheapest funds you’ll ever borrow and using your money in other investments may provide a greater net benefit in the long-run. However, if you are retired or on a fixed income where monthly cash flow is tight having a no-mortgage home would be a very comforting position.
As far as loan types, it really depends on a lot of factors. I don’t necessarily think IO loans are all that bad, since you have basically not put a whole lot of principal into the property the first several years. The spread between loan rates aren’t as big as they used to be. Also, if you absolutely know you’ll sell in the next few years, I probably wouldn’t get a long-term amortized loan unless you can get the payments less than IO.
Is it typical for an interest only loan to have a lower rate than a P&I loan? That seems counter-intuitive as IO loans are a riskier program to lenders.
I was just going to jump in there and say yes, but I just checked one of my rate sheets and it’s about the same right now on a 3/1 or 5/1 ARM. It used to be a little higher like a 1/8 or so. Just goes to show you that rates change every day.
The only thing between theory and practice is being able to sleep at night. Got lots of people calling and wondering if they should refi into a 30 because they’re worried that rates are going to go up once their 5/1 ARM expires and they’re still in the house and things haven’t gone as planned. So with their refi costs, they would have been better in a 30 year. I think one of the reasons mortgage brokers push the 5/1 ARMS or the I/O loans are because it gives them a better shot at doing a refi a few years later.
I just got a 30 year fixed rate with a 10 yr interest ony option. If you pay toward the principal the payment adjusts lower each time you do.
Then in the 11th year it goes to a 20 yr amort of the remaining principal at the same fixed rate. No prepay penalty, all good. I have 2 national lenders do this for me. Let me know if you want contact info.
If you only keep it for two years then it doesn’t matter much which loan you get. In my experience, IO loans have higher rates. If you actually can invest effectively then go for the lower payment and invest. In real life many people get in trouble with their investments and cash flow.
A 1031 exchange is not an option with your primary residence.