Newbie question: Which mtg is better?

I am buying my first house to buy and rent, not flip. I’m confused about what mortgage to get.

The house is $151K outside of Savannah, GA. It is new construction to be delievered in Sept.

For mortgages, I’m considering 30yr fixed and I put down 20% in cash, which would be a payment of $925. Or, a 5yr IO 80/15/5 and the payment would be $931.

The payments are almost identical. My confusion is about putting down 20% or 5% in cash. I do have the cash, but don’t know if I should be tying it up. On the other hand, if I want to buy and hold for longer than 5 years, shouldn’t I get the fixed?

I’d appreciate you thoughts on these loans or any others. Cheryl

Well, IO’s are a bad idea for buy and hold. The whole point is to reduce your principle and gain cash flow.

On the other hand, and IO is viable if you can be disciplined enough to pay on the principle yourself. This way you are not legally responsible to pay the higher payment in case something happens.

With buy, hold, rent properties, less cash down is not always the best way to go.

I am sure more experienced people will chime in. If the numbers work both ways, having more of my cash on hand is preferable to me. I can always pay down the principle.

A couple thoughts:

  1. If you take the 5% down financing and the payment is similar, this may be a good option because you will not be tying up your cash, as you said. The 5 year ARM will start to adjust in 5 years, and at that point, if you have not paid off the 2nd, you can refinance into one mortgage because if you have fised up the property and wil modest appreciation, your combined loans should be less than 80% at that time. However, the negative is that if you have moved out of the property by then, you will be subject to investment property rates which are a little higher than owner-occupied. The interest only is not a bad idea because the 2nd will be at a higher rate- I advise my clients in this situation to pay interest only on the 1st and use extra payments to knock out the 2nd quickly. However…

  2. 30 year fixed is not a bad idea either with rates at all time lows. You will probably not get a rate as low as you could get now for many, many years to come. You can lock in now at historically low levels and also get owner-occupied rates.

I would say it depends on how long you plan to keep this property.

RJ Baxter

Well depending on your Fico score and income you may qualify for a 100% loan if you do not have the cash.

You could also use grant money to help with financing the 5% if the seller is willing to help you too.

There is many ways to get you into this property using OPM

If youre planning on staying there long term I would ask about a 2 0r 5 year arm…and Im assuming that your bank has already qualified you for the IO loan program…chances are youd qualify for a 2 or 5 year arm program with 85-95% financing. Usually lenders will only offer the IO option to borrowers with over 600 credit and assuming that there is enough equity in the home 95% financing should be an option. You can always shop around with different banks instead of having to choose between just two options from one bank. With a loan amount of 151k dont waste your money with IO. Technically most banks see this as a construction loan until the home is actually set on the property and livable…but with most banks there is some flexibility in how howe the loan is structured.

Generaly when you take an I/O it is to lower the payments and free up capital for yourself to invest in other avenues. If the fixed program has pretty much teh same payment you would be better of to go with the fixed program. In 5 years your loan will be paid down as with the I/O it will not uless you drop a little extra here and there to bring the principal down. If the payment difference was a bit more dramamtic then it might be worth but from the information you gave us the fixed program would be a smarter choice.

generally when taking an I/O over a traditional fixed the payments have a substantial difference. In your case the payments are roughly the same. In five years with teh interest only your principal would be the same as with teh fixed program you would have taken off quite a bit off the principal at this point. In your situation the fixed is a much smarter route to take.

You can also cash flow massively with a product called the option ARM, but you need 10% down. If monthly cash flow is the issue, something to consider.

RJ Baxter

You really need to be asking this to your personal mortgage broker because

  1. They see your financials and credit report and know what your ratios are and need to be and what your credit score is .

  2. Can help you with your cash flow by offering you a number of products there are literally 1000’s of products with variety of down payment options and interest rates

  3. They can only go to the lenders that offer the particular product and interest rate that you need.

You are shooting in the dark when you are asking all of us who know nothing about you. it is like going to a dentist to give you an oppinion on your ear infection.

I’m going to be different from the rest. I recommend you look at the Option ARM which works like a credit card. You have the option of paying a 30 year payment, a 15 year payment, an interest only payment or like a credit card a minimum payment. If you do the minimum, the difference between it and the interest only are tacked on to your loan balance. Yes, its the dreaded negative amortization.

If you are in a market that appreciates in value consistently, the hope is your negative am will be less than the appreciation.

The major advantage to this loan is you can create positive cash flow immediately. The payments will tick up every year but you should be able to cover that with annual rent increases. If you made a down payment, the negative am will eat that up but you still have positive bankable cash flow.

There are more issues than I can go into here. The loan itself has been around since the late 1980’s and its proven to be a fairly safe vehicle for buying property. Overall, its going to average about 6.5-7% which is higher than you can lock into today on a fixed, but you might not be able to get a positive cash flow today with a fixed and you can with an option arm. One of the other advantages is they pay me a big enough commission that I can usually pay a portion of the lenders closing costs. Keep in mind that even on a zero point loan, there will be closing costs you will have to pay in normal circumstances.