Best Mortgage Type for 1st-timers: 30-YR Fixed?

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Savvy
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Best Mortgage Type for 1st-timers: 30-YR Fixed?

Post by Savvy »

Hey Bogleheads!

My wife and I are purchasing our first home. We are putting 20% down. We would expect to be in the home for 10-12 years. Should we be considering any type of loan besides a 30-year fixed?

We do not want to pay off the loan quicker than the 30-year schedule, but since we don't expect to be in the home beyond 12 years, are there other options we should consider? I just want to make sure we're not missing anything...thanks!
Grt2bOutdoors
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Re: Best Mortgage Type for 1st-timers: 30-YR Fixed?

Post by Grt2bOutdoors »

The first 10-12 years you will be mainly paying interest, so if you are inclined to/want to build equity faster, a 15 year might be the preferable route. Otherwise, you will basically try to sell the home for the value paid at time of purchase, if home prices fail to appreciate, you may find yourself bringing money to the closing.
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Ketawa
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Re: Best Mortgage Type for 1st-timers: 30-YR Fixed?

Post by Ketawa »

PenFed has a new 15/15 ARM product that might be a good option. It probably had a lower initial rate than any 30 year fixed loans.

You would want to have a contingency plan for refinancing in case you stay in the house longer than 15 years since the rate reset could be pretty bad -- at that point, you could refinance into a 15 year fixed, since you should have about 15 years left anyway.
BuckyBadger
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Re: Best Mortgage Type for 1st-timers: 30-YR Fixed?

Post by BuckyBadger »

The nice thing about a normal 30 year fixed is that there isn't anything stopping you from paying it off as if it were a shorter-term loan. But you also have the flexibility to go back to the 30 year payments if you have changes in your life, a lay off, or other savings goals for a period of time.

What do you lose from this? Maybe a point or so in rate? I think it's a small price to pay.

I would recommend getting a 30 year fixed loan but using an amortization table to figure out how much you would have to pay to pay the loan off in 15 years. Try paying that much and see how it feels. (Make sure that extra money is going to pay down the principle, not to just make early payments.) If it's not too much of a pinch, stick with it.

Or, get the 30 year fixed and pay it down not one cent faster than necessary and enjoy these insane low rates in 20 years.

Or anything in between!

That's the nice thing about the 30 year - you can pay it early or not. Your choice!
HornedToad
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Re: Best Mortgage Type for 1st-timers: 30-YR Fixed?

Post by HornedToad »

We did a 7 ARM since it had a substantially better rate than 30 year FRM and we were planning on moving within 7 years.

We are paying the mortgage payment like it is a 30 year FRM and so over the course of 7 years will pay down an extra ~$30-35k in principle.

In your case, since you have a 10-12 year window, I would do a 30 year FRM or the 15/15 that was suggested from Penfed (I've never heard of that).
Rondo
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Re: Best Mortgage Type for 1st-timers: 30-YR Fixed?

Post by Rondo »

I'd say go for the 30. You can always pay extra principal if you want to at any time, but if times get tight, it's nice to know you don't "have" to pay the extra money if you don't have it.
sls239
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Re: Best Mortgage Type for 1st-timers: 30-YR Fixed?

Post by sls239 »

I think with a 30 year fixed you are paying a premium to have that rate for 30 years. If you aren't going to take advantage of all 30 years, then you should consider if another product would save you money and allow you to pay down the principal faster. A 10/1 or even a 7/1 with good caps might be worth considering, especially if you still make what the 30 year fixed payment would have been. But you'll want to pay attention to closing costs as well.
Twins Fan
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Re: Best Mortgage Type for 1st-timers: 30-YR Fixed?

Post by Twins Fan »

What do you want, OP? The lowest monthly payment and have that fixed, to pay the least amount of interest, to build equity the quickest, to....?

It sounds like you want the 30 year fixed rate. I say, go with that. I'm also in the camp of get the low 30 year fixed rate monthly payment, and then you can flex off that if you choose to. It leaves more comfort in the monthly bill department, at least to me. Also, we never know what the next 5, 10, or more years will bring us. Who knows what your situation will be? Maybe your situation at the time dictates you can't move 10 years from now. I would prefer to have that fixed payment.

Of course, they also say most folks stay in their first home about 5 years. So, you might not get anywhere near 10-12? :D We never know, is my basic point here. Go with makes you most comfortable.
wholeinone04
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Re: Best Mortgage Type for 1st-timers: 30-YR Fixed?

Post by wholeinone04 »

I think people are way too conservative when it comes to mortgages. Fact: the average length of homeownership is 7 years. Why do most people go for 30 year mortgages instead of a 7/1 ARM? I don't know.

Also remember that since you're getting a lower rate, the break even period will be around 2-3 years after the 7 years is up! So as long as you plan on keeping your house 9 years or less(don't remember the exact figures), you're 100% guaranteed to save money.

This also assumes that interest rates go up, what if they don't? You could reset at the same or lower rate like what has happened to many people over the past few years.
YttriumNitrate
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Re: Best Mortgage Type for 1st-timers: 30-YR Fixed?

Post by YttriumNitrate »

wholeinone04 wrote:I think people are way too conservative when it comes to mortgages. Fact: the average length of homeownership is 7 years. Why do most people go for 30 year mortgages instead of a 7/1 ARM? I don't know.
People move in and out of condos a lot more frequently than houses. There's about a 50/50 chance a house buyer will be in that same house 15 years later.
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Andyrunner
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Re: Best Mortgage Type for 1st-timers: 30-YR Fixed?

Post by Andyrunner »

My wife and I just had this decision.

This was our 2nd home and we had about 30% down. We decided to go with a 30yr. We have a young daughter (8 months) and planning on one more. I have no idea how much they are going to cost in the long run, but I would like the idea of a smaller payment if need be. As of now, I plan on putting down an extra $500 a month on this house just to pay it off quicker.
wholeinone04
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Re: Best Mortgage Type for 1st-timers: 30-YR Fixed?

Post by wholeinone04 »

YttriumNitrate wrote:
wholeinone04 wrote:I think people are way too conservative when it comes to mortgages. Fact: the average length of homeownership is 7 years. Why do most people go for 30 year mortgages instead of a 7/1 ARM? I don't know.
People move in and out of condos a lot more frequently than houses. There's about a 50/50 chance a house buyer will be in that same house 15 years later.
Image
http://www.nahb.org/generic.aspx?generi ... nnelID=311
Thanks for posting a link to that study - very interesting. Although I'd be curious to see what the data looks like over the past few years as that study ended around 2007.
According to data from the most recent (2007) ACS, a little over 22 percent of single family home owners have been in their homes 10 to 19 years, 12 percent have been in their homes 20 to 29 years, and a little over 15 percent have been in their homes at least 30 years.[1] Added together, this comes to roughly half of all single family home owners having lived in their homes for at least 10 years. There has been very little change in this percentage since 2003.
I'm a little confused though since this ACS study(from your link) says half of all buyers lived 10 years or less but the AHS says it's around 14 years? There's obviously some variability here not to mention the study is about 7 years old.

I never thought about length of ownership with respect to condos vs SFH but it definitely makes sense that condos are shorter than homes. Regardless, I still think way too many people opt for fixed 30 years b/c it's the safe thing to do. Why pay more than you have to though?

I'd be interested to see a study where they ask buyers how long they think they're going to be in their home and how long they actually stay.
YttriumNitrate
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Re: Best Mortgage Type for 1st-timers: 30-YR Fixed?

Post by YttriumNitrate »

wholeinone04 wrote:I'm a little confused though since this ACS study(from your link) says half of all buyers lived 10 years or less but the AHS says it's around 14 years? There's obviously some variability here not to mention the study is about 7 years old.
I think they address that with some reference to a 1992 article:
These ACS percentages can’t readily be used to produce a true average length of time buyers remain in a home, however. As discussed in a 1992 NAHB article by Michael Carliner and David D’Alessandris[2], data on home sales has traditionally shown that about five percent of the owner-occupied stock turns over in a given year. If all homes sold exactly at that rate, it would imply an average stay of 20 years, about the same number you would get if you assumed that single family owners in the ACS have on average been in their homes for half the time they will ultimately live there. But this would overstate the typical length of stay because it neglects the effect of frequent movers—that is, those who will move more than once in a ten year period and bring the average down. In order to calculate a true average, it would be necessary to begin with a representative sample of people buying a home in a given year, and then track them year after year until the last one moves out. Information has not been collected in a consistent manner for a long enough period to produce a data set like this.
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steve r
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Re: Best Mortgage Type for 1st-timers: 30-YR Fixed?

Post by steve r »

If you have young kids and can afford it, you may want to consider a 15 year. It will be a real plus to have a home paid for pre-college years. As a general rule of thumb, the most competitively priced products (mean best deal for borrowers) are the 15 and 30 year mortgages. I would not do a 10, 20 or 25. I once had a 7 year variable. If you stay less than ten years or if rates do not rise, you will come out ahead.
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Savvy
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Re: Best Mortgage Type for 1st-timers: 30-YR Fixed?

Post by Savvy »

Thank you all for the great advice. In general, we could afford to pay a 15-year mortgage but it would substantially damage the tax-advantaged retirement savings contributions. We'd like to pay at the amount per month similar to a 30-year mortgage. It sounds like the 10/1, 15/15, and 7/1 are all worth considering.

I will talk to our mortgage broker about the options and costs associated.

Good points also on the fact that we may be moving sooner, or later, than we expect. And yes, we have no idea what life is going to throw at us :D Thank you again! :beer
ratesguy
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Re: Best Mortgage Type for 1st-timers: 30-YR Fixed?

Post by ratesguy »

I'm very happy with my 5/1 IO. I don't understand the obsession with being un-mortgaged on these forums. My property taxes are more than my mortgage. Even if I was mortgage free I'd still have a big tab for property taxes. So the "emotional" - live for free argument! doesn't work for those of us in high tax areas. My IO gives me the ability to pay principal in the amount I want, when I want.
Cigarman
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Re: Best Mortgage Type for 1st-timers: 30-YR Fixed?

Post by Cigarman »

While looking at costs make sure you investigate no-closing costs mortgage's. I have done several of these, always lowering my rate and keeping the 1 - 2% typical of closing costs in my pocket.
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Ketawa
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Re: Best Mortgage Type for 1st-timers: 30-YR Fixed?

Post by Ketawa »

ratesguy wrote:I'm very happy with my 5/1 IO. I don't understand the obsession with being un-mortgaged on these forums. My property taxes are more than my mortgage. Even if I was mortgage free I'd still have a big tab for property taxes. So the "emotional" - live for free argument! doesn't work for those of us in high tax areas. My IO gives me the ability to pay principal in the amount I want, when I want.
There are good arguments against an interest only loan, especially a 5/1 when the OP is expecting to stay in a home for 10-12 years. You didn't exactly represent the arguments very well.

1. All things being equal, interest only loans have higher rates than equivalent fully amortizing loans, for obvious reasons.

2. If you have any bonds in your portfolio, they probably earn less than your mortgage rate. Why borrow money to invest in something that makes less? This becomes more an issue if you have a taxable portfolio since preserving tax-advantaged space is important.

3. A 5-year initial period is fine if you plan to pay off the loan or move in 5 years. If not, you are introducing extra risk into your finances because interest rates might go up.

4. Property taxes have basically nothing to do with what type of mortgage makes sense. Total red herring.
Last edited by Ketawa on Tue Mar 25, 2014 8:47 pm, edited 1 time in total.
poker27
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Re: Best Mortgage Type for 1st-timers: 30-YR Fixed?

Post by poker27 »

I purchased my first house in summer of 2012 and went with a 30year. My original thought was that I would be living here for a very minimum of 5 years, hopefully more like 7-10 or longer. If I could go back, I would take a deeper look into a 7 year ARM. The recent options I looked at had a max increase at the end of the term of 2%, so depending on the different of the spread (between 7 and 30 year) you could be at 14 years before it makes sense to do the 30year. On the flip side, if you have any intention to rent out your place and become a landlord long term, a 30 year might be best.
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Watty
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Re: Best Mortgage Type for 1st-timers: 30-YR Fixed?

Post by Watty »

Also consider that you might keep the house as a rental when you move or that if interest rates are a lot higher then you might decide to stay where you are and upgrade that house. My parents had a mortgage at about 3.5% during the double digit inflation years and that was like money in the bank. There very well could be some other type of loan that has compelling numbers, but if the numbers are not compelling then the 30 year fixed rate loan has a lot going for it.
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