Help me choose mortgage

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
spry
Posts: 21
Joined: Mon Apr 15, 2013 12:44 am

Help me choose mortgage

Post by spry »

We just had an offer accepted on a house! I need some help thinking through mortgage options. Here are the main issues that I think are relevant for our choice, but let me know if something else is important too.

a) We expect to be in the house for the long run but there is a possibility that in 3 years or so we may have to (or want to) move. We seriously considered renting but there were no good options in the the neighborhood that we wanted.
b) We have enough liquid cash at the moment to deal with extra closing costs and then will also have enough cash flow month to month to deal with a potentially higher mortgage payment. For some more info on our situation, see this earlier thread: viewtopic.php?p=6305297#p6305297
c) This is a neighborhood that is "gentrifying", which means that there is a reasonable concern about appraisal coming in lower than our price.

Here are my questions:
1) How to think about online lenders like say HomeFinity that offer lower rates vs. local lenders that might make the process easier (e.g. by using local appraisers)?
2) Should we try to avoid points given uncertainty about how long we will be in the house? Local rates are something like: 5.125% (1 point) or 5.375% (0 points) vs. online rates ~5% (0 points) or ~4.85 (1 point)
3) Should we consider ARM, again given the uncertainty about how long we will be in this house?
4) If we go fixed, then do 30 or 15?
exodusNH
Posts: 3747
Joined: Wed Jan 06, 2021 8:21 pm

Re: Help me choose mortgage

Post by exodusNH »

spry wrote: Fri May 13, 2022 2:48 pm We just had an offer accepted on a house! I need some help thinking through mortgage options. Here are the main issues that I think are relevant for our choice, but let me know if something else is important too.

a) We expect to be in the house for the long run but there is a possibility that in 3 years or so we may have to (or want to) move. We seriously considered renting but there were no good options in the the neighborhood that we wanted.
b) We have enough liquid cash at the moment to deal with extra closing costs and then will also have enough cash flow month to month to deal with a potentially higher mortgage payment. For some more info on our situation, see this earlier thread: viewtopic.php?p=6305297#p6305297
c) This is a neighborhood that is "gentrifying", which means that there is a reasonable concern about appraisal coming in lower than our price.

Here are my questions:
1) How to think about online lenders like say HomeFinity that offer lower rates vs. local lenders that might make the process easier (e.g. by using local appraisers)?
2) Should we try to avoid points given uncertainty about how long we will be in the house? Local rates are something like: 5.125% (1 point) or 5.375% (0 points) vs. online rates ~5% (0 points) or ~4.85 (1 point)
3) Should we consider ARM, again given the uncertainty about how long we will be in this house?
4) If we go fixed, then do 30 or 15?
Points only make sense after 6-7 years. Probably avoid those. You can pretty easily figure out the breakeven time just calculating the payment differences.

Regarding the ARM, it depends on the cap and annual increases. If it went to the max rate, would it destroy your finances? In theory, 7 years from now, the rates should be lower, but there's no guarantee of that. (Not to mention what happens if the real estate market crashes 20% again and you're under water? Refinancing might not be possible.)

Whether to choose 30 or 15 depends on the rate and how it affects your cash flow. You can always take the 30 and then pay enough extra principal to pay it off sooner.

Over the next 10 years, do you expect to have increased expenses (e.g. kids?). The 15 builds equity faster, but if your cash flow needs change, you cannot access the equity without a loan or refinancing. ("You can't eat your house.")
DoTheMath
Posts: 565
Joined: Sat Jul 04, 2015 1:11 pm
Location: The Plains

Re: Help me choose mortgage

Post by DoTheMath »

A few thoughts:

I find the calculators on the Mortgage Professor's website really helpful for comparing mortgages. It can be hard to properly understand, say, the real difference between 5.125% and 5%, especially if there are fees and such to also consider. The calculators make it really easy to compare mortgages under various assumptions. For example, you'll see that the lifetime cost of a 15 year vs. 30 year mortgage is dramatic.

Of course, the cost is only one consideration. For example, we went with a local lender who would hold the mortgage as we wanted to have someone we could deal with directly if we had an issue. We recently had to file an insurance claim and it was certainly handy that I could do all the mortgage related paperwork by stopping in a local office. But is it worth .125%? Probably not.

For 15 vs. 30, we ended up doing a 20 year on our first mortgage. It gave us most of the benefit of a shorter mortgage, but with a slightly lower monthly payment. That could be a good compromise if you're on the fence. Just depends on the available rates and how much of your money you want to be putting into the house (vs. the alternatives).

I would be disinclined to do an ARM unless you have high confidence that you are likely to move. It's pretty hard to say what interest rates will do in the next few years. It's not clear to me that they'll be lower than they are right now. A fixed rate mortgage which can be prepaid and can be refinanced at any time is less likely to box you into a corner. Again, the Mortgage Professor calculators would help here. You can compute how much total savings you'll make from the lower ARM rate and then weigh that gain against the risks of an ARM vs. a FRM.
“I am losing precious days. I am degenerating into a machine for making money. I am learning nothing in this trivial world of men. I must break away and get out into the mountains...” -- John Muir
Topic Author
spry
Posts: 21
Joined: Mon Apr 15, 2013 12:44 am

Re: Help me choose mortgage

Post by spry »

Thanks for the comments.

Will avoid points and will check out Mortgage Professor.

For ARM considerations, the cap rate would not put too much pressure on our monthly cash flow. But I am leaning towards a fixed rate.
Doohop65
Posts: 122
Joined: Wed Feb 04, 2015 11:54 am

Re: Help me choose mortgage

Post by Doohop65 »

In this environment I would get the fixed rate that suits your needs. To me, it’s risk management. Very little risk in fixing it and having interest get cheaper. You just refinance and move on. If the interest market runs you will be happy you have a fixed rate.

Congrats on the new house.
sureshoe
Posts: 1517
Joined: Tue Jan 15, 2019 4:26 pm

Re: Help me choose mortgage

Post by sureshoe »

spry wrote: Fri May 13, 2022 2:48 pm 1) How to think about online lenders like say HomeFinity that offer lower rates vs. local lenders that might make the process easier (e.g. by using local appraisers)?
2) Should we try to avoid points given uncertainty about how long we will be in the house? Local rates are something like: 5.125% (1 point) or 5.375% (0 points) vs. online rates ~5% (0 points) or ~4.85 (1 point)
3) Should we consider ARM, again given the uncertainty about how long we will be in this house?
4) If we go fixed, then do 30 or 15?
1) I have used nothing but online lenders for the last 10 years. They are just as easy, and likely easier, than physical banks - because they have to be to be profitable.
2) Points are pure math. You have to cashflow them. If you are certain you won't hold the house for more than 3 years, use that as your timeframe. Personally, I would not pay points that take more than 5-7 years to break even.

3) and 4)
It depends on the rate differences. For ARMS - just look at the discount. I personally would not do an ARM unless I knew that when rates became variable that I would nearly certainly move or pay the house off. 3-4 years from now, mortgage rates could be 7-8%. I wouldn't want that staring at me. I did this about 10 years ago on a 7 YEAR ARM where we got a ridiculously low rate.

For 15 vs. 30 - this is more philosophical. I personally wouldn't do a 15 because I want to lock in a good rate for a long time. But, if you are nearly certainly moving and going to have to flip the cash, 15 would be fine.
deikel
Posts: 1304
Joined: Sat Jan 25, 2014 7:13 pm

Re: Help me choose mortgage

Post by deikel »

1) the process is the same, I don't think its easier one way or another, try a local credit union for a truly local approach and a local underwriter that can take personal circumstances into consideration - they also sometimes have better rates then the internet - mine does consistantly.
2) given the uncertainty in time line, I would avoid any and all closing costs you can (no points, maybe even closing cost free loans) and instead push the money into the later years of the mortgage
3) Hell no ARM - we are in a high inflation environment, there is very few ways the rates will fall instead of explosively increase. If you think a 15/1, then maybe, but the whole beauty of the 30yr fixed when starting at low inflation is the inflation protection
4) 30 or 15 yr fixed - you can always pay off faster if you like, but its a pain to refinance - so long and slow to start with
Everything you read in this post is my personal opinion. If you disagree with this disclaimer, please un-read the text immediately and destroy any copy or remembrance of it.
dboeger1
Posts: 1122
Joined: Fri Jan 13, 2017 7:32 pm

Re: Help me choose mortgage

Post by dboeger1 »

There are very few things where I prefer to think in terms of payments rather than total cost, but mortgage is one of them. We're talking about your home. Arguably bigger than the financial cost of moving is having to uproot children in the middle of a school year, accept a much longer commute to work, etc. Of course you should take into account total cost, but if going with a 15-year mortgage is going to put you in a position where you're constantly worried about job security, monthly cash flow, bills, etc., I wouldn't do it. You wouldn't want to let the car dealership finance guy talk you into buying more car than you should just because you can afford the payments, but if he was selling the ability to live a better, happier life, you'd do well to hear him out. That's kind of what a 30-year fixed-rate mortgage is, and probably why it's so popular, even among hardcore finance nerds and people with large incomes. It's an affordable way of getting more house, a better neighborhood, etc. and amortizing the cost over a longer period of time.

As a certified cheapskate who is finally approaching some degree of early FI, I've had to start reconsidering frugal habits which no longer move the financial needle enough to justify the sacrifice in quality of life. Remember that if you get a fixed-rate mortgage, those payments will be nominally fixed despite inflation over the term of the mortgage. There is potential for significant inflation over the next 30 years. So when you compare total costs, remember that the difference is in today's dollars, but the payments will be spread out over 15-30 years, during which your income and assets should ideally be keeping pace with inflation. And in exchange for paying that extra cost, you get some combination of better payment affordability and more house, ability to make up for an appraisal shortfall, etc. I honestly think that's a fair tradeoff, and it's one of those situations where you can end up being too much of a cheapskate by saving and investing more money than you really need for retirement but making huge payments for a shack the entire time your kids are growing up. When you think of it in those terms, it really puts into perspective the sticker shock when comparing total costs of 15 and 30 year mortgages.
Topic Author
spry
Posts: 21
Joined: Mon Apr 15, 2013 12:44 am

Re: Help me choose mortgage

Post by spry »

Thanks, these are helpful. I am starting the process with an online lender, here's hoping it goes smoothly.
User avatar
Hector
Posts: 1605
Joined: Fri Dec 24, 2010 2:21 pm
Contact:

Re: Help me choose mortgage

Post by Hector »

spry wrote: Fri May 13, 2022 2:48 pm 1) How to think about online lenders like say HomeFinity that offer lower rates vs. local lenders that might make the process easier (e.g. by using local appraisers)?
We closed a few weeks ago; first time mortgage. We went with local credit union because we did not find better rate than their 10 year ARM rates. Relationship between all parties helped. If I was doing again, I would go with a local lender again, even if I don't get the best rates. You can refinance any time after it closes as long as rates don't climb up quickly.
spry wrote: Fri May 13, 2022 2:48 pm 2) Should we try to avoid points given uncertainty about how long we will be in the house? Local rates are something like: 5.125% (1 point) or 5.375% (0 points) vs. online rates ~5% (0 points) or ~4.85 (1 point)
I don't know if/when I would re-finance. I won't pay for points.
spry wrote: Fri May 13, 2022 2:48 pm 3) Should we consider ARM, again given the uncertainty about how long we will be in this house?
Depend on the difference, and if you are comfortable with worst-case scenario.

spry wrote: Fri May 13, 2022 2:48 pm
4) If we go fixed, then do 30 or 15?
Even if I had money, I would go with 30. I think it is likely that stock heavy portfolio would return higher than mortgage rate over 30 years.
bradinsky
Posts: 936
Joined: Sat Jul 21, 2018 6:32 am
Location: Ohio

Re: Help me choose mortgage

Post by bradinsky »

Try Third Federal Savings & Loan, if they’re active in your area. Absolutely great to deal with if you’re in the market for a mortgage.
www.thirdfederal.com
Post Reply