Now that our interest rates have pretty much doubled in the last 8 months, inflation hasn't yet been controlled, supply shortages with infant formula and other necessities, the question is how should I finance my housing purchase? Well, if you look at the current rates, you will find the 7/1 year A.R.M. (adjustable rate mortgage) is lower than the 15 or 30 year fixed and just maybe more beneficial in lowering your monthly cost. Also, generally the penalties in breaking a fixed (could be upwards of $10,000 during the first 3 years) vs. a variable can be considerably less as it all depends on your lender’s terms and conditions. It all depends on how long you will be in your home. If you believe you will be moving within that 7 year period, then the A.R.M. will be your best choice. Another possibility is that you just may believe and feel that you will be able to pay off your mortgage in that 7 year period, then again that will be your most logical and cost effective decision. Even though the lower rate stays fixed for 7 years, it is based on a 30 year payout; so then the remaining 23 years will have a rate adjustment annually or there will be a final balloon payment on your 84th installment unless you refinance. This is a calculated risk as no one knows or can predict what rates might be after that 7 year period. More important, your lender might have a capped top fixed rate, thereby having some safety in the actual long term costs of one’s mortgage. In the 1980s-1990s variable rates had been consistently lower than fixed rates as a form of financing. Now that rates have increased dramatically over the last 8 months, you will find a greater difference between fixed and variable rates, whereby the variable rate of a 5/1 and 7/1 A.R.M. will be more desirable in lowering the monthly mortgage costs. However, one must again weigh the long term risks as the rate will adjust at the end of the term and/or the balloon payment will be due. Also, if refinancing before the end of the term, one must consider what penalties will accrue in doing so.
One must take into consideration the length of time you will be residing in your home to determine what type of mortgage should be considered. Do you have or will you have children, and if so will you stay put until they are out of college? If not and you decide to commit to a variable rate mortgage, will you consider moving before the end of the term of your variable rate mortgage? How safe and secure is your job and/or business in our new Covid-19 Pandemic effected world? Will your income be stable, possibly decrease or potentially increase? There are many crucial questions to be asked before making that most critical decision to commit to a fixed or variable rate mortgage when considering purchasing your home.
Maybe renting for a few more years will be a more prudent decision after analyzing and comparing the costs. Squirreling away more money to save for a larger future down payment will assist in decreasing the overall costs. However, over the long run owning your home has been the only and single best asset that most consumers have possessed as a forced savings in building their wealth. Paying your monthly mortgage over time, creates equity slowly but surely. Unless you are an amazing, expert and proficient stock trader and have a crystal ball as to earning money in the stock market which as of this writing today Monday, June 13, is way, way down; a home as opposed to gambling in the market, or being in a rental has always been a better path to increasing one’s long term wealth. Having that security and comfort in knowing you are in control, having somewhat fixed financing costs as opposed to what rent might be in the future; and being your own landlord, in determining if and when you and only you decide to consider moving goes a long way in being confident about home ownership. However, how you will determine the path to pursue financing your purchase will require much thought and planning. If you need any assistance or want to discuss your specific “needs and wants” you can always feel free to reach out to me.
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