It depends on what you mean by “for many years.” For some people, 5 to 10 years is a long time. If you are definitely staying longer than 10 years, I would recommend the 30 yr. fixed rate.
As far as investing goes, what is your time frame? How soon after you’ve settled down are you thinking of investing? There are many factors one must consider when getting into investing. Generally speaking, if you’re going to wait 6 months to a year after you’ve settled down, have good credit and, ideally, have money to put down, then you should be ok. Good luck!
My husband & I are having a house built. We will not be getting financing until it is done. What would be the best financing plan for us? We’ve been told a 5 yr ARM would be good vs a 30 year fixed, but I’m worried about the possibility of interest rates being sky high when we have to refinance in 5 years. We plan on staying in this home for many years… what would be the best loan for us?
My other question is, after we have financed our home, and things settle down, we’d like to begin investing in real estate. How will having a large debt like a home loan affect our ability to turn properties? Thank you in advance for any help you can give me on this. Robin
Posted by Jorge Carrejo on July 03, 2005 at 24:10:01:
Another point that you might find is that a 5 yr ARM usually has about the same rate as a 30 yr. Pretty close anyway. For example on Friday, I could have gotten you a 30 yr for 5.375. Or a 5 yr ARM at 5.125. Pretty close to the same.
I too would recommend the option arms. There are lenders out there that go up to 100% CLTV (on your primary home) If you are disciplined enough with finances you can pay off your house much faster with that type of program. That is if you even want to pay off your home. But that is a different subject all together. Just know that having say…$200k in equity on a paid off home makes you absolutely no money! But $200k invested properly does.
Why don’t you tell us what state you are in and the details of your credit and income/employment situation. THat way we can advice you a little better?
As a future investor lets start your investing education now.
When you say ‘sky high’ just how do is the sky? How high have rates risen in the past? Check the ARM loans and you will notice that some of them have a cap so the rate can never reach the sky; it can reach a specific number.
It is very costly to manage a risk that does not exist. One example is your assumption that with a 5 year ARM you have to refinance in 5 years. That is not how the loan works. It is normally a 30 year loan with 5 years being fixed and then 25 years with the rate floating. Hence there is no need to refinance if circumstances prevent you from considering that option.
When you say ‘stay a long time’ the average person does not keep their loan as long as they might stay. Many people refinance at some point even though they did not move. So consider if you will live there. Consider if you expect to pull out cash through a refinance vs. a Home Equity Line Of Credit (HELOC). It could very well be that you live there for 10 years but have three different loans over that same period.
A related thing is change in family circumstances might dictate a change in home. Job loss, change in marital status, illness with a relative, college funding, and winning the lottery are all things that can cause someone to change home. Death, divorce and job loss are the top three drivers from what I have read.
Compare a 30 year fixed with an ARM. Look at the difference in the payment. Then run the math to see if an ARM with the same payment of a 30 year fixed would actually result in a loan pay down that is faster. If the outstanding balance is lower while the interest is rising you still might end up paying less then with a 30 year loan.
I do not recommend homeowners do the calculation as the math is not how they emotionally think. As a future RE investor you will need to become a pro with the math so start now.
Many investors started out when they had no money and bad credit. There are multiple ways to do deals where no one sees what your credit is so they would not notice a loan on your residence. Hence the path is not blocked if you have a large mortgage. That does not mean that having a large mortgage is good, bad or recommended. Just that it is less of a factor to investing then you might have realized.
FYI there are also 7 and 10yr arms. If you feel you will be in the house for 30yrs and your goal is to pay down the mortgage than go for a drawn out 30yr loan front loaded with interest. If you plan to invest in more properties like you say then wisely keep your capital free and go for the 5yr Interest Only loan. It will keep your payments down and your debt to income down and make you more eligable for future qualification on additional loans. Most people end up refinancing every 2-3yrs or so on average anyhow.
Also you might research the pay option arms that start at 1%, lots of cashflow.