Need help with mortgages (homeowners insurance, mortgage, loan)

[crease123]

My fiance and I are planning to buy a house, and we are now in the process of figuring what mortgages to take.

The house we are interested in is priced $150,000. We have about $25-30k in cash, but that would leave us to next-to-nothing in the bank. We are thinking, with fair certainity, that we will move from the house in 5-6 years time.

Given our circumstances, we are considering between a FHA 30-year and a 7-year 5% down ARM. Right now, I'm leaning towards the ARM for these reasons:
1) lower interest rate

2) there are no prepayment penalties in NY state.

3) the PMI will go away after you pay down 22% of mortgage, so an addition 17% after taking out the 5% down payment. 17% is about $25,000. My fiance and I will make a combine salary of $100,000 gross annually, so I think this is definitely do-able. FHA sucks because you need to pay the PMI for 5 years regardless how much you pay up.

4) We are planning to sell the house in 5-6 years time, so we can potentially dodge the rate adjustment. I know life can change, and if we didn't or couldn't sell the house in 5-6 years, I doubt there will be much of the mortgage balance left that we couldn't handle with a higher interest rate (its a $150,000 house after all, not a $400,000 house).

[proulxfamily]

I think you've thought it out well... That FHA MIP hurts when you've already paid down the balance significantly.

What's the difference in rates between a conforming, 20% down loan and the ARM? I *loathe* ARMs but in this market, I don't think you'd have trouble selling and honestly, with the income you'll have, you could very easily pay the entire mortgage by the time the ARM is up. Put in your mortgage debt at one of my favorite sites, www.whatsthecost.com and see how extra payments could pay it off quickly.

If the purchase price is $150K with $7500 down (that's 5%, right?), it leaves a mortgage debt of $142,500. That's a payment of $722.03/month, if the ARM's interest rate is 4.5%. Plus, you'd still pay PMI of about $50/month until hitting 78% LTsaleV. (FHA would be 3.5% down at 5% so a mortgage of 145,250 with a payment of $779.73. Plus about the same PMI, in the form of the MIP.)

If you paid an extra $1000/month on the principal, the house would be paid off in 8 years, 4 months. At the 7-year point, the balance would be $24,814.19. And I doubt the house will be worth less than that. lol - in this market area, houses don't shoot up in value but unless they're in the ghetto, they certainly don't go down. That would be a tidy sum to take to your next home/life adventure.

If you paid an extra $1500/month, the house would be paid off in 6 years, 2 months.

If you paid an extra $2000/month on the principal, the house would be paid off in just under 5 years. 58-59 months.

[crease123]

Thanks for this numbers proulx. I drew out a excel spreadsheet comparing FHA to 7-year ARM. Assuming we pay $1,800 monthly to cover everything (principal, interest, tax, homeowners insurance and PMI).

At the end of 7 years, we will have $61,000 with the ARM loan (the PMI goes away in just under 3 years), compared to $75,000 with the FHA (the PMI goes away after 5 years).