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Our mortgage broker gave us two options for a 7/1 ARM. 10% down (all we can put down with our current assets.)
Option one is to pay monthly Private Mortgage Insurance (PMI) until we have enough equity in the house. About 4 1/2 years. This would give us a 3.16% interest rate. ($99 a month PMI on a $320 7/A Arm 30 year mortgage)
Option Two is the mortgage broker would elimate the PMI requirement but would charge a higher interest rate of 3.50%.
Option two is actually cheaper per month but would be more expensive, after the 4 1/2 years point, when we have the 78% equity in our loan that would have allowed us to cancel PMI (under option 1). Under option two we would keep paying the higher interest rate until we refinanced or sold the house.
If you planned to live in the house for seven years, what would you do?
Uh, just bc people are doing it doesn't mean they are making the wisest financial decision.
I really hope you advise your clients better than this. Not just "Well, everyone else does it!"
In my market, I can happily advise people of this. Even if things go back down to the traditional 3-5% appreciation year over year, from the current 15-25% appreciation we have in different communities in my area, that 7 years in the house is still a sound decision.
You might live in a dilapidated area where you would make a bad financial decision in buying a house, but across Texas, it's a very sound and smart decision to purchase. In the 6 1/2 years I've been in my house, the value has gone up $150k. Why would I have wanted to miss out on that if I sold tomorrow?
In my market, I can happily advise people of this. Even if things go back down to the traditional 3-5% appreciation year over year, from the current 15-25% appreciation we have in different communities in my area, that 7 years in the house is still a sound decision.
You might live in a dilapidated area where you would make a bad financial decision in buying a house, but across Texas, it's a very sound and smart decision to purchase. In the 6 1/2 years I've been in my house, the value has gone up $150k. Why would I have wanted to miss out on that if I sold tomorrow?
What makes me suspect you're one of those 'used car salesmen' real estate agents is the fact that you didn't even advise him to do the math. And you're actually actively arguing against it. That's skeevey.
Different areas, different markets, different rates of appreciation, different everything...every decision has to be done in the context of the mathematics. It's not like, "Oh, we're bubbling up! Everyone buy!"
There are lots of calculators out there to do the math for you, op, if you don't want to do it yourself.
But do yourself the favor of doing the math.
People bleating, "Rent is wasting money!" are usually people who have something to gain from your buying. Or who don't like math.
I am rather surprised no one mentioned an 80/10/10 with a 7/1 ARM. Best of both worlds and should you stay longer, you aren't setting yourself up for a future refinance. For a slightly higher rate, a 10/1 ARM.
Our mortgage broker gave us two options for a 7/1 ARM. 10% down (all we can put down with our current assets.)
Option one is to pay monthly Private Mortgage Insurance (PMI) until we have enough equity in the house. About 4 1/2 years. This would give us a 3.16% interest rate. ($99 a month PMI on a $320 7/A Arm 30 year mortgage)
Option Two is the mortgage broker would elimate the PMI requirement but would charge a higher interest rate of 3.50%.
Option two is actually cheaper per month but would be more expensive, after the 4 1/2 years point, when we have the 78% equity in our loan that would have allowed us to cancel PMI (under option 1). Under option two we would keep paying the higher interest rate until we refinanced or sold the house.
If you planned to live in the house for seven years, what would you do?
If you cannot afford to pay more each month than the minimum on a 7/1 ARM, you can't afford the house. Sorry.
If, OTOH, you can pay it down faster, get the lower rate with PMI and then pay it down to drop the PMI ahead of schedule...
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