When Your Dream Home Isn’t Your Forever Home
Consider Options to a 30-Year Fixed-Rate Mortgage
Most home purchase borrowers are choosing a 30-year fixed-rate mortgage, according to Freddie Mac. But how many of those buyers will live in that same house for 30 years or more? People generally don’t have the faintest idea what they will be doing in 10 years' time, no less 30.
Are buyers considering all the financing alternatives? I’d advise against automatically going for a 30-year fixed-rate mortgage almost every time. Main reason being that while you might keep that property for a long time, the likelihood of you keeping the LOAN that long is slim - at best. At some point, you will have an opportunity to restructure it, refinance it, pull equity from it, maybe even sell it and move on.
A 15-year fixed-rate means higher monthly payments, but usually includes a reduced interest rate, so tens of thousands does not go into the lenders’ pockets.
A loan can be customized, say for example, in anticipation of a child’s high school graduation year or made around a plan for retirement age.
Historically, throughout the 1980s, the average cost of a 30-year mortgage did not drop below 10 percent for a decade. Actually, in October 1981, it reached an astonishing 18.45 percent. Rates like those looked more like a credit card than a mortgage.
Since 2012, the annual average 30-year rate has remained between 3-4 percent. As of mid-2019, it is 3.99% With rates so low, the difference between a 30-year fixed-rate and a 15-year fixed-rate aren’t that big, since there’s not much room to create a significant gap.
An adjustable-rate mortgage can be 5/1, 7/1 or 10/1. With a 5/1 ARM, buyers have a low fixed interest rate for five years, and then for the remainder of the loan, the rate adjusts annually according to the fully indexed interest rate. With interest rates already low, this option may not have the best upside potential. However, a 7/1 or a 10/1 ARM would fix rates for the longer introductory period, changing to an adjustable rate for the remainder. Personally, I am a fan of such products and always look at it from the standpoint of: “Why would I take a higher interest rate for a longer period of time if I am unsure of exactly how long I may actually stay here?” For this question, the answer generally points to an ARM that has the benefits of both a fixed term of your choice, and a lower interest rate than a traditional fixed rate loan.
For those who are confident of selling during the introductory period, this presents a potentially sound strategy. Three other possibilities that may underpin this choice: increased personal earnings, stable or declining interest rates, or refinancing.
Plenty of buyers are starting out fresh on the home owners’ ladder. Some buyers indicate they don’t plan to be in a property for more than three to five years. Sometimes, this time frame is cut even shorter due to events such as job transfer, marriage, or children.
How could a 30-year, fixed-rate mortgage always be the best solution for up to 90 percent of all new buyers? It cannot.
Consider: Are you really going to stay put for 30 years? A shorter term could be more beneficial based on your lifestyle and personal situation.
It’s always good to consult with a mortgage lender, attorney and/or a financial advisor about the best options for you. A 30-year fixed might be the right choice, but just know there are other choices out there, too. It requires you to ask questions and a savvy mortgage lender who has a successful track record with plenty of examples of alternative options for lending.
Thinking of buying? Why not reach out to me and find out how can I help you get settled into your own home, even if it’s not your forever home.