No technology thoughts here; instead, I’m looking for any advice you folks might give to a first time home buyer. I’ll have much more on the move later, but in the meantime I’m trying to wade through the complexities of mortgage options. The interweb of course is offering a multitude of options (Smartmoney’s been the best resource thus far), but I’m looking for some real world advice having already solicited a variety of opinions from family and friends.
A few of the questions I’m pondering:
Fixed v Adjustable - being both financially conservative and possessed of the belief that the interest rate 5 years from now will be considerably higher, I’m leaning towards the higher cost but more conservative fixed rate mortgage. Any reason that’s incredibly wrong?
Bank v mortgage broker v E-Loan - I’ve got a few options here; going with a regular retail bank like Bank of America, going with a mortgage broker that works out of the office of my realtor, or turning to an online service like E-Loan. Anybody have experiences here they can relate?
Points? - I understand conceptually the reasoning behind points, but can’t really digest whether it’s worth getting a smaller bridge second mortgage to avoid paying them. I’m not going with a zero down mortgage or anything ridiculous, so whatever points I’d have to take wouldn’t be that bad, but maybe it is worth avoiding them.
Anyway, for those of you expecting some technology commentary, apologies for the distration and now back to our regularly scheduled programming.
Update: I already thanked the many commenters both public and private below, but wanted to be sure and do so on the front page. Really appreciate all the advice, guys. Also, I did solicit a response from ELoan last night following Christopher’s suggestion and wow, the rate is much better. 5.75 no points for a fixed loan, versus my current 6.25 offer from BofA with points. Not sure what I’ll go with, but in case anyone’s curious here some experiences with ELoan.
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Have you already made the decision to buy? If not, check out this past Thursday’s issue of the Economist — they have a couple articles in there on how right now, renting is much cheaper than buying. The whole article’s worth reading, but here’s a precis:
(1) the normal argument of equity-building only applies if you’re going to stay in your first home for a lot longer than the average person does (i.e. you’ll be staying for 10+ years).
(2) Even with tax breaks and the fact that you leverage the value of the home itself when you get the loan, the cost of home ownership — especially maintenance — is typically underestimated by first-time homeowners, and typically puts the actual cost of buying above the cost of renting.
(3) Renting is only actually cheaper than buying if you invest the difference between your rent and what your mortgage would have been wisely enough that the returns are greater than the (long-term) increase in house prices. (Note that in the short term, with as frothy a market as there currently is in housing in the US, you won’t make as good returns — but house prices can’t stay as irrationally exuberant as they are forever.)
(4) All these things said, there are still externalities (such as neighborhood, available space, and The American Dream) that make home ownership attractive; just be aware that, if you look at it from a purely financial perspective, owning might not be best.
interesting, and thanks for the info Dan. hadn’t seen the article, and while it makes some good points i’m still pretty set on buying. fortunately i’m buying in a market that’s hasn’t seen the meteoric price increases that say, Boston or San Fran have. i’m also somewhat optimistic that the overall value of my projected neighborhood is better a few years from now than currently.
i’m a little fuzzy on the specifics of #1, however. i’d imagine that’s true if your equity contributions are just along the lines of the mortgage, but i can also see myself taking a bonus and pouring some of it back into equity.
regardless, i find it similar to the arguments that i’ve heard leasing vs renting cars. the pro-rent argument essentially could essentially be extrapolated outwards to a scenario where one simply keeps renting forever and never builds any equity in anything, which i have to think is a poor financial strategy.
either way, good food for thought and thanks for the post.
Your instincts on fixed rate are quite correct. Personally, I would be terrified of a variable rate. I would probably pay a few to AVOID a variable rate loan. That’s a strong statement.
That being said, the devil is in the details. The variable rate may have a ceiling and either may have a provision whereby the lender can call for payment of the entire principle all at once. Make sure you read the fine print, ask lots of questions, and know EXACTLY what you’re agreeing to. The next few years promise much excitement in American finance–excitement that I would not want to remotely be near.
Fixed, e-loan, no-points.
Why take a variable with record low interest rates? My opinion is too many people are over stretching themselves with variable rate mortgages.
Points are a bet that interest rates won’t go down. If they do go down you can always refi.
With that said don’t get a mortgage that penalizes you for paying it off early. That is a trap to prevent you from refi the mortgage.
Mortgage brokers IMHO bring very little added value to the table. Same with banks. Again the internet changes everything.
1 - Fixed. Rates are very low right now and the chance they will get significantly lower over time is small. If they do, you can refinance or simply pay some extra each month and get done sooner. Get the lowest monthly payment you can, you can always pay more, but if you’ve stretched yourself too far they won’t let you skip a month.
2 - I don’t have much experience in this area, but in all likelyhood your loan will be sold to someone else and in 6 months it won’t matter where you started.
3 - Do the math on the points. Simply divide the points by the monthly savings to know how long you need to stay in the house to come out ahead. If you move before that point you should have paid the higher rate. Of course, if paying the points will leave you “house poor” then don’t do it.
As others have said, you will underestimate the number of things you need to do and buy when you first move in so make sure you have enough money left over for all these things.
Don’t forget about Excel! It’s your very best friend in this case.
You can quickly mock up a mortgage payment schedule using the IPMT and PMT functions. Email me if you’d like a sample XLS.
regards,
-fs
wow - thanks for all the great comments, both here and offline. i really appreciate all the feedback, particularly in affirming my preference for a Fixed rate. next step is to try and decide on properties, which of course i’ll be commenting on here.
I just want to add that I used e-loan to buy my last house. I put them through hell (changed my mind on the house while in escrow, then changed back), and they came back and closed the deal with a smile.
There are a lot of scammers out there in the mortgage industry, but e-loan is fine. They will answer all your questions about they loan, but you have to know what to ask. Mortgage brokers aren’t in business to educate you. They are in business to take your money. Eloan takes the least amount of your money. I’m happy.
On points: if you pay points and interest rates go down, you WILL be kicking yourself. I say don’t do it.
There are so many different mortgage products available now that it can be very difficult to pick the one that might suit best. The other thing is probably worth bearing in mind is that because the market is in currently in the middle of a slowdown that I will probably be all sorts of additional deals coming on stream in next few months. A few the mayors are mortgage lenders have already introduced deal so that’s also worth keeping an eye out
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