Friday, April 07, 2006

Which Mortgage is Right?

In all my mortgage shopping, I debated a number of different types of mortgages in trying to find what one would be right for me.
  • 3/1 and 5/1 ARM (adjustable rate mortgage)
  • Here I was very tempted to go with the lower rate and allow for the variable rate since it could very well be lower in 5 years. After all, the rates have been going up for over a year now and seem likely to end soon. The Fed could very well of overcompensated causing some economic problems and be forced to lower rates in the future. Looking at long term rates, it seems many think the same way. I also figured I could just pay the whole thing off in 5 years if I had to (assuming current investments not taking any major hits). My parents cautioned me though that they could remember the days when 7% and higher was common and even times of double digit interest rates, and I usually give serious consideration to my parents advice.
  • 15-year fixed
  • Here was a decent rate, but high payments. The higher payments didn't bother me too much though. For me it seemed about right for what I could be comfortable with. A broker asked me why not the 10 year, but although I could swing that as well I just didn't see the need to stress my payments. I'd rather have a bit of flex room in my budget.

  • 30-year fixed
  • The rate is not that great until you look at it historically. The low payments for this was attractive, but also had to consider how long I really wanted to pay for the mortgage. Some said I could just increase my monthly payments, but why do that at a higher rate instead of going with the 15 year?
In the end I opted for the 15-year fixed cause I figured this was a house that if I remained single would be suitable for me, and after 15 years of the current pace, I won't need to do much work. It also was comfortable enough for me by way of amount of payment per month. Here's a few things people pointed out to me about going for a long term rate though:
  1. Inflation is your friend
    As one older coworker pointed out to me. To have these payments over the long haul, they'll just look smaller over the long haul especially under a spat of inflation. Your house meanwhile can offer protection against inflation.
  2. Historically low rates
    Rates have been going up quite a bit lately, and even after locking in a few weeks ago I now feel glad I decided on this route seeing the long term rates rising. I can invest probably even in bonds soon at a higher rate than my mortgage, not to mention longer term type gains in stocks (invested in large cap, small cap, and international).
  3. Tax deduction
    Anything to lower my tax bracket is something that would be good to keep while I'm continuing to work. No need to play the game with ARM and risk having to possibly try to pay off earlier due to a higher rate.
So, what kind of mortgage have other people gone with and why?


Blogger RS said...

We got a 30-year fixed mortgage with our new house. The rate is 4.875%.

The reason that we got it was because we didn't want the added pressure (meaning higher monthly payments) of a 15-year mortgage. What if, god forbid, one of us loses our job, or even if someone is to stay home when we decide to have kids. We just liked the idea of having lower monthly payments and then we could pay it off sooner if we were able to. However, since that time, we have decicded not to pay it off early because our rate is so low, we feel that we would be better off taking that money and investing it.

4/07/2006 9:00 PM  
Anonymous Phil said...

You know, there's a popular myth that you get married and have to move right after you buy a house, apt, or condo. Be warned...

My wife and I bought two years ago. We got a 5/1 ARM because (1) we expect to live in the house about 5 years and (2) my wife was in school and our income wasn't quite high enough at the time for a fixed. At any time in the last 30 years, a home buyer would have killed for rates like we have now. Even if they do go down, they can't go down much farther without more serious economic problems or consequences. I think the 15 was a good choice.

However, I think it really doesn't matter too much because a 32 basis point difference on a 6% loan plus the inverted yield curve of the Treasure notes means that interest rates are expected to be about flat over the long term. ARMs might expose you to short-term fluctuations, but it's probably a wash. So, it's really which one you can best afford.

Also, I agree with RS, our mortgage is that last thing we plan to pay off. The rates are so low now that you're better off with the arbitrage.

4/08/2006 12:29 AM  
Anonymous Anonymous said...

Great article! Mortgage. Find best mortgage rate and mortgage calculator.

6/15/2006 2:15 PM  
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