I’ve got a conversation I wanted to share with you from this week that circles around financing. A client is looking at buying their first home and really didn’t know where to even start. I talked with them for a about five minutes and got them pointed first at few lenders. Because you really can’t buy something unless you know how much money you have. Right?
So put a few days distance and we are hooking up to go look at the first round of homes that we’ve picked out. We are riding around and have a little time to talk in between and I ask what their fears are about buying a home an I can hear that they are really concerned about the price point. The homes we are looking at aren’t really hitting a home run. We stumbled on a home about 20k over their requested price point and they really have that level stuck in their head. Question is how do we get there. Well, I’ve always been a fan, and some people aren’t gamblers so this isn’t their bag but I’ve always been a fan of Adjustable Rate Mortgages for first time home buyers and young couples. Cause here’s the deal, how long are you really going to live there? Three years, Five years tops? I mean if you are hard core and want to front load a bunch of cash into a note on a home so you can drag a ton of equity out later then that’s your gig but, for most people the goal is to get as much house as they can for as little cash up front as possible. An ARM is a great way to do just that.
What’s an ARM? Well, in the a Conventional loan the interest rate stays the same over the entire length of the note. So if you have a Conventional 30 year loan at say 4.1% then that’s the rate for 30 years. In an ARM the bank gives you a lower up front rate on the gamble that they are going to earn that back later. There is an initial period where the rate will be at say, 3.25% compared to that 4.1% Conventional, so you are saving almost a full percent on the interest portion of your payment. Later that rate will go up but we aren’t worried about that. (I’ll explain later) The lower rate translates into about $72/month in savings on a 150k home. After the initial period that can be three, five or seven years, then rate will change based on the prime rate. (If you want to know about the prime rate you need to ask a lender or a finance guru.) The rate is usually capped in the amount it can rise each year so you won’t see a crazy change in your payment. But that’s not the point.
Back to my single, 25 year old client who is probably going to find that special person in the next five years and start thinking about starting a family. Are they going to want to stay in this first home. No way! They are moving on up to the top with their new two wage earner income. So why saddle into a long term loan with a higher rate? They are going to kiss that mortgage good bye in less than five years. So why not pay less up front and get that ARM?
OR, here’s the point….
Use that lower interest rate that gave them $72/month and put it against the price of the house to leverage them into the house they REALLY wanted in the first place. That $72 allows you to bump the home price up over 15k and can make the difference in getting the home you had to buy or the home you wanted to buy.
And if you aren’t out of the home within the five years that’s okay too. Just keep your financial nose clean and re-finance the home before the end of the initial term of the ARM ends. You’ll have paid a ton into equity on the home in five years and you can get a loan for thousands less which will lower your payment again.
Got questions? Call me or shoot me an email. Answering Real Estate questions is what I do for a living. If I don’t know the answer, I’ll find it.
eally think that looking at a range of homes is always, always a good idea. Look a little under your range and a little over.