Everyone who is financing a home purchase should strongly consider the standard 30-year fixed-rate mortgage.
Though I recommend you move every 6 to 12 months (it’s good for business) these days most people are in it for the long-term. Even if you knew it wasn’t going to be a lifetime house, consider keeping it as a rental when you move.
But for those who have very strong income, or know they have an inheritance coming, a business or property to sell, or know their lucky Lottery numbers are going to pay off sooner or later, you may want to consider today’s version of exotic financing.
You should only take an alternative to the 30-year fixed rate if you had a solid plan to pay it off early. Don’t get an ARM thinking you’ll refinance someday, because it’s likely you’ll never get around to it – the fixed rate loan will have a higher payment, and you’ll shrug it off.
Here’s a choice today for mortgages up to $1,500,000:
3.875% fixed rate at 1.25 points, or
4.375% interest-only for ten years, no points.
Let’s say you want to finance $1,500,000:
The 30-year fixed option is $7,054 per month, and will cost $18,750 up front.
The ten-year ARM is $5,469 per month for ten years, with no points.
A benefit of the regular 30-year fixed-rate mortgage is the principal reduction every month – it’s a forced savings plan. After ten years, you will only owe $1,137,917, instead of the full $1,500,000 with the interest-only loan.
The ARM will feel like a fixed-rate loan with no payment change for ten years – which could lull you to sleep, and come back to haunt you 8-9 years from now.
Don’t take the 10-year deal just to get a lower payment. Take it because you know you have the ability to pay it off in the next ten years.