sgl@psuvm.UUCP (03/28/85)
My wife and I are in the market for our first home. I've heard a different
story from virtually every real estate agent that I have talked to about
which mortgage is the best for me. I thought I would throw it out to you
experienced investors and see which mortgages you've dealt with or are
familiar with and the pros and cons of them. The three I have been repeatedly
advised to consider are VA, GEM, and VIM.
The disadvantage of the VA or other conventional mortgages as far as I'm
concerned is the way they figure how much you're eligible to borrow. Since
the payments are at fixed rate the amount you qualify for is based on your
current income. I suppose this is reasonable, but I prefer to tighten the
belt a bit now and be able to afford a nicer home since I expect my income
to grow significantly in the future.
The disadvantages associated with the Variable Interest Mortgage make me
wonder what the advantages are? I can't imagine paying a possible 19%
interest a few years down the road! That's what seems attractive about
the Graduated Equity Mortagage. The fact that the interest rate remains
constant while the payments increase 7% per year makes the GEM seem ideal
to me even though a $500 house payment grows to around $1200 by the 15th
year. Can't you *ALWAYS* refinance your home if things don't progress as
rapidly as expected? Why are some realtors dead set against this mortgage?
Is it simply because they have no experience with it or is there something
that I've overlooked?
I get the impression that there are literally hundreds of different types of
mortgages. I was hoping that some of you net.investors could share some of
your expertise. Replies could be sent to me, but it might be more interesting
to post to the net and see what evolves. If there are sufficient personal
replies I will summarize to the net.
Many Thanks,
Steven G. Liptak
sgl@psuvm.bitnet
-or-
liptak@gondor.uucpark@alice.UUCP (Andrew Koenig) (03/31/85)
> The disadvantages associated with the Variable Interest Mortgage make me > wonder what the advantages are? I can't imagine paying a possible 19% > interest a few years down the road! That's what seems attractive about > the Graduated Equity Mortagage. The fact that the interest rate remains > constant while the payments increase 7% per year makes the GEM seem ideal > to me even though a $500 house payment grows to around $1200 by the 15th > year. Can't you *ALWAYS* refinance your home if things don't progress as > rapidly as expected? Why are some realtors dead set against this mortgage? > Is it simply because they have no experience with it or is there something > that I've overlooked? The advantage of a variable rate mortgage is that the rate is usually several percent lower than any fixed rate mortgage available at the same time. It is also now possible to get variable rate mortgages with a ceiling on the rate -- typically about 15%. Such a mortgage will be a better deal than a fixed rate mortgage unless the prevailing interest rate goes up and stays there for a long time. You pay your money and you take your choice. Attractive as it may look, there is only one advantage to a GEM: it permits you to pay less than the interest you owe for a few years, at a time when you might like to have the additional money for other things. Because the initial payments are artificially small, the total amount of money you owe the bank actually increases for a few years, and then starts to decrease. Thus, if real estate prices stay constant and you have to sell, you might find yourself having to pay the bank extra to clear the mortgage! Except for this "feature," a GEM has nothing to offer, because you can always set up an equivalent payment schedule for yourself on a conventional mortgage. I believe that all mortgages must now allow any part to be repaid early at any time without penalty, so you should consider the published payment schedule as a lower bound, and realize that you can pay it back faster (and pay less interest as a result) whenever you like.
dberg@noscvax.UUCP (David I. Berg) (04/02/85)
Fixed Rate Mortgages are pobably better during times of low interest rates, particularly if it appears on the horizon that rates are going to increase. Conversely, Variable Rate Mortgages are better in times of high interest rates, especially if they are too high to sustain the real estate economy, like they were in the early 80s. (Variable Interest Rate Mortgages usually have a ceiling above which the rate cannot go). Sometimes, you can get a builder to "buy down" the interest rate at the bank by adding to your cost of the property. (For example, with only hypothetical numbers, a builder selling a $100,000 house at 15%, might "buy down" the interest rate to 12% by paying the bank the difference up front (say $10,000) and adding that amount to the purchase price). The monthly cost to you is minimal when amortized over 30 years. The risk to you is that if you sell before the house has appreciated the amount of the added cost, you may have to take a loss. This is in no way as risky as a Graduated Equity Mortgage, though. Graduated Equity Mortgages may be attractive to a buyer in your shoes, but they can be painfully dangerous. You actually start out paying some fraction of the total interest due each month, and no principal. The balance of that interest is then added to the principal. (This is called "negative amortization"). As your payments go up, the amount of excess interest added to the principal decreases, until you reach the point of equilibrium where your monthly payment equals the monthly interest amount. This usually takes about five years. By now, your principal has increased, perhaps at a rate greater than your property has appreciated. If you have to sell, or if you are forced to refinance (as some GEM mortgages are set up), you may owe the bank a tidy sum just to clear the loan. BUYER BEWARE! -- David I. Berg (dberg) ARINC Research Corporation San Diego, CA ihnp4 \ MILNET dberg@nosc akgua \ UUCP decvax >------------!sdcsvax!noscvax!dberg dcdwest / ucbvax /
jeff@wjvax.UUCP (Jeff Albom) (04/02/85)
.
In choosing an ARM over a conventional fixed rate, you have several advantages
and disadvantages.
Advantages of ARM
1) Interest rate is usually lower than that for a fixed rate. (Typical
difference in the bay area right now is 1-1.5 points).
2) Assumibility of the ARM by a new buyer (most fixed rates have due
on sale clauses and even some ARM's do).
3) Going in rates for ARM's can be several points lower than the set
rate of the loan, thus making it easier to qualify for the loan
(of course, you have to pay the set rate so the lower going in rate
may result in a lumped payment at the end of the going in term or
adding the sum to the balance of the loan).
4) Loan initiation points are usually lower for an ARM (I'm not sure
why...does anyone have an explanation?).
Disadvantages of ARM
1) Interest rate can increase depending on what money indicator the loan
is pegged to (get a cap on the loan that you can handle financially).
4 to 1 in favor of the advantages... so why go with a fixed rate loan?
1) You don't have to worry about nasty little increase in your monthly
payments should the interest rates go higher.
2) If you are planning to own your house (as opposed to an investment)
and do not intend to sell it before the end of the loan period, you
don't have to worry about assumability. Remeber, 30 years is typical
for a mortgage and a lot of things can change in that time.
3) Right now, in the bay area, fixed rates do not exceed ARM rates by
a sufficient amount to justify the chance (my opinion) of rate
increases. In fact, more people are taking out fixed rates now than
in previous years as compared to ARM's due to the small difference
in the rates.
THE CHOICE IS UP TO YOU. Just remember that foreclosure lurks around
the corner if you make a very bad choice
jeff@wjvax
suhre@trwrba.UUCP (Maurice E. Suhre) (04/11/85)
The variable rate mortgage moves the interest rate fluctuation risk
from the lender to the borrower. The lenders got burned very badly
during the high inflation periods and they aren't about to get caught
again. Since the risk of lending is reduced, the rate of return
(interest charged) is also reduced. Seems simple enough.
Maurice
{decvax,sdcrdcf,hplabs,ucbvax}!trwrb!suhre