Financial Planning for Generation X & Y Women
 
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Expert Q&A Archive

06/02/2004
Mortgages
My fiance and I are buying a house and are unsure of which type of mortgage to choose. We would like to do an 80 (30 year fixed) /10/10, but is that our best option?. We have enough to do an 80/20, but would like to keep some of money liquid for new furniture, appliances, etc. We don't know how long we want to stay in the house exactly, probably 5-10 years. Should we look into doing a 7 year arm? How are they structured, like an 80/10/10? We definitely want to stay away from PMI.
Frank Wells:
expert info »
You may want to consider 2 options:

1. Interest-Only financing will offer a smaller monthly payment because you will not be paying principal, unless you want to pay extra, which will then lower your payment further.

2. Adjustable Rate Mortgages can have a fixed interest rate for the 1st 3, 5, 7, or 10 years. You should compare the rates and consider the length of time in the home. It sounds like a 7-year or 10-year fixed-to-adjustable mortgage might be a good fit for you.

The 30-year mortgage will work best for someone planning to be in their home for over 10 years. The 2 options above will offer a lower payment and rate and allow you to direct some money to your other needs, or pay down your principal. Remember, your home will appreciate (or depreciate) regardless of your equity in the home or your payment. So, a lower payment will provide more flexibility

Also, you can combine the 2 options above into an Interest-Only fixed-to-adjustable mortgage, which will give you the benefits of both. And, one more option can allow 100% financing without PMI, which involves securities as collateral instead of making a down payment.
Bret Duvall:
expert info »
If you've got the funds to put down 20% and have an 80% loan that would be great. If you need a little more liquidity though, I would recommend the 80/10. This would still allow you to avoid PMI and give you some extra spending cash. The 5/7 ARM products are great products and they are probably the most popular on the market. They give you some of the lowest interest rates possible for the first 5/7 years. These products are perfect for people in your situation that will not be living in the same house for 30 years. You would be able to structure this like I described above.
Marquetta Broome:
expert info »
Congratulations on your decision to purchase a home and being one step closer to achieving your American Dream. The 80/20 would be the best option since you want to stay away from PMI. You must invest at least 20% into the property or the property must be at 80% loan-to-value in order have a loan free from PMI. Another thing with PMI is the amount of insurance is based on your loan amount so it may not be as bad as you may think, especially if you want to keep some of your cash to furnish your new home.

You mentioned that you may stay in the home from 5 to 10 years. In this case a 7 year ARM loan would not be a bad idea, if you know for sure that you may plan to move within the first 7 years of the term. With an ARM loan, your loan is set at a fixed interest rate for the initial term, (3, 5 or 7 years) and then began to "adjust" once the initial term has ended. Depending on what the interest rates are at the time when the adjusting begins, will determine which direction the rate will adjust to. Also with an ARM you can amortize your payments over 20 or 30 years, depending on how low you want your monthly payments to be. So really both options are great, it just depends you where your greatest needs lie.
Charlotte Anne Bond:
expert info »
I agree with Marquetta that the 7 year ARM could be a good idea if you plan to be out of the house in 7 years or less (and most Americans live in a house less than seven years (and even less time when they are young and upwardly mobile)). The rate on the 7 year ARM should be lover than the fixed rate as well. I like the idea of the fixed rate. The way these work is that the rate stays fixed for the first 7 years then will vary each year there after if rates change. They usually have limits as to how much they can move each year and in total, but they do move so know that if you stay in the house more than 7 years and rates are higher then your payment will probably go up.

The 80/10/10 is also a good option. It avoids PMI and will leave you with some gettign started funds. I might recommend the 80/10/10 also to keep your emergency fund intact. I personally would not be very comfortable with much less than three months worth of cost of living expenses aside.
Anne Delle Donne:
expert info »
It is my understanding that when you undergo a 80/10/10 you will avoid PMI (this is true of any unconventional mortgage with a ratio of 80/20). This decision to put down 10 or 20% will undoubtedly be based on the how old you are, your credit score (above 740 increases the options available to you) and the ratio of your liquid investment portfolio versus your illiquid assets (such as the equity in your home). Should you decide to go with the above option, you will not only avoid PMI , but can select a 7-year arm for the first (80%), and have additional options for the second such as a Home Equity Line of Credit (HELOC) or a Home Equity Loan. The HELOC is usually based on the Prime rate (currently 4%) and will fluctuate as the Prime rate fluctuates-which creates some added risk should interest rates increase dramatically. The Home Equity Loan is a fixed rate loan, and the last time I checked these rates were running around 8-9%. I would encourage you to explore the components of an ARM so you fully understand the maximum they can adjust in any given period or over the life of the loan. They are also tied to various indices (to determine the initial rate), and depending on what index is chosen may affect how quickly your ARM will adjust to rate changes after the fixed period (7 years). In any event, if this home will not be the "home you retire in," then I would recommend considering an ARM versus a 30 year fixed.
Connie K. Marmet:
expert info »
Marquetta has done a great job of describing the benefits of an 80/20 loan. Another plus is that with an 80/20 loan, you may be able to get a line of credit of up to 10% of the value of the house. At the current time, the interest rates on lines of credit are fairly low and they are tax deductible where other types of credit aren't. The line of credit could be used for the furniture or for future unforeseen needs. Lines of credit can become a problem if you don't pay them off. Minimum payments generally only pay off the interest and it can be tempting not to pay off the principal. Consider the payments as repaying yourself!
Bettye J. Banks:
expert info »
Her best bet would be to access the services of a broker. She can ask the broker to run the numbers for her on the 8-/10/10 or the 80/20 deal. She should include the deal which includes Mortgage Insurance, too. It could be that the interest on the 80/10/10 could significantly exceed what she would pay in MI. Get a professional to run the numbers. MI may not be such a bad deal.
 

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