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Choosing between two mortgages.

Hello,

I hope you can give me some guidance on my mortgage question and I thank you for taking the time to read this.

I am buying a non-warrantable high-rise condo for $350,000. I have two choices in financing I am considering and I cant figure out the best path to take.

Loan 1

90% LTV 2 year ARM starts at 4.25%. Caps are 1/1/6. Margin is 4% on the 1 year Constant Maturity Treasury Yield.

Loan 2

80/10/10 5 year ARM Primary starts at 4%, second is fixed at 6.5% for 15 years. The cap structure is 2/2/5 and the margin is 2.25. Index is the 1 year LIBOR.

The closing costs on Loan 2 are $800 higher and in the first 2 years it will cost me $2200 more than Loan 1 due to higher payment, but after 3.6 years Loan 2 is cheaper if rates go up and the loans adjust to the max each year.  If rates stay stable for years to come than Loan 1 works out better.

Which do you think is the smartest way for me to go?

Thanks for your help.

  • November 19 2013 - US
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Answers (10)

Keep in mind that the difficulties you are having finding financing could be even worse for a potential buyer when it is time to sell.
  • November 19 2013
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Check with other lenders, while Arms are the most common on Portfolio loans a 15 year Fixed is usually available too if that is an income/ debt ratio option.  
  • November 19 2013
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We intend to be there at least 12 years. Fixed rate loans of any type are not an option. This is a non-warrantable condo. I have spoken with over 20 lenders and these are the two best options out there.
  • November 19 2013
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When making the decision, break down certain variables 1) How long you plan on staying in the home? 2) What are your long time goals for the property? 3) What is your current financial situation?  
  • November 19 2013
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Visit with a couple other lenders in your area to get a feel for their products and more understanding of what options are currently available. 
  • November 19 2013
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While a 30 year Fixed may not be an option, ask if a 15 year is. If the Borrowers can comfortably afford the 15 Yr payment then the rate should be close to the Arm rates but Fixed.       
  • November 19 2013
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Fixed rate loans are not an option for this condo. The terms and caps I listed are correct.  These are portfolio loans from small banks.
  • November 19 2013
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I agree completely with the previous reply.  Five years of certainty is much better than two years.  Also, if this is a "starter" home, in five years your life may be in a different situations where you (plus family) will be buying a bigger home and you can sell, without ever having to refinance or worry about rates.  Good luck!
  • November 19 2013
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When rates are this low you should really look into a fixed rate loan. There's a lot of risk in an ARM right now because rates really have nowhere to go but up.

Based on what you've put here I'd recommend option 2, but I think both are very risky options.
  • November 19 2013
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The margin on loan 1 is extremely high at 4%, cap of 6 very high too. Don't assume rates will stay low, look at where you will be if the economy takes off in a couple years, worse case is 7.25% in the 5TH year compared to loan 2 still at 4%. 

Are you sure loan 1 is a 2/1 Arm based on the 1 Year CMT? The caps of 1/1/6 would usually indicate a 2/6 Arm that adjusts every 6 months based on the 6 Month Libor. 
  • November 19 2013
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