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Replies (12)
- Dan, "the_country_hick"
- Contributions:4699
You missed the real savings with a fixed rate mortgage. When an ARM adjusts higher you could see a massive amount of increase in your monthly payment. If your payment jumps up by $200 a month the ARM just showed it true nature as a financial suicide machine.
- Rchan81
- Contributions:73
Agreed Dan. That only reinforces what OP was pointing out. I think the homeowner referred made a horrible decision. Unless the owner is definitely selling within 5 years and the current 15 year fixed mortgage is at a much higher rate.
- Ray Blindauer, "SigmaWealth"
- Contributions:246
To offer an opposing opinion, the borrower did say that his goal is to save money. For five years at least, he will save money. There could be more to the picture and my hope is that his loan agent discussed this with him. We don't know what the borrower is going to do with the savings--if he will put it to good use like investing it or putting it aside as a future loan payoff fund.
- Greg Cowart, "Roseville Loan Guy"
- Contributions:448
Both of those scenarios are bad advice. A 30 year fixed and a solid strategic equitly management and investment plan is the way to both save the most money and build the most wealth.
- Ray Blindauer, "SigmaWealth"
- Contributions:246
Greg, I disagree and so would so many of my high net worth clients who use interest-only ARM's to manage their real estate investments.
If you disagree, then this should just go to prove that blanket advice about a 30-year fixed being the best strategy, isn't for everyone.
My point is that or advice to our clients should be as specific as their financial strategy.
If you disagree, then this should just go to prove that blanket advice about a 30-year fixed being the best strategy, isn't for everyone.
My point is that or advice to our clients should be as specific as their financial strategy.
- Hamp Yonce, "Zilluminati"
- Contributions:3463
The OP's numbers are all screwy. I agree that this is only about one third of the story, or the question. The main missing ingredients being what the customer does with the early savings, and what will rates actually do. I ran the scenario through a couple of calcs and came up with a different outcome.
If the customer took the savings and bought a stock(s) with at least 3.25% dividend....
If the customer took the savings and bought a stock(s) with at least 3.25% dividend....
" If you disagree, then this should just go to prove that blanket advice about a 30-year fixed being the best strategy, isn't for everyone."
Don't waste your time Ray, he doesn't get it. He probably listens to talk radio and repeats what he hears. Check this thread where he obviously contradicts himself. His "always a 30 year" strategy makes zero sense and a 5 year old could see it.
Don't waste your time Ray, he doesn't get it. He probably listens to talk radio and repeats what he hears. Check this thread where he obviously contradicts himself. His "always a 30 year" strategy makes zero sense and a 5 year old could see it.
" If the customer took the savings and bought a stock(s) with at least 3.25% dividend...."
Or even if they used the savings to apply to principal the outcome is different. The post is moronic. Who compares a 30 year to a 15 year and then concludes the 30 year will cost more if you only make scheduled payments?
Well duhh!!!
Or even if they used the savings to apply to principal the outcome is different. The post is moronic. Who compares a 30 year to a 15 year and then concludes the 30 year will cost more if you only make scheduled payments?
Well duhh!!!
- Greg Cowart, "Roseville Loan Guy"
- Contributions:448
Ray,
I have no problem with interest only loans or ARMs for the right borrower. As a matter of fact I always show my higher net-worth clients these options in their total cost analysis if there is a chance that one of these products might better suit them and their goals (as often as I have high net worth clients in my local market anyways).
I'm referring more to this scenario. Someone with a $325,000 loan amount with the goal of "saving money". In this case I try and talk them out of a 15 year loan at all costs (saving interest over 15 years isn't actually saving money if it's at the expense of one's net worth after those 15 years) and the arm I wouldn't recommend if the borrowers had told me they planned to still be in the home 15 years from now (as it seems in this scenario).
Not to mention we should be under the assumption that this is a primary residence, not an investment property (no one is getting 3.25% on an 15 year fixed for an NOO property).
Greg
P.S. An IO loan is a great product for many people if utilized correctly. It's still a 30 year loan and actually has the opposite effect of a 15 year fixed. I'm all over that strategy compared to a 15 year loan all day long. As I would be with a 40 year loan compared to a 15 year loan. Every time.
I have no problem with interest only loans or ARMs for the right borrower. As a matter of fact I always show my higher net-worth clients these options in their total cost analysis if there is a chance that one of these products might better suit them and their goals (as often as I have high net worth clients in my local market anyways).
I'm referring more to this scenario. Someone with a $325,000 loan amount with the goal of "saving money". In this case I try and talk them out of a 15 year loan at all costs (saving interest over 15 years isn't actually saving money if it's at the expense of one's net worth after those 15 years) and the arm I wouldn't recommend if the borrowers had told me they planned to still be in the home 15 years from now (as it seems in this scenario).
Not to mention we should be under the assumption that this is a primary residence, not an investment property (no one is getting 3.25% on an 15 year fixed for an NOO property).
Greg
P.S. An IO loan is a great product for many people if utilized correctly. It's still a 30 year loan and actually has the opposite effect of a 15 year fixed. I'm all over that strategy compared to a 15 year loan all day long. As I would be with a 40 year loan compared to a 15 year loan. Every time.
- Greg Cowart, "Roseville Loan Guy"
- Contributions:448
Steve,
You're confusing "saving interest" with "saving money". They are not necessarily the same thing and in this scenario your recommendation is doing the opposite of what your client told you his goal was.
Greg
- Thuan Nguyen, "thuan_nguyen"
- Contributions:32
I do agree with your headliner, "A lower interest rate doesn't necessarily mean you are saving money!"
But I think he just meant his total monthly payment was now almost $600 lower on the current loan.
But I think he just meant his total monthly payment was now almost $600 lower on the current loan.
to save a very low rate differential, he took a hefty interest rate risk.
I would go 5 year ARM to save a couple percent over 15 year fixed, not for a fraction...
I would go 5 year ARM to save a couple percent over 15 year fixed, not for a fraction...
Is low rate really saving you money? Not necessarily!
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- 0.0/5.0
Contributions:9I told him that he is wrong if saving money is his gold. He was confused. Here is the truth:
Current loan after refi 5/1/ ARM ( a 30 year mortgage fixed for the first five year only): 2.625% ($325,000 loan amount)
Monthly payment: $1,305.36
Hazard insurance: $80
Property tax: $727
Total monthly payment: $2,112,36
Total payment (360 months): $760,449.60 (assuming he gets 2.625% for 30 years).
Total interest payment: $144,931.12
If he still has the 15 year mortgage at a higher fixed rate of 3.25% for 15 years (same loan amount of $325,000), here are the numbers:
Monthly payment: $2,283.67
Hazard insurance: $80
Property tax: $727
Total monthly payment: $2,691.66
Total payment (180 months): $556,320.60 (the fixed rate remains 3.25% for 15 years).
Total interest payment: $86,061.23.
As you can see, even though his monthly payment has increased, but for the life of the loan, his 5/1 ARM at 2.626% will cost him $144,931.12 in interest payment, when the when the 15 year mortgage at a higher rat of 3.25% will only cost him $86,061.23 in interest payment. A saving of $58,869.89 with the 15 year loan.
Why? because on the 15 year loan, you pay of the loan in 15 years, and with the 5/1 ARM, you pay off the loan in 15 more years.
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