patrick.net

Experts say today’s adjustable-rate mortgages, or ARMs, as well as interest-only loans, are especially suitable for borrowers who expect to move before any rate increases can wipe out the savings in the early years. They’re also useful for sophisticated borrowers wrestling with uneven income, borrowers who expect their income to rise, or borrowers who are willing to bet they can invest their mortgage savings for a greater return elsewhere.

The key word in the entire paragraph is bet.

With a typical rate of 3.75%, the monthly payment on a $300,000 loan would be $1,389, compared with $1,449 for a 30-year, fixed-rate loan at 4.1%, saving the borrower $5,040 over seven years.

Lets do some math.
30 year 4.1% after 7 years.
Principal paid 40,992.
Interest paid 80,704
total payments 121,800
total interest after 30 years 221,584

30 year 3.75% after 7 years
Principal paid 44,772
Interest paid 71904
total payments 116,576.
total interest paid unknown

15 year 3.375 after 7 years
Principal paid 125,580
Interest paid 53,508
total payments 178,584
total interest after 15 years 82,071.

Looks to me like you would pay about 60k less or about about 8k a year for 7 years in a 30 year but will have 80k less in equity. Anyone really think they can earn the 20k difference by investing 8k a year for 7 years? Anyone that good wouldn't be reading patnet for mortgage advice. Pay the whole life of the loan and the interest is triple with a 30 year. The moral here is to find a house you can afford with a 15 year or stretch out the extra $700 a month for a 15 year in this case.

PeopleUnited says

Any of our financial guru's want to ring in?

Go with a 5 year fixed. It's a no brainer.

Want to make God laugh - tell him about your plans.

Stupid risk

my opinion is buying now and selling 5-7 years later will result in a loss.

RealEstateIsBetterThanStocks says

my opinion is buying now and selling 5-7 years later will result in a loss.

How often does that ever actually happen

errc says

RealEstateIsBetterThanStocks says

my opinion is buying now and selling 5-7 years later will result in a loss.

How often does that ever actually happen

http://moneyboss.com/housing-market-history/

I dunno about that graph, are there places where prices are still that far south of the peak?

I appreciate the input everyone.

Here is some more info. One place we are considering last sold for a little more than 20% above current asking price, which is about what we expect it to sell for this time (doubtful a bidding war will drive the price up more than a couple thousand dollars if any). It is a one owner and was sold when new in 2005. So in the past 12 years its value has depreciated about 20%. The original owner never lived in it and has been renting it out. I expect that when all is said and done he/she will see a 3.5% return on investment over the past 12 years. Not so great for him or her who holds the property in an LLC but there may be other factors that made this investment more profitable than would appear on paper for the original owner.

I anticipate that we would be investing 5% of purchase price in upgrades/maintenance over the course of the next 5-7 years, with the goal of preventing any further depreciation in the value of the property.

So all said and done we could continue to rent to the tune of about $132,000 over the next 5 years

Or we could buy at around $430,000 and try to sell the place in about 5 years.

My thought was if we finance at the lowest possible rate, and sell as FSBO, we should be able to come out ahead vs renting.

Does that make sense?

PeopleUnited says

I anticipate that we would be investing 5% of purchase price in upgrades/maintenance over the course of the next 5-7 years, with the goal of preventing any further depreciation in the value of the property.

So all said and done we could continue to rent to the tune of about $132,000 over the next 5 years

Or we could buy at around $430,000 and try to sell the place in about 5 years.

My thought was if we finance at the lowest possible rate, and sell as FSBO, we should be able to come out ahead vs renting.

Does that make sense?

Where are you buying? What are your plans after 5 years when you sell.?
It seems you will be better off buying even if there is no appreciation. I would buy.

Strategist says

PeopleUnited says

I anticipate that we would be investing 5% of purchase price in upgrades/maintenance over the course of the next 5-7 years, with the goal of preventing any further depreciation in the value of the property.

So all said and done we could continue to rent to the tune of about $132,000 over the next 5 years

Or we could buy at around $430,000 and try to sell the place in about 5 years.

My thought was if we finance at the lowest possible rate, and sell as FSBO, we should be able to come out ahead vs renting.

Does that make sense?

Where are you buying? What are your plans after 5 years when you sell.?

It seems you will be better off buying even if there is no appreciation. I would buy.

No, that's mathematically just not true.

If there is no appreciation in those 5 years, you lose and would be financially better off renting.

Check https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html and put in $430K house price, $2200/month rent, zero appeciation, and holding for 5 years.

The cost of owning (the actual loss per month after tax deductions, etc) would be $2665 per month. That's a larger loss every month than the $2200 rent.

rando says

No, that's mathematically just not true.

If there is no appreciation in those 5 years, you lose and would be financially better off renting.

Check https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html and put in $430K house price, $2200/month rent, zero appeciation, and holding for 5 years.

The cost of owning (the actual loss per month after tax deductions, etc) would be $2665 per month. That's a larger loss every month than the $2200 rent.

I get a cost of around $2,000 per month for the cost of owning based on zero appreciation.
I used a 3% rate, because that is the rate for a 5 year fixed.
I used 1% as the cost of buying because you can get a zero point loan. Also the pre paids are not real costs.
The calculator does not take into account the principal you pay down.
Why are utilities there? Renters have the same utility costs.
Homeowners insurance is about half what the calculator states in California.
Tax brackets are higher in California.
It's all a matter of what numbers you plug in. The largest effect is the rate of appreciation. If you plug in 6% appreciation rate, which is normal for California, it's a no brainer. If I was considering buy vs rent in the Mid West, I would not bother to buy for 5 years. I would rent.

Strategist says

It's all a matter of what numbers you plug in. The largest effect is the rate of appreciation. If you plug in 6% appreciation rate, which is normal for California, it's a no brainer.

Yes, mostly it depends on the appreciation.

But it's not necessarily wise to count on 6% appreciation.

rando says

Strategist says

It's all a matter of what numbers you plug in. The largest effect is the rate of appreciation. If you plug in 6% appreciation rate, which is normal for California, it's a no brainer.

Yes, mostly it depends on the appreciation.

But it's not necessarily wise to count on 6% appreciation.

It's a pretty good calculator, but a young first time buyer would have no clue what to plug in or what some of the questions even mean. It could lead to an incorrect conclusion.

I agree it is a pretty good calculator. And it clearly states that the charts that have the biggest slope such as estimated appreciation in home values, estimated return on investments and mortgage rate have the most influence on the overall calculation.

As such that is why I considered a low interest rate to be the most important variable that I could control with my choice of mortgage, and possibly what separates renting from buying as the most economical choice (in addition to the most comfortable and enjoyable choice).

In reality, there are no "similar" homes for rent. Because in general the places for rent are much smaller than the places for sale. I can continue to rent, with rents ranging around $1.22 per square foot per month (in order to achieve this I would have to rent a smaller place located in the neighborhood I want to live in, and then also rent a large storage unit to keep some of my toys in). This means if I could find a "similar" rental to the ones for sale I would be paying at least $2700 a month probably much more if it has a quality kitchen, nice yard, etc.... Thus the cost of "similar" place to rent would be much more than the mortgage, insurance, taxes would be if I took out a mortgage.

This is the midwest, but it is a big city in the midwest. There is very little price flexibility unless you want to live in the diverse neighborhoods.

APOCALYPSEFUCK_is_ADORABLE says

This is a great plan if you're a fugitive PRC Army officer who has $141 million to launder before the shithouse slave operation called China implodes into CANNIBAL! ANARCHY!

Don't you think Europe/North America will get there first?

@StrategistStrategist says

If I was considering buy vs rent in the Mid West, I would not bother to buy for 5 years. I would rent.

care to elaborate?

PeopleUnited says

Here is some more info. One place we are considering last sold for a little more than 20% above current asking price, which is about what we expect it to sell for this time (doubtful a bidding war will drive the price up more than a couple thousand dollars if any). It is a one owner and was sold when new in 2005. So in the past 12 years its value has depreciated about 20%. The original owner never lived in it and has been renting it out. I expect that when all is said and done he/she will see a 3.5% return on investment over the past 12 years. Not so great for him or her who holds the property in an LLC but there may be other factors that made this investment more profitable than would appear on paper for the original owner.

I anticipate that we would be investing 5% of purchase price in upgrades/maintenance over the course of the next 5-7 years, with the goal of preventing any further depreciation in the value of the property.

So all said and done we could continue to...

Is there a reason moving is a must? Seems like a lot of work and a bit of a gamble to probably not save that much money. Moving is expensive and time consuming. What happens when you need to move in 5 years if the market were totally dead and you are forced to convert it to a rental?

There's a lot of missing information for making the calculation. Like property taxes and insurance. Water/sewer? Moving? You anticipate spending 5-7% on upgrades based on what info? Has there been an inspection? Do you really have the credit score to get such a low interest rate? Too many missing variables for anyone here to make the call.

Selling FSBO is a tough road. I know a couple people who have done it and worked their asses off doing it. Every dreamer and schemer (and a few scammers) shows up to waste your time. Everyone low balls and at the very least wants to knock you down the 6% realtor fee. You can put a heck of a lot of time and money into selling FSBO. In the end you might end up with no more than if you had let a realtor do all the work.

I appreciate your perspective Bob.

Moving is not a must. Renting is an option. There are drawbacks to continuing to rent (no real savings vs buying over time, less space, no yard, uncertain status - owner may decide not to rent out one day, must drive half hour to my storage unit because that is where my stuff is and it won't fit in rental to name a few).

Property taxes is a consideration, but it is in the calculation. Water bill will definitely increase costs but that is known as well. Moving cost will be less than continuing to rent storage unit. Upgrades is a best guestimate knowing what kind of things I would like to see done with the house and estimating another 2% for the unknown. Yes, immaculate credit score. I agree too many variables. That is why this forum is both great (can speak to generalities) and also can be misleading. At the end of the day housing is purchased based on what people think will make them happy. Fact of the matter is, I'm not happy renting because it is too small, I don't have a yard, I don't have easy access to my stuff because it is in a storage unit several miles away and I am paying my Landlord's mortgage. Over time she will own my place and I will own nothing.

Selling FSBO can be tough, especially if you are in a hurry. There is no sure way to predict how easy/expensive/time consuming it will be. Market may be great in 5 years or may be in the tank.

ARM means for 5 to 7 years you'll be basically paying interest and property taxes, you won't be getting any benefit out of it. You can't rely on appreciation, it won't even come close to stock market in next 4 years. If you are going to sell, there is that nice 6% fee that goes to realtors. FSBO is not really doable these days, and you still have to give 3% to the buyer agent even if you do somehow magically pull it off. There is literally no profit to be made, you just tie up your money and end up spending a lot more in a short run.

If rate goes up after some # of years, you are toast.

That all comes with a grain of salt, I don't know your financial situation. If you don't own a house, first house is generally beneficial, but only if you stay all 30 in it and don't try to ARM sell after 5 years.

bob2356 says

What happens when you need to move in 5 years if the market were totally dead and you are forced to convert it to a rental?

This is one real drawback to getting an ARM if you plan on moving.
The other situation to look for is if interest rates shoot up, and house prices appreciate as well. If you then move, your monthly nut will increase greatly. If you stay, your monthly nut will increase greatly. If you lock in a 30 yr rate, you have the option of staying there (reduced living costs) or renting it out (locking in more profit with reduced borrowing costs).

Obviously, there is a reason that the ARM is cheaper today. If you don't want or need the option of keeping the house at today's rate, get the ARM.

PeopleUnited says

@StrategistStrategist says

If I was considering buy vs rent in the Mid West, I would not bother to buy for 5 years. I would rent.

care to elaborate?

I am looking at it from a biased investment point of view. Regions that have the best appreciation rates will continue to have the best appreciation rates, because nothing has changed to derail that trend. The Mid West barely keeps up with inflation over time.
Buying to live in your own castle is a different story, but a time frame of 5 years raises a lot of questions.
Maybe you should consider a home that will not require any major work for the next 10 or 15 years.
Your wife probably wants to buy a home. "A happy wife is a happy life"

FortWayne says

ARM means for 5 to 7 years you'll be basically paying interest and property taxes

This is factually incorrect. An interest only ARM is what FortWayne would be describing. I would think that an ARM with a 30 yr amortization would put in the same for principle as a fixed rate mortgage. The main benefit is lower interest rate, which would allow you to pay more toward principle if you were inclined. But you get the freedom to invest it any way you want.

Strategist says

Your wife probably wants to buy a home. "A happy wife is a happy life"

of course they want to spend your hard earned money