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My wife and I are buying a small weekend house on large acreage. Although we could pay cash for the property, we have decided to take advantage of these super low rates and get a mortgage but are not really sure which one makes the most sense so I wanted to solicit some opinions here. Not that it makes any difference but we are buying from a distressed seller at a 35% discount to its current (tax-appraised) value and a 60% discount to its 2005 appraised value. We are basically paying at or below fair value for the land and getting house, barn, driveway, septic system, well and electrical for "free".
We are putting 25% down and our lender has quoted us 3.0% (no points) for the 15-year and 3.75% for the 30-year(no points). Clearly the lower rate for a rather small increase in monthly payments makes the 15-year attractive but there is something intellectually appealing about being able to borrow money for 30 years at only 3.75%.
ON a 15 year your interest payments are same, same. You are only putting down more principal. So if you think you could do something better with that extra principal then go with 30 year. Also be aware of how this might be appraised. If you can afford it and don't need the cash, just pay cash. Also consider the ARMs. Can get a 10 year for lower than 3%. Then you can reassess (likely pay it off) in ten years.
Also remember that you if you go with the 30 yr. term, you can always make on extra payment a year, and this would reduce the amount of time it takes to pay off the mortgage. In view of this it could make more sense to go with the 30 year.
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Unless there is a 100-bp difference in rate, I typically advise take 30-year, pay down faster if you can, and preserve liquidity. If you are able to pay cash in full, liquidity is obviously not an issue. I would still take the 30-year bc I can't imagine we won't have inflation during the next 30 years and the cash you saved by using leverage will give you an opportunity in the future to earn more than 3.75%.
Re: ON a 15 year your interest payments are same, same. You are only putting down more principal.
me too wondering HUH?
In order to keep the monthly payments equal in the 30 vs. 15 query the buyer would essentially have to borrow less (bigger dowmpayment).
I'm a big fan of the 15 year if you can afford it. The sooner one gets out of mortgage debt the better. Prepay that 15 year and you are even more ahead of the game. Paid off home mortgage is the new BMW(e.g. status symbol).
cc you take this one. Thanks
The biggest question is how long you plan to live there. If it is up to 10 years, get an ARM for sure and a interest only if it is available. If length of time is more, I would suggest the 30 year because for the most part you are paying considerably more principal per year on the 15 year and even though the interest will cost you more the future interest rate will probably be considerably higher in 5 to 10 years.
Status symbol? Who goes around telling people that their mortgage is paid off?
Like many things in life the answer is not clear. The difference between the 15 and 30 year rates is extremely small, relatively. So it comes down to your likelihood of selling, your desire to tie up money rather than having the flexibility of additional payments, how far you are from retirement, etc.
These are historically low rates. You are the lucky beneficiary of official damage-control efforts. There's no guarantee that we won't go Japanese, in terms of the economy, but either choice looks at the very least very good.
The biggest question is how long you plan to live there.
since the question is between 15 & 30 years, the presumption is the borrower is not a short term buyer, which is really a whole other question bringing up market risk for the property in question. Seems like only a few years ago we saw 40 and 50 year mortgages only to discover that what buyers were really doing was renting and there was no possibility of paying these off before death.
Back in the 1960's and early 1970's lots of people took out 10 , 15 & 20 year mortgages. Being debt free sure feels good. Research has it that most foreclosures occur to people with a mortgage. Something to think about..
presume, presume, presume. how do you know? how do you know whether or not they plan on building additional structures with additional mortgages at a later date? you can't, and likely even they can't due to the various curveballs that life throws, and you're just using this to promulgate your relentless agenda.
research also shows that most people with a mortgage never experience foreclosure. something to think about.
Welcome back to Easy Street and becoming a home owner!
thank you, but i only spent about a year not being a home owner, actually. since 1990 i've only not owned anything for a total of about 20 months.
i've never been about not owning, i've been about wise buying. there's a difference, and herd mentality promoting bubble conditions is not a time for young owners to fret about eating rice and beans so that they can "get in the game" and buy a studio so that they can move up in three years to a one bedroom and then another five years to a junior 4 and then hopefully a real two bedroom in another five years.
but this does not meet the particular needs of the OP. i agree that the sound of the post is not someone who is planning on being there short term, and i'm very hesitant to encourage the arm's/IO's in today's interest rate/unstable home sales environment. even if you think you might want to sell in about 10 years, you have no guarantee that you'll be able to do so. some products are much better than others, but some aren't so great.
nobottomever, congrats on finding such a well-priced property. may you enjoy it for many years.
Outside of the deductibility of mortgage interest, this is only about the time value of money. There is no real intellectual appeal in the 30-year number, as it's a committed amount, not a revolving line of credit. You have agreed to repay an existing debt at 3.75% over a fixed period. You don't have ongoing access to additional money at 3.75% over the 30 years -- only bragging rights in 15 years when rates have gone up and you can point out how clever you were to get such a low rate way back when.
I had a 20-year note on my 2nd home -- a nice compromise between the 15 and the 30.
Thanks everyone. Some very interesting food for thought actually and I appreciate everyone's input.
I'll give a little more detail on the property and our plans with it as that may change things a bit. The house is a rather ugly but completely habitable 1960's ranch-style house that sits on the edge of a very beautiful (200 yr old trees, trout stream, ancient stone walls, etc.) 40 acre piece of land. Our plan is to subdivide the 7-acre section that has the existing house and barn and live there over the next few years while we design and build a family retreat on the remaining 33 acre section. Realistically we are looking at 3-5 year to complete that probably as I suspect as we will want to spend at least a year or two getting to know the land well, clearing woods for meadows, etc. After the new house is complete, we may sell off the 7-acre piece with the existing house, rent it out, or just keep it as a guest house or a place for my parents or something.
>There's no guarantee that we won't go Japanese, ...
>presume, presume, presume. how do you know?
>i've never been about not owning, i've been about wise buying. there's a difference,
Thought you were about wise selling?
@Aaron2 - I was quoted 3.625% for a 20 vs 3%@15 and 3.75%@30. I was thinking the same thing but it doesn't really seem worth it really as the rate is so close to the 30.
40-acres, what is that 2,000,000 sf?
If you've already decided to buy and you have the option of paying cash, then the mortgage isn't going to pay for the property but for something else -- the investment or consumption you wouldn't do if you pay cash. The decision about whether to take out a mortgage has little or nothing to do with the property that secures it (unless you can get a non-recourse loan, which is unlikely).
Think about it this way:
A mortgage is a opportunity to rent money on unusually good terms -- low interest rate, option to refinance if interest rates move in your favor, but no obligation to do so if they go the other way, no call if you have financial difficulties or are illiquid, possibly even some Federal welfare payments if it is deductible.
So the first question is whether the price you are paying to rent money -- the interest -- is worth the benefit -- the possibility of investing or spending someone else's money. What are you going to do with the money from the loan that you wouldn't be able to do if you paid cash? Can you make more than the mortgage loan interest rate, or do you value instant gratification more than that rate?
A fixed term loan is insurance against the possibility of having to refinance at a moment when interest rates are higher, asset prices are lower or your income/liquidity has dropped. You pay for the insurance -- rates are higher for 30 year fixed than for 1 year ARM -- but right now the price is lower than usual.
So the second question is whether the insurance is worth the cost. How volatile are your investments and income? Will you have a crisis if you hit the loan term and the value of the property has dropped, interest rates are high, and you didn't get a bonus?
As for the self-amortization feature, it is a bit more insurance against having to refinance at an awkward time. It too has a cost: the loan you've decided is worthwhile shrinks each month. Depending on your investments, income and health, either the benefit or the cost could be minimal or quite high.
Will a bank that provide mortgage for a 40 acres property allows formal subdivision at a later point? doesn't it change the value of the original property?
We're in a very similar situation and decided to go with the 30 year. We value the ability to lock in such a low rate for a long time and feel that it gives us flexibility that justifies a slight tick up in the interest rate. The curve is so flat, the actual annual cost is not material. Good luck with your decision and congrats on what sounds like a very special property.
Are these ar posts I see?
welcome back, I missed you!
30yr fixed. borrowing money cheap for as long as possible heading into inflation is the best bet .
realtime has a point. If you subdivide the mortgaged property, the bank might call the loan.
when i was looking (upstate, eight years ago) i couldn't get a mortgage on more than 4 (maybe five) acres. for a larger property (that i didn't purchase at the end of the day) i was planning on two purchases, a subdivided lot with the house and four acres, and all the rest, which i would have had to pay cash for. the owner was willing to arrange/pay for the surveys, subdivision, etc, prior to closing.
Since I am "new", Street easy is inspecting my posts and it takes a while before they are posted.
Anyway, our lender is Ulster County Savings as our real estate agent recommended we go with someone local who has more experience with these sorts of issues. We told our loan originator exactly what our plans were and she has been super helpful about everything and said the original loan won't be a problem, nor the subdivision although I will now re-confirm this. We talked a little about a 5-year arm but since we can't say for sure that we are going to sell the house and since the interest rates aren't that much better than a 15, it didn't seem to make much sense. She did say that if we sold the house for less than the amount outstanding on the loan we would of course have to make up the difference. Worst case scenario is we just pay off the mortgage when we are ready to subdivide but that is a few years away most likely.
Another option we have discussed is to apply for a zoning variance (the property is technically multifamily with multiple houses) which would allow us to build an additional house on the property prior to subdivision. My understanding is that that anyone with a guest house has to do this and it is relatively easy and pretty common. I will of course verify this with our attorney after we get through inspections.
More good advice. Thanks everyone.
testing if my account is off quarantine.
Just got off the phone with our lender and got answers to most of these questions. I sincerely appreciate all the feedback.
Regarding Aboutready's comment as it relates to property size, our lender suspects you were probably working with one of the large "city" banks that are not used to dealing with larger properties, farms, etc. The zoning minimum in our area is 5-acres but most properties are at least 10 acres and many much larger. She assured me that if a local bank like them was not comfortable with loans on farms and larger pieces of land, they would be out of business and there would be no real estate transactions would ever take place in many parts of Ulster County, or any rural area for that matter. The lesson here I think is to use local lenders familiar with local properties.
Regarding subdivision. Ulster Savings will be servicing the loan so I would be dealing directly with them at the time of subdivision but this also is a very common practice in rural areas as "this is how many farmers fund their retirement". There is nothing at all that prevents me from subdividing the land at any time - the bank will simply have a lean on both properties.
If I want to un-encumber the remaining 33 acres after subdivision, they would come out and do an appraisal on just the house and I could make up any outstanding balance bringing the LTV ratio back to 20-25%. Essentially a re-finance.
If I do not want to un-encumber the land at the time of subdivision, we simply pay-off any outstanding amount that is owed on the property at time of sell and free up title on the remaining 33-acres.
Lastly, she is a hell of a lot more pleasant to talk to than the idiots at C____ (take your pick).
Why not pay in cash and then immediately get appraised for a HELOC? That's what we did and our HELOC rate is 2.49%. We're considering just paying off the HELOC though because after investing it and getting a 10% return it is now sitting in a savings account getting 0.45% return and we don't need the money? Would welcome thoughts on the wisdom or stupidity of this.
How high can these HELOCs get? I though they were only up to about 100k
Our HELOC is for 80% of the appraised value of our coop, which is definitely many multiples higher than $100,000. We paid cash for our apartment, then at some point it occurred to me that we could get a HELOC for a very low rate. We were told that the HELOCs could be obtained for up to 80% of the appraised value of the home. If we had taken a mortgage out, we were told you could only obtain a HELOC for the part of the home that was actually paid off. So if you only put down 20% you couldn't take out a HELOC at all. We let it sit there for a while all through an insanely low introductory rate, and then only pulled out the money when I had a very good investment opportunity. That matured recently (a couple weeks ago), and now the money is just sitting in a savings account at 0.45% interest. I could re-invest it in something I suppose, as the non-intro rate of PRIME -2.26% is good for another 26 years and it is interest only. Since the Fed is supposed to keep the PRIME where it is for the time being that is effectively a 2.49% interest only loan for a lot of money. Our coop is liberal and come to think of it the 80% limit may be based on our coop rules. Anyway, we are trying to decide whether to put it in a short-term fixed income type brokerage account that is very liquid and earns slightly more interest than 2.49% interest only or just put it back so we have no debt. We are very debt-averse and pay cash for all large purchases (houses, cars, etc) and pay off our credit cards in full every month so we will likely put it all back within a year or so - especially since we're looking to buy another apartment now and don't want any debt on our books. Would welcome comments on pros and cons of putting it all back vs re-investing. Someone told me that it was possible for the bank (Citibank) to pull the HELOC if the economy went south so I should be using the money while it was available - don't know if that is true or baloney. I don't see the point of having it in our savings account if we're effectively paying 2.04% interest every month to have it sit there though. Again, would welcome input from others more financially sophisticated than myself.