By all accounts the rates are looking to go up pretty soon. I'm doing a 5-year ARM and super worried about the rates when 5 years is up, and with the sky rocketing housing market here in SoCal (house already up by 20% in the past 4 months), I figure this is as good time as any to re-fi into a 15 or 30 year fixed mortgage. What do you guys think?

 

Rich,

What I've done is gone with a 7 year ARM. I can already afford to make payments as if I was on a 15 year fixed. What my wife and I planned for is that every month we'd make the same amount of payment as if we were on a 15 year.

This way, we are aggressively paying down the principle for the next 7 years....that is to say if we are still in the house in 7 years. In anycase, if a month or two come along where we need extra cash, we only make the payment we're tied to, which is not even a third of what our payment would be had we gotten a 15 yr fixed. About 60% of our monthly payment goes to principle.

If you can afford to do the same, I say you go for the ARM; especially if you don't see yourself in that house for the full term of the loan. Also, if the rates are much higher when you are ready to re-fi later, just compare what your ARM rate is + whatever cap on the ARM is. If rates are like what they were in the 80's, then you're still ahead with your ARM for the next 25 years on a 5 year ARM.

 

TRUST ME!!!!!!!! FIXED / INTEREST ONLY!!!!!!!!!!

I'd go with an (interest only loan) 30 year fixed. Affordable monthly payments allow you to leverage your investment. How? You'll be able ride time, which in return is your basis for appreciation. Interest only is the way to go. Say your fixed for 30 years "interest only", note "INTEREST ONLY" the balance at the time the loan was initiated remains outstanding. However, it's a given the property will appreciate in value FARRR beyond the balance due on the note. Especially prime areas in Cali. Alot of the investors, builders, that make money in real estate or people with 1 - 2 - 3,000,000 + homes either have a substantial amount of cashflow or finance "INTEREST ONLY". Interest only = Low monthly's - YOU CAN AFFORD TO HOLD YOUR PROPERTY - in return you will build MASS EQUITY. It will work for you best; TRUST ME.

Avoid the ARM - Adjustable Rate Mortgage, people have been foreclosed on because of PAYMENT SHOCK. Payment shock is high a$$ interest, after the low introductory rate. Stay away from it. It only works for investor's, that fix and sell quick, usually foreclosures. On an ARM, say your cap rate is 10%, after the intro rate. On 500k - SH!T man that's 5 grand a month. On the other hand FIXED 30 years INTEREST ONLY, at roughly 4%- 5% makes a 1 million dollar purchase just as afforadable at only 4 - 5 grand / month. Do the math at 500k. See what I'm saying, you get more for your money. Note, I didn't calculate APPRECIATION. Main thing, low, low, monthly, "FIXED" for the duration while you build EQUITY!!!!!!!!!!!


INTEREST ONLY!!!!!

 

Scot.....you around?

Your thoughts please!

 

Well, I'm in the ARM now (5-year ARM). The house has already apprciated 20% in the past 4 months (crazy), and I'm totally worried about the bubble bursting, and then the rates going through the roof.

What I'm doing now is paying it as if it was a 30year fixed - I think you're right and I'll put in a few hundred more to bump it up to equal 15-year fixed payments.

I want to keep this property as a rental in a few years, that's why I'm thinking of doing a re-fi...

 

I forgot to mention that in the last year of your ARM, if the mortgage rates have gone up but are cheaper than your adjustable rates on the ARM, you have the opportunity to refi the ARM into a fixed.

Sure you won't get the rates then on the fixed that you would now, however, if you've paid down the principal, you're still quite a bit ahead in overall interest paid once the house is paid for.

As for worrying about the bubble, here in the Chicago area (at least where I'm at), I'm not too worried. I'm in an area where teh residents aren't too heaviliy in debt. From what it seems to me, most of all my neighbors are more worried about wealth accumulation and wealth management. I've even heard rumors of many residents here who have already paid their houses off. The average age in our neighborhood is in the upper 30's to lower 40's.

For your area in CA, I'd try to look for factors that could point to a sample of the population's debt ratio. Your area's home appreciation will also be more affected by the current mortgage rates. As they go up, appreciation on homes should increase less. As it costs more to live where you do, there'll be less of a customer segment that will make up the supply of prospective home buyers for that area.....but then again, CA is the land of the nuts and berries. I shouldn't speculate about things there.

I mean where else can a broke family-man, who has been jobless for over 2 years here and there, still afford to own a $400K+ house San Jose area, own a 360 Modena, own a fully tricked Escalade, own a BMW 5 (for the wife), send the oldest son to UC-San Diego, and have a daughter in a private school. This happens to be one of my uncles out there....he is in IT and picks up a very short term contract here and there. Baaahhh....I will never get California or Californians.

 

400K+ house in SJ is a small ass house (if that, maybe a condo)...

I'm sort of conservative about wealth management, that's why I worry about a bubble. The demand in OC far outstrips supply, that's why we have the market as is today. My problem is I don't know how long this would last - I mean, OC is pretty much built out (unless the Irvine Company or the Mission Viejo Company starts releasing strawberry fields...) so you'd have to go south and farther south. That's the good news. The bad news is that every article I read says how similar this run up in prices is like the 80s before the crash.

 

His $400k house was a $400k house when he bought it back in '87.

Regarding the "run-up", that's what I'm getting at. Not that I was paying any mind to status of our economy back in the early 80's (God I miss being young and only having to care about keeping my Transformers and GI Joes clean), but wasn't there a spike in interest rates that started that crash.

I'm almost sure that our current rates are going to spike within this next year, causing the demand for home sales to drop considerably.



***On a side note, where is Mission Viejo Lakes from Mission Viejo? When I was out there last year, I visited my aunt, her husband, and my cousins out in Mission Viejo Lakes. One week there and Ronica and I were in love. We started asking about home prices in the area.....soon enough, we knew this was a love that would be adored from afar.

 

In a couple years rates will not be as low as they are now. The guys who refinance on a ARM, are taking a gamble, you are paying the principal down in order to get capped at a higher interest rate anyways. The convenience on an ARM is "pick a payment option" the people who go this route sometimes do it in order to secure their finances for the short time being. Or, the ARM can be used as a tool to generate positive cash flow. In seven years, rates will be at 10% or higher. Could be sooner. Fixed rate mortgages, and interest only are the way to go. The longer the duration the lower the montly, the more stability you have to capitalize on your return. You'll be able to rent this one out, and still buy another property owner occupied. You can do this either way, but be aware of the payment shock. Keep in mind, people that plan on owning expensive pieces of real estate, finance interest only to capitalize on the long term appreciation, and enjoy the luxury of their estate being secured.

 

under-rated,

You would do fixed, interest only on a non-investment purchase of a home? Sounds risky. I'm not expert, extremely far from it. But isn't it a risk to count on your property appreciating in value? Especially if you are only looking to be in the property for 5 to 7 years.

I hear what you are saying if you plan on renting out your home, but I'm not sure about it any other way outside of a purely investment vehicle.

Please help me understand your reasoning. Because if rates go up to 10%, my home certainly will not appreciate at the same rates they are now.

ERIK