Why didn't you tell me this!
One more "little thing" about why a 30-year fixed rate is a mistake for members when a fairly priced ARM is available. (I know, I know you find that hard to believe).
✅ Here again is the example on a $300,000, 30-year mortgage loan [see entire post]:
"The monthly principal and interest payment on the 30-year fixed rate loan is $1,847 for the next 360 months (30 years).
The monthly principal and interest payment on the 5-year ARM is $1,476. the SECU borrower will save @ $22,260 ($1,847 - $1,476 = $371 savings per payment x 60 payments = $22,260) over the first 5 years. If market rates decline or don't move, the SECU member will save at least another $22,260 in the second five years!"
With the ARM you save $22,260 in the first five years, breakeven in terms of monthly payment amount in years 6-10 (would be $1,847, at worst - same as the fixed!), and so forth....
Fannie/Freddie require mortgage borrowers to have at least a 20% down payment to get their best fixed-rate. Most young SECU borrowers in particular have difficulty coming up with down payments of $60,000 and up! But an extra fee (called "PMI") is required if you don't. Without a 20% down payment, the SECU member would be required to pay an additional @$150 per month on that 30-year fixed rate mortgage, not so on the SECU ARM.
So, on top of that $22,260 you saved with the SECU ARM, you will save an additional $9,000 ($150 x 12 months x 5 years = $9,000!) with the no PMI requirement! With the ARM you'll be $31,260 ahead - that's @ 10% of the total cost of your home!!!!.
But the PMI penalty payment is worse than you think. The GSEs which bought your loan generally require you to continue to pay PMI until you mortgage gets down below that 20% down payment requirement. Wanna guess how long that will take?
To get your principal balance below $240,000 (80% x $300,000 = $240,000) will take until 2036 - 11 years! If your mortgage loan is sold by SECU, your PMI extra cost will be $19,800!
😎 A 30-year fixed rate mortgage is a costly, risky deal for the member and SECU!
Since you enjoy bringing up Warren buffet when making your argument, he famously said "You would think that people would be lining up now to get mortgages to buy a home... It's a good way to go short the dollar, short interest rates. It is a no-brainer."
ReplyDeleteFrom the Mortgage Bankers Association: PMI
ReplyDelete'If you put down less than 20% on your home purchase, you are likely paying private mortgage insurance (PMI), often 0.5% to 1.5% or more of your loan amount. This is due monthly until you reach 20% equity."**
** 1% of a $300,000 mortgage means you would be paying an extra $3,000 per year (an extra $250 payment each month!) or $15,000 extra dollars for that fixed rate loan!