My wife and I are looking to build in about two years. We both are wondering if it makes sense to move that up to take advantage of the low rates? Afraid if we wait the rates will be higher than they are now. (Looking at 100K for 15 years) We would need to watch spending closer but feel the money saved in interest would be worth it. [img]/forums/images/icons/confused.gif[/img]
The truth is its people like you that are holding this economy afloat...that is if you take advantage of the low rates now vs. later.
Assuming you already own the land and will only be financing building costs, then it may be in your favor to act now...so long as present financial situation allows.
All my contractors have more work than they can handle and its primarily due to the low rates (new homes, remodels, etc.). Now yes, you will not get a discount in this high demand era. But, even if the demand dries up in two years followed by a spike in interest rates, I doubt you will save as much by hiring a builder in search for work than you would have taking a lower interest rate.
Now if you need the land too, then that's a gamble. In my opinion the values are over inflated...however its been that way for the past 4 years and one recession and values have not dropped...in most regions they are still increasing. Help me understand that.
Good luck with your decision, just be sure you can afford what ever you do.
Looking forward to hearing what others have to say on the topic. Some folks on-line have had a lifetime of these types of decisions!
If you can afford it, do it now. Interest rates will go back up.
Gary
Bluegrass Music ...
Finger-pickin' good!
Interest rates have already went up about 1 to 1.5% in the last eight weeks. I believe last week was the first time the rates have dropped in the last couple of months. Rates before last week where around 6%. Two months ago I could have borrowed for about 4.90 to 5%
If (AND ONLY IF) you can swing it without toooo much risk, take the money now. Do not expect to see significantly better rates in the next few years. The lower rates (even with a short...15 yr note) will save you significant $ over what was happening not so long ago.
One insurance policy you can get is to go for a 25 or 30 yr mortgage but pay it at the 15 year rate. As you are probably aware, the longer notes carry tremendous total interest burdens but if paid at a 15 year rate are no more burdensome that a 15 year note. The difference is... If there is any kind of money squeeze or emergency you can make the "standard" payment for a month or so and revert back to the higher payment when able.
If you sign up for a 15 yr note and have a temporary problem there isn't any easy (built-in) releif.
By shoping around you should be able to find a lender that will allow double payments with no early payoff penalty. Every dollar put against the principal will save you multiple dollars over the life of the note, more so with long terms but still quite significant at 15 yrs. Every dollar put against the principal on a 6% note is a dollar invested at 6% and where are you going to find an investment as safe as your home, paying 6%, these days??????
Wish you the best of luck in your home quest,
Pat
"I'm not from your planet, monkey boy!"
So, I live in Canada, and the dynamics are different.
But I know a bit about $, so here goes.
Lower interest rates correspond to high real estate prices and vice versa, depending on where you are buying because people calculate what they can carry, and that dictates price, rather than 'value'.
The biggest lie about real estate is that the market value means something, and usually it doesn't. Some places, a 3 bedrrom house will cost you $100K, other places it'll cost ya $1M. I know, location, location, location. But if a house is worth $300K and is selling for $1M, you can buy a lot of cab fare for $700K.
So the real issue is, is it better to buy now and lock in low rates, or delay and save mucho on the value of the property. Believe me, real estate prices will cool once rates tick up.
So, if you need to buy now, or you figure the property is worth what it is being offered for, then go for it. Otherwise, it may pay to wait, or sell now, rent for a while, then buy.
Overpaying on a property can offset a lot of interest savings.
Odds are rates will be higher in two years, as will the cost of building materials.
Unfortunately, the guys are right, rates have already jumped over the past few weeks from the lows that they hit this spring.
Steve
>> Every dollar put against the principal will save you multiple dollars over the life of the note, more so with long terms but still quite significant at 15 yrs. Every dollar put against the principal on a 6% note is a dollar invested at 6%
This is true only if you stay in the home long enough to pay off the mortgage. If you sell in a few years, you've wasted every dollar you prepayed unless you were able to negotiate an immediate reduction in monthly payment. So think ahead, if you're sure you'll pay off the mortgage go ahead and pay extra every month. Otherwise, put the additional payment in the bank or other secure place and collect a few bucks interest on it.
AndyF, Could you give me a simple example, Please? I just don't see it.
If a person were betting that the property in question was going to depreciate and lose value rather than hold its own or appreciate then it is likely they might not buy that particular chunk of dirt.
If the property holds its own or appreciates then when sold you get your extra payments back since they did not include interest, just principal and you can spend the offset interest.
Why would you say this "extra principal method" is ONLY a good deal if you keep the loan to maturity? What magic do you think happens at the instant the last payment is made? (Not counting the mortgage burning party!)
I can sure agree with your comment about "a few bucks" as that is all you'd get with any bank account, a few bucks (very few) in a SAFE FDIC covered plan which is way less return these days than the 6% house mortgage. Now then if you want to speculate, then that is different. Try a REIT which is pretty good or for a really big upside potential bet the horses. [img]/forums/images/icons/laugh.gif[/img]
Sorry to be so thick headed but I just don't see the downside of saving interest. The 15 year mortgage was what was picked. That gives a clue as to their intentions. Taking a longer mortgage but paying it off in 15 yrs ammounts to the same thing if you stick to the accelerated plan. Admittedly the savings on the front end are smaller than the back end but they are positive, safe as your appreciation poltential and a better deal than a CD, money market account, savings account...
Typically, someone looking to get into and out of a house in the short term goes for the lowest monthly payment possible and accepts renegotiation, ballons, variable rates, or anything else except heavy front end points because they don't intend to be the ones standing up with no chair when the music stops.
Note, I didn't recommend "buying down" the interest rate by paying points, I recommended saving interest and simultaneously creating an insurance policy against uncertainties in the future, the ability to make smaller monthly payments with NO NEED FOR ANYONES APPROVAL, in the event a crisis should occur.
Standing by for Investment Strategy 101... Go ahead.
Pat [img]/forums/images/icons/smile.gif[/img]
"I'm not from your planet, monkey boy!"
>> Could you give me a simple example, Please? I just don't see it
Let me preface my response and examples with a disclaimer. I'm not a mortgage expert and my experience is limited to buying and selling three houses over the past 15 years.
For each of the mortgages I've had, the amortization schedule was set for an equal monthly payment over the life of the loan. In the first several years of the mortgage, this meant that almost all of the payment was for interest on the loan. If I paid extra each month, my principal due was reduced, but the interest schedule was not modified to reflect my increased payment. Simply put, the bank still treated my 30 year loan as a 30 year loan and assessed interest on the expected principal balance, not the actual balance. If I sold the house before paying off the loan, I would get all of my extra payments back, but I wouldn't make anything on those extra payments.
As a simple example, say you have a 30 year mortgage of $100,000 and are paying it back on a 15 year schedule. After five years you relocate and are forced to sell the house. Due to the quick sale you sell for exactly what you paid for the house. When you close, the remaining principal balance is paid to the mortgage holder. You get back the principal portion of your mortgage payments and your profit in terms of actual dollars in your pocket on the additional monthly payments is $0. If you had put the extra mortgage payment into a savings account, money market or other minimum risk investment each month, you would have made a few bucks.
If you stay in the house and pay it off on the fifteen year schedule you'll end up saving a lot of interest and can treat this as a profit, but again, its not money in your pocket. For money in your pocket, what you need to do is take the extra payment and invest it in a zero risk investment - money market, CD, Series I bonds, etc... and at the 15 year mark liquidate the investment, pay off the mortgage and pocket the interest you've earned. Even better is to invest the money and as soon as the investment has earned enough, liquidate it and pay off the mortgage. With this method your money is working for you all the time, with the extra payments on the mortgage, your money doesn’t really start working until you pay off the loan.
Where the pre-payment option makes a lot of sense is with a home equity loan or other loan which recognizes additional payments of principal immediately and recalculates the loan each month based on the previous months payment. This is the type of loan I have and it was a great deal. I pay 1/240th of the principal each month and my interest is calculated on the current principal balance. Consequently my minimum payment changes each month, but since it goes down every month I’m not complaining. If I have a good month, I increase my monthly payment and see the benefit the following month.
Other nice points on the loan were closing costs of $0 if the line of credit is kept open for several years and an interest rate pegged to the on the Federal Reserve rate. Right now I’m paying 4% interest on the loan.
If I’ve missed the boat on this extra payment deal let me know.
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