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Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: twinklebell on December 17, 2018, 07:21:31 PM

Title: Buying and selling- 5 year mortgage choices
Post by: twinklebell on December 17, 2018, 07:21:31 PM
First time poster, but I knew you were the people to help :) We are under contract for a "fixer upper" for $285,000. "Fixer upper" is generous, but with some hard work and about $60,000, it will be wonderful, and it has a great partially wooded acre lot, which is hard and expensive to find where we are. We will hopefully get it into a livable condition in the next few months, and then list our house, which we should be able to take away about $225,000 after paying off our mortgage and realtor fees. We have an easy 20% to put down in cash, and with the sale of our home, we should be able to get the house paid off quickly. My question is, what type of loan is best when I plan on using our current home sale to pay down the loan, and then pay the remainder of the loan off in about 5 years? Do I shoot for a 15 year loan with low fees/no points and a slightly higher interest rate, or a 5/1 ARM? Paying for the lowest rate with points, won't help if we pay off the loan fast, but I'm not sure the best option here beyond that.

Cost (house + updates): $285,000 + $60,000 = $345,000
Down payment: $57,000
Additional payment after home sale:  $225,000
Remaining balance: $63,000
Title: Re: Buying and selling- 5 year mortgage choices
Post by: CptJack83 on December 19, 2018, 03:22:55 PM
If you're plan is to pay off the $66k in ~5years, I would go with either a 5yr ARM or a 15 year fixed.

If you do the 15 year fixed, the minimum payment will be based on the starting loan amount.  What you can do, is after you pay down the large chunk of principal, you can have the loan "re-cast" which would re-amortize the remaining balance over the remaining term.  This would significantly reduce the minimum monthly payment.  If you are not worried about the higher minimum payment, then don't worry about re-casting.  Ask your lender if this is an option, it should be, although some lenders will charge a nominal ~$100-$300 re-cast fee.

The 5 year ARM would also be a good option.  Just depends on if you can get a better rate with lower costs than the 15 year fixed.   Even if you don't get the full $66k paid off in 5 years, I wouldn't be super concerned with rates increasing, as you'd likely have the balance fairly low anyway.  So even if the rate jumped 2-4%, the actual amount of gross interest would be fairly small with such a lower mortgage balance.

As far as costs go.  You can get a lower rate and pay higher fees or get a higher rate and pay lower fees.   It is really just a math question that you can figure out based on your estimated loan payoff date and principal reduction to find what will be the cheapest overall.   This will depend on what specific offers you get and your paydown/payoff schedule.