Hey Mustache kingdom,
Rookie homebuyer + wife here trying to understand as much as possible before we actually find and pull the trigger on a house. Well, in Austin's super-fast-paced market, we've already tried that a few times, but we're taking a brief break to consider some sudden advice from a friend.
So you know, my "friend" is a self-made millionaire, one of these people who happens to be a closet mustachian. He's more than twice my age and in my eyes a Grand Old Master of finance and shrewd life decision making. His name is John.
Now you know who he is, so John gave me this advice:
even though you can afford a conventional 30yr fixed loan with 20% down and get a great rate on it right now, you should get an FHA instead. This is not because of the lower down payment, and an FHA loan surely has little else going for it since the origination costs are higher and PMI is there for a long time. But, there's one thing that's amazing about FHA loans, he said:
assumability.
That is, FHA loans can be transferred. So, that means in say 5-6 years when we might decide to sell the house, our ~3.8% APR FHA loan is going to be much more valuable than the house itself that we're selling. This is because, as I am told, it is rather unlikely that interest rates will be this low ever again. In 5-6 years rates could be back up to 6, 8, 10%, who knows? In that case, even assuming our home appreciated very little, the financial instrument of our FHA loan would actually be extremely valuable. Since it is assumable, we would hope to sell it to some enterprising individual who has enough cash on hand that he / she could pay down to the remaining balance of our original loan, and we would walk away with a small net profit -- if my calcs are right. Of course, my calcs are just mostly blind shots in the dark.
So, there is the scenario. I've tried to understand this quickly, and I think I've gotten the gist of it. But, money / finance instruments are still very new to me -- I really am very much a n00b here. So I have some questions about these things. You may answer all or any of these you wish, or even any questions that I didn't think to answer:
- Do you buy this story that interest rates are definitely going to rise, and substantially, in the next few years? How sure of you are this? I know almost nothing about how this works, but I know it is the story that everyone seems to be hawking.
- I'm still not quite sure I follow why someone would (in the scenario above) want to pay us a big chunk of cash on a less-valuable home simply because the remaining payments will be burdened with lower interest. Such a buyer (perhaps an investor) with cash in his pocket would likely be able to put down a large down payment on a nicer and more cash-flow-lucrative home than what he'd be buying from us. But, I guess running comparisons side by side, I can see that perhaps the interest differential would be more than enough to overrun the potential upside of buying a better (but more interest-burdened) home. I suppose also that assuming the FHA would be less risky as well since the investor could pass on such a loan to somebody else if he/she ever needed to. Okay, maybe this particular item isn't exactly a question.
- If the scenario I outlined above takes place and we have a higher-interest environment at the time we're selling the house, how on earth would we know how to price such a house?
- Overall, does this FHA thing seem like a good plan to you? I have to admit the numbers work out pretty positively looking at some simple math on it all. That's assuming very little appreciation in the house itself. But again my numbers could be wildly inaccurate.
- Finally, key question: in Austin we've had trouble getting the attention of sellers simply because the market is filled with competitive buyers and investors. We've had to jump up to putting down 20% + offering higher than list price on every home we've seen, simply to get our feet in the door. In those most recent cases, we have been beaten out anyway by other buyers who are presumably offering even more cash down at the outset, which (I've been told) indicates to the seller that that buyer is more likely to make it to closing -- and that's why they select that buyer. So *IF* we take John's advice and try to play the current interest environment by going with an FHA ... how are we supposed to get the attention of the seller? With only 3.5% down, that is?
Hopefully all that holds together alright. I welcome all clever comments, questions, and wise observations! Let me know how this looks to you all. Thanks as always.