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Financial advisors - mortgage.

Old 05-07-2007, 09:56 PM
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Default Financial advisors - mortgage.

I am in the process of purchasing another home and am looking at financing options. I am getting mixed reviews from financial advisors regarding the type of mortgage I should go with. I am very conservative financially and am leaning towards a traditional fixed rate mortgage. However, i have a financial advisor who is suggesting a 5 or 7 year arm noting that it would save on interest that could be invested in other places or added back towards the home. He also noted that despite the fact I am being offerd a 6.125 to 6.25% rate that he believes that they will go down over the next 5 years. I am not sure I want to take that gamble considering the rates over the last 10 years. What are your thoughts? While this is not a waterfront home it is a water view home that is water privilaged that we have hoped for and plan on staying here a very long time. It is a home I would want to pay off prior to retirement. That is the goal anyhow.

What are your thoughts...
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Old 05-07-2007, 10:39 PM
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Default Re: Financial advisors - mortgage.

I was talking with my local Wachovia Branch the other day and they had all kinds of different options available including one called the "pick a payment fixed or ARM" which would be good if someone was very disciplined but needed flexibility in the early stages of the loan. 3 years ago I refinanced my home after some additions and decided to go fixed for 30 years just because it felt better to me and as we are looking for new homes now I wish I had done a 5 year ARM but still feel like I will probably do a 30 year fixed on our new home.
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Old 05-08-2007, 08:07 AM
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Default Re: Financial advisors - mortgage.

If you plan on staying there "A very long time" I would go with the traditional fixed rate loan. Why have to worry about interest rate movements with the ARM and trying to decide the best time to refinance out of it?

Also, with respect to the advisors advice on interest rates - if he/she is suggesting an ARM, what do expect them to tell you that interest rates are going to do?

A relatively simple way to accelerate a mortgage is to round your payment up each month to the next hundred. For example, if your PITI is $1,225 - pay $1,300 each month. Run the math and you will be amazed at how much this knocks off over the life of the loan.

Oh, and if rates to go down significantly over the next 5 years - you can always refinance.
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Old 05-08-2007, 08:14 AM
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Default RE: Financial advisors - mortgage.

Go with the lowest fixed rate and prepay as RI Builder suggested. If rates drop you can refi at a lower fixed rate. I refer to ARM's as "neutron mortgages"..... they save the house and kill the owners.
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Old 05-08-2007, 08:29 AM
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Default Re: Financial advisors - mortgage.

I would go fixed. Whether your rate is 6.125% versus POSSIBLY 5.75% a year from now is a big risk, considering how low the rates still historically are. I also think it is a big risk/ questionable bet that the FED will cut rates this year. So much worldwide credit has been created globally over the last five years that it is unlikely we can keep doing it (keeping rates low) without a hangover.

I believe we are in the eighth or ninth inning of a global asset bubble, and although I am in the minority, I think you can get doubly hurt if you are taking out an arm, because you will invest extra proceeds in assets that yield higher (stocks). Be conservative and go fixed with the house. Limit your debt to the extent you can.
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Old 05-08-2007, 09:05 AM
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Default Re: Financial advisors - mortgage.

To me, it's not the rate but the closing costs that are deal killers. Points are pure profit. The average life of a mortgage is what, 6 years? Amortize those costs over 6 years and see what the effective rate is.
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Old 05-08-2007, 09:21 AM
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Default Re: Financial advisors - mortgage.

Depends on the loan size!! 6% or 5.75% on 100k is no big deal. On 500k is a lot per month. Also 6.125% is high for a 30 yr fixed. As of yesterday I can do 6%. Also points are not always bad depends on what you get for them. 6.5% with 2 points is horrible. but remember this is how we get paid by higher rates or points or a combo of both.

Also i don't see a big difference from a 5 yr or 7 yr arm to justify them like it was 2 years ago. call me if you want some ideas or have questions. I work for a bank not a broker.

rob 800-893-5882 ext 102
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Old 05-08-2007, 09:26 AM
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Default Re: Financial advisors - mortgage.

Thanks fells. The arm is a 5.5%. I wasnt even considering it until it was brought up to me. I am going fixed rate. It is what I already have and feel most comfortable with it.

Second question is how much should I put down? I was going to put down over 50% (once my current home sells). I am being told that I shouldnt put more than 20% down since the interest is tax deductable on the loan and I could grow the money I planned on putting down in other investments. This advisor says that it is not good to have my money tied up in a home that I would have to borrow against to obtain the money if I ever need it down the road for weddings (I have 3 kids-2 daughters), college educations, job loss, etc. He also said that these investments will grow and the equity in the home will grow regardless of how much I put down so I might as well take advantage of two investments growing. He said that being I am 33 (for another week) that my goal shouldnt be to pay off my home but to aquire as much wealth as I can. He said if I do this, paying off a home or handling a mortgage in retirement can be done. He also noted that because the interest on the loan is deductable, it is better to start making interest on a larger sum of money than to save slightly more per month and have the equity in the home.

What do you all say? As I stated before, I am very conservative and had always planned on paying off the home and saving as I go but I have to admit that his rational sounds like it has merrit.

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Old 05-08-2007, 09:29 AM
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Default Re: Financial advisors - mortgage.

remember you rgetting advice from your advisor who wants you to have as much free cash as possible so he can get you to invest it and buy insurance etc... why? because he gets paid.. no one has unslanted opinions...
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Old 05-08-2007, 09:33 AM
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Default Re: Financial advisors - mortgage.

Actually he is an independant financial advisor who runs hedge funds. I personally do not invest with him. He is close friend from college and I believe his advice is purely based on what he thinks is best for me and my family. I am just not sure it is for me and want others thoughts on the advice without giving personal financial information.
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Old 05-08-2007, 09:35 AM
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Default Re: Financial advisors - mortgage.

It is a personal choice. FYI theoretical scenarios are just that.... theoretical. If you put down the bare minimum, would you take the rest and invest it in an S&P 500 fund? Or would at least a portion of it sit in the bank earning 3%. What will you do with the extra cash if you put down only 20%?

I own two homes. I paid off both mortgages. I don't pay interest expense, and my monthly nut is that much lower without any mortgage payments. It makes me sleep well, and would make others on board here turn in their graves for the potential lost opportunities that could be made investing in metals, stocks, or Florida real estate.

Seems to me conservative is good, and for you to be thinking like that at 33 years old means you are doing something right. Your boat sucks though.
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Old 05-08-2007, 10:10 AM
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Default Re: Financial advisors - mortgage.

Here's my thoughts on paying off your last house as quickly as you can:

Most banks/investors will preach that you take a long mortgage out, and use the extra cash for investments. My analysis: That way you can pay the financial market 2 times. 1st- by paying the interest on your mortgage and 2) giving your extra cash to them to make investments. If you pay off your mortgage 2 things happen that a banker does not what to happen 1) they are no longer making money via the interest/loan payments 2) they are no longer using your money via the extra investments to make themselves money. Remember financial markets need your money to make money

I'm extremely conservative when it comes to long term issues. Paying off my house is my #1 goal, and will continue to use what ever extra $$ I have to put towards buying down that debt. Not planning on moving from our present house. And not having that mortgage payment seems to make me smile.
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Old 05-08-2007, 10:18 AM
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Default Re: Financial advisors - mortgage.

Fixed rate. If you go 30 years and make two extra full pymnts per year towards principal, you'll pay it off in about 15 years. Negotiate [read argue] on points/originations. They are flexible. Remember half the profit on a mortgage is back end money i.e. if your loan is priced to you at 6%, they are buying the paper at 5.25% or so. They have room on the back, make them aware that you know and get them to drop the origination/points. Shop it!

You said you were conservative. Don't mess with your house. Yes rates will most likely drop before they rise but it's not not worth the trouble or risk. You can always refinance and with 6% money it is hard to go wrong, as long as you plan on staying in the home longer than the length of the arm.
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Old 05-08-2007, 10:34 AM
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Default Re: Financial advisors - mortgage.

The arguement for 2 investments growing doesn't fly. Say the house value grows at 5 % a year and you are paying 6% on a mortgage. You are actually losing money except for the mortgage interest deduction. On a 30 yr note you will pay almost 3 times the price of the house over the term. Keep some money for emergencies and put as much down as you can. On a 30 yr note 1 extra payment a year or 1/12th extra a month will knock off 8 years off the loan. On a 500k loan at 6% you are paying $ 30,000 in the first years interest.
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Old 05-08-2007, 01:44 PM
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Default Re: Financial advisors - mortgage.

I know up here the is a big difference between a financial adviser and a mortgage broker. Just last week we had a mortgage broker/ financial adviser in to the house to talk things over....we are selling and buying a home right now.
The broker shops for the Best rates possible for you new mortgage....generally always below prime and they can also buy down the rate by another few points......we are currently locked into 5.18% for the next 120 days.
The other half of this lady, the financial adviser said that it is old school to try and pay off the mortgage as early as possible, she said there is no money in it! She said there is lots of safe place where we can pull 10% for our money at today's rates.

* oh, shopping for a m. broker, call a handful of real estate brokers and as them who they recommend......pick the top two and play them against each other for additional savings!
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Old 05-08-2007, 01:49 PM
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Default Re: Financial advisors - mortgage.

parkersal - 5/8/2007 9:35 AM

It is a personal choice. FYI theoretical scenarios are just that.... theoretical. If you put down the bare minimum, would you take the rest and invest it in an S&P 500 fund? Or would at least a portion of it sit in the bank earning 3%. What will you do with the extra cash if you put down only 20%?

.....Your boat sucks though.
Sal, He believes in investing in the market. He says it is not that difficult to average over 7% long term. Even if the interest on the home isnt tax deductable, it still would gain me over 1%. He doesnt advocate the interest only loans but thinks min down on a 30 year is the best bet for a working individual and having outside investments growing along with the value of the home. His round number example was saying I buy a home for 100k and put down 20k. If the home appreciates 5% year in equity (105k value after one year) that I am gaining actually 25% on the 20k down. And if I put down 50%, I have only gained 10%. He says that while I gain 20% on 20k down, I could take that other 30k and invest in the market and get 7% long term (gaining an additional 2.1k a year). In other words he says, by putting the min down and investing the rest I would gain 7,100 per year on average vs. 5,000 per year if I put 50% down on his 100k home example. Of course this doesnt count the interest paid on the mortgage but that interest is deductable from income tax and the market should yeild hire returns than interest paid on a mortgage in the long run.

He also wants me to ask you how did you pay off two mortgages. He bets that your did it in the market or other types of investing. He claims your situation is my goal, it is just getting there is where you have to get creative and aggressive.

I will say that I am chicken and probably will stick to my plan of 50% down and 30 or 15 year fixed.

Btw, you forgot to comment on my Merc
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Old 05-08-2007, 02:04 PM
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Default Re: Financial advisors - mortgage.

Garett - 5/8/2007 12:44 PM
...The other half of this lady, the financial adviser said that it is old school to try and pay off the mortgage as early as possible, she said there is no money in it!
PFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFF FFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFT!
There is all the same money, either way__the difference is, who will have how much of that money.
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Old 05-08-2007, 02:18 PM
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Default Re: Financial advisors - mortgage.

Greg,

The way I look at it, If I have a monthly payment that is $1500 lower (ie smaller mortgage), I am paying less interest expense. I can also choose to invest this $1500 automatically into a Fidelity index fund, for example. If I do just that very thing, than I am averaging into the market monthly, automatically, and that is intelligent.

Ask those who invested in NASDAQ 5000 how they are feeling now, despite NASDAQ rising from 800 to 2500 since 2003. Picking one point in time is dangerous. Even if you choose to put down 20%, and take the rest of the cash from the gain on the house you are selling and invest it, then by all means dollar cost average in over the next year. DO NOT lump sum it.

Either way, glad you are doing well Greg; your family is lucky you are a good provider and have a level head. All families need a solid anchor. Yours has two: you and the Merc.
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Old 05-08-2007, 02:55 PM
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Default RE: Financial advisors - mortgage.

Practically speaking, rates have no where to go but up. Yes, there might be minor flucutations in the rate, but overall, we are very near the bottom. Go fixed rate. Five years from now if your advisor is correct, you can refinance, it will still cost you less than if his advice is wrong.
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Old 05-08-2007, 03:28 PM
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Default Re: Financial advisors - mortgage.

do what you're most confortable with, but i think fixed is definitely the right way to go.

if it were me and i could easily make the payments with only 20% down, then i'd take the rest an invest in the stock market. 6% is relatively cheap money, so use it -- with your tax deduction it's effectively closer to 4.5%. investing the balance of the equity from your previous house in the stock market will also diversify your holdings -- an important consideration give the insane growth in the anne arundel county real estate market...it's going to flatten at some point which means you will have used your cash to "buy high". if your time horizon is at least 20 years you could reasonably expect 8% from the stock market or about 6.8% after taxes. that 2% hedge (diff btwn your effective mortgage rate and stock market rate of return) over 20 years could be a new boat when you retire.
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