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What mortgage loan do you go with today?

By BayArea follow BayArea   2020 Mar 20, 8:50pm 1,512 views   30 comments   watch   nsfw   quote   share    


Gentlemen, here is a question:

If housing does follow the stock market (assuming this corona shit goes into multiple months), might be a good time to pick up a rental, or even a new primary home:

Given today’s interest rates, I’ve been giving some thought to what the best mortgage option is and wanted to see what you guys think.

30yr fixed 20% down

30yr fixed 10% down PMI

7/1 ARM 20% down

7/1 ARM 10% down w/ PMI

10/1 or 7/1 interest only with either 20% or 10% down

I can also avoid PMI in the 10% down payment option by taking out a second loan to cover the missing 10%...

Part of me wants to avoid putting down a full 20% and I sort of like the idea of doing interest only for smallest possible mandatory payment and pay the principle off at my own pace.

What do you think? What’s the appropriate play in today’s climate?

I should qualify a few points for consideration:

a.) we are at 0% federal rate. It can only go up from here.
b.) my overall feeling is that real estate market upside will be limited over the next 5yrs or so.
c.) lets assume I would hold for a decade or so.
1   just_passing_through   ignore (8)   2020 Mar 20, 8:56pm     ↓ dislike (0)   quote   flag      

30yr fixed 25% down (investments)
30yr fixed as close as one can be to 100% in california down (to live in)
2   B.A.C.A.H.   ignore (1)   2020 Mar 20, 8:57pm     ↓ dislike (0)   quote   flag      

Everybody needs a place to live. Choose wisely. A decade or so can turn into several more decades.
3   just_passing_through   ignore (8)   2020 Mar 20, 9:28pm     ↓ dislike (0)   quote   flag      

Some of those ideas may not be available for a rental property. For instance you can't put 20% down (legally) for a 30yr fixed the minimum is 25%.
4   Malcolm   ignore (2)   2020 Mar 20, 9:33pm     ↓ dislike (0)   quote   flag      

Conserve your cash. Do the 80/10/10.

1. Anyone would be nuts to get an adjustable rate.
2. The rates are so low that this is a rare time that I say borrow as much as you can, conserve your cash, at the very least, to pay off higher interest debt.
3. Assuming the rate and fees justify point 2, if you have more cash than you know what to do with, just do 20% down. PMI is pure waste, avoid at all costs.

I concur with just_dregalicious. Lock it in for 30 years, count on inflation in the future, you'll thank me. This may be a rare opportunity to get a house on the cheap with a cheap loan.

Note: This is not my typical advice and my opinion is my current view of the economy and not specific financial planning advice.
5   BayArea   ignore (1)   2020 Mar 20, 10:41pm     ↓ dislike (0)   quote   flag      

What is 80/10/10?
6   BayArea   ignore (1)   2020 Mar 20, 10:42pm     ↓ dislike (0)   quote   flag      

Is there a way to put down less than 10% cash and avoid PMI?

Perhaps a second loan to cover the missing 10%?

How does that work?
7   PMack   ignore (0)   2020 Mar 21, 4:55am     ↓ dislike (0)   quote   flag      

Well sorry I cannot answer your question precisely since i dont know the US market.
Real Estate is very situational to the market you're buying...my only advice is to not stretch yourself thin. Stockmarket is front-running the real economy by weeks / months ( depending on the sector ), so yeah there could be opportunities out there but the government is already going full helicopter money so I think that window will be relatively short-lived unless you live in a oil-town. I like to give myself a 30% margin overhead of safety e.g. all my fixed cost at 2200$ a month, mortgage 1800 or so and have a 2000$ extra ( cars break-down, furniture, holidays, clothes etc ), put down an extra payment once a year, just to feel warm and fuzzy ( even if it totally doesnt make financial sense ).
Im thinking about getting 5 years fixed / 25 years at those rock bottom rates and pay down agtessively and re-evaluate in 5 years, I want to retire at 53 years old so yeah.
8   Malcolm   ignore (2)   2020 Mar 21, 8:34am     ↓ dislike (0)   quote   flag      

BayArea says
What is 80/10/10?


10% out of pocket
10% as a secured loan in a 2nd position to the 1st.
80% as a traditional conforming mortgage aka trust deed.
9   Malcolm   ignore (2)   2020 Mar 21, 8:42am     ↓ dislike (0)   quote   flag      

BayArea says
Is there a way to put down less than 10% cash and avoid PMI?


Borrow the desired portion from a relative or close party, and designate it as a gift. Then you simply return the gift afterwards.

Some may try to question whether this is deceptive borrowing, IMO it is not because the gift letter legally makes it a gift with no recourse by the gifter. It is a matter of reputation and honor to repay that friend or relative, but they can't sue for it. So even though you did technically borrow the money, it is a way around a formidable hurdle in real estate borrowing.
10   BayArea   ignore (1)   2020 Mar 21, 9:23am     ↓ dislike (0)   quote   flag      

Malcolm says
BayArea says
What is 80/10/10?


10% out of pocket
10% as a secured loan in a 2nd position to the 1st.
80% as a traditional conforming mortgage aka trust deed.


But the 2nd 10% is a heloc? It will be higher rate than the 80% loan.
11   B.A.C.A.H.   ignore (1)   2020 Mar 21, 11:56am     ↓ dislike (0)   quote   flag      

One of my millennial kids asked me a few days ago how all this will affect the Market For Houses In The Bay Area.

I said, somewhere between these two outcomes:

- every Rich Asian Kid in a US graduate program will stampede into the Bay Area to buy their haven with money sent from "home", bidding up the prices even further into the Stratosphere,

or,

- the cities will empty out like Cleveland and Detriot

Somewhere in the middle is the likelier outcome. Till things settle down, just think about today and tomorrow.
12   Dholliday126   ignore (0)   2020 Mar 21, 1:58pm     ↓ dislike (0)   quote   flag      

Absent a depression, this wont effect housing that bad. Inventory will dry up and zero percent interest rates and all the liquidity flooding the system will keep the market from dropping too bad on the backside.

2008ish was a once in a lifetime liquidation of housing based on an leverage and bullshit. Kinda sounds like stocks this time, so maybe that will be the real buying opportunity.
13   Malcolm   ignore (2)   2020 Mar 22, 5:25pm     ↓ dislike (0)   quote   flag      

BayArea says
But the 2nd 10% is a heloc? It will be higher rate than the 80% loan.


A second will usually be at a higher rate than a first because of a higher risk to the lender, if a foreclosure is necessary.

No, a second isn't always done as a HELOC, though it can be. A HELOC is a reusable loan that is secured by equity in the home. A HELOC can be in any position and I even used one to pay off a first, so that I could reuse it. This is different than a first or 2nd mortgage that is secured directly by the property through a note based on a fixed number of payments.
14   GlobalRoamer   ignore (1)   2020 Mar 22, 9:08pm     ↓ dislike (0)   quote   flag      

None. Unless you want to lose your shirt like 2018.
15   Hircus   ignore (0)   2020 Mar 22, 10:49pm     ↓ dislike (0)   quote   flag      

I've been trying to reason how the housing market might get affected by this virus. So much depends on how long the high-panic mode persists for, and how many old people die.

On one hand, when old people die, their homes pass to heirs. This will either add housing supply, or suppress demand for housing. This is somewhat mitigated when a spouse, or other family member may still live in the home. But, a child who inherits a house, is not likely to become someone looking to buy a house, because now they already have one. So either they sell, adding supply, or they keep it to live in, reducing demand - kinda the same side of the coin.

I think the main point is that the # of houses will remain the same, but the population will shrink, which should be a downward pressure on housing prices.

I've read articles over the past 5-10 years that say the current younger generation has a taste for a different style of housing. They're more attracted to dense urban locations, apartments, condos, don't care for front or backyards so much, would rather have the space inside the house. So, the suburban housing owned by old people, with large yards and long distances to urban centers, isn't prime desirability for younger people. I'm not sure how true that is, but this mismatch in what the market may supply, vs what the buyers desire, could possibly negatively affect housing prices for these specific types/locations of homes. This is probably a pretty minor factor though.

Anyway, here's my crack at some rough math to estimate how many housing units will be added to the market due to deaths.
------
https://www.cdc.gov/mmwr/volumes/69/wr/mm6912e2.htm
This first preliminary description of outcomes among patients with COVID-19 in the United States indicates that fatality was highest in persons aged ≥85, ranging from 10% to 27%, followed by 3% to 11% among persons aged 65–84 years, 1% to 3% among persons aged 55-64 years, <1% among persons aged 20–54 years, and no fatalities among persons aged ≤19 years.


So, death rates are
55-64 = 1% to 3%
65+ = 3% to 11%


Population by age bracket
https://www.kff.org/other/state-indicator/distribution-by-age/
55-64 = 13%
65+ = 16%





If we assume 50% will get infected this year, and 2020 usa population is 331M then:
2020 pop = 331M, so 50% infected = ~165M

Then, we find out how many old people in each age bracket:
55-64 group = 165M X 13% = 21.5M
65+ group = 165M X 16% = 26.4M


Then, find out how many are expected to die in each bracket (I'll use midpoints of the mortality ranges listed above)
55-64 group = 21.5M x 2% = ~0.43M
65+ group = 26.4M x 7% = ~1.85M


I didn't readily find a source listing how many ppl are in the 85+ age bracket, so I just lumped them in with the 65+ bracket, which has a much lower mortality rate. Anyway, we get about 2.2M dead old people.


To estimate how many homes, I found home ownership by age
https://www.census.gov/library/stories/2018/08/homeownership-by-age.html

Looks like about 75-80% home ownership rate for the 55+ bracket.

But we also need to adjust for marriages, because the house may be owned by 2 people, and so if 1 were to die, the home would not become housing supply.

This says at least 60% of the 55+ bracket are currently married or widowed


2.2M dead old people X 75% home ownership rate = ~1.65M homes

But, 60% of those would goto a spouse, not onto the market, so
1.65M X 40% = 0.66M homes

I'm not very confident in these last couple calculation steps involving marriage. I feel like I might be double adjusting some of these stats, as I'm not clear how home ownership rate was calculated. Also, a certain % of cases would have both husband and wife die. But, whatever.

So, my spitball math says about 660k existing homes might be added to the housing supply over the next year or 2. And, I'm assuming a bad scenario by assuming 50% will get infected, which I think that could actually happen in 1 yr if next winter is bad. But, this is probably near realistic worst case, so serves as an analytical upper bound. Anyway...

A quick google search said in 2018, 617k new homes were sold, and 5.3M existing homes.

So, this doesn't look like it, alone, would cause a huge oversupply of homes. I think changes in demand due to the economy are likely bigger factors. Low interest rates should be stimulatory, but jobs/wages/income will probably take one to the chin pretty good.

I guess I see many reasons for prices to go down. But, the # of deaths is still very low, as are the panic induced negative economic effects, so we will see.
16   Malcolm   ignore (2)   2020 Mar 23, 9:57am     ↓ dislike (0)   quote   flag      

Other than the lowered interest rates, I see no upward pressure on housing prices through this crises.

1. Fortunes have been wiped out in the stock market crash.
2. Everyone is technically unemployed.
3. Small demand decrease due to deaths.
4. Continued and ever growing behind the scenes bailouts keeping prices artificially high.
5. Reduced EPA and regulation nonsense allowing more supply with less wasteful costs.
6. Change in mindset of millennials who are content with a bicycle and bunk bed somewhere.
9. Migration to lower cost areas.
10. When the government steps in and outright declares a moratorium on evictions and foreclosures and says don't panic, it's time to panic.
17   EBGuy   ignore (0)   2020 Mar 23, 1:42pm     ↓ dislike (0)   quote   flag      

Malcolm says
9. Migration to lower cost areas.

Saw a moving truck last weekend. COVID-19 killed the elevator pitch. The migration has begun?
18   FuckCCP89   ignore (6)   2020 Mar 23, 2:12pm     ↓ dislike (0)   quote   flag      

EBGuy says
Saw a moving truck last weekend. COVID-19 killed the elevator pitch. The migration has begun?


Nah, these were the TP hoarders making their rounds.
19   EBGuy   ignore (0)   2020 Mar 23, 2:19pm     ↓ dislike (0)   quote   flag      

just_dregalicious says
Some of those ideas may not be available for a rental property. For instance you can't put 20% down (legally) for a 30yr fixed the minimum is 25%.

Mortgage consultant Ed "my primary residence is in Phoenix" Jew says otherwise. I joke; jd is correct.
20   Malcolm   ignore (2)   2020 Mar 23, 5:55pm     ↓ dislike (0)   quote   flag      

For the record, I don't agree that 25% down is some sort of legal minimum for an investment property, even on a conventional loan.
21   ad   ignore (0)   2020 Mar 23, 8:39pm     ↓ dislike (0)   quote   flag      

Even with the Fed discount rate at 0.25% , I don't expect 30 year mortgage getting any lower than 3.5%.

https://www.bankrate.com/rates/interest-rates/federal-discount-rate.aspx

Banks still have to make money lending money for mortgages and home equity loans in addition to charging an origination fee of around $750.
22   just_passing_through   ignore (8)   2020 Mar 24, 9:07pm     ↓ dislike (0)   quote   flag      

I was wrong, the minimum is in fact 20%. Less than 25% you get charged with a private mortgage insurance tax though.
23   BayArea   ignore (1)   2020 Mar 26, 12:18am     ↓ dislike (0)   quote   flag      

You just tell them it will be your primary... then you rent it out after it closes. Come on, it’s banks you are dealing with here, not starving children.
24   WookieMan   ignore (6)   2020 Mar 26, 5:28am     ↓ dislike (0)   quote   flag      

It's been awhile for myself, but y'all need to get better banking relationships. You need to get with a bank that loans the money itself and aren't just a conduit to the 3rd party market (Fannie and Freddie mainly). I've bought buildings with 5-10% down. You have to prove yourself first and/or have a lot of cash in their bank, but there is no minimum down payment on anything. That's a misconception.

And yes, I get what I'm saying only applies to probably 2% of the population. But if you want the big bucks (big risk) you have to forge these banking relationships. Network as much as you can with whatever level you can in a bank. Friends of bankers. We know who the gatekeepers are. Instead of bitching about them, play the game and make some money.
25   just_passing_through   ignore (8)   2020 Mar 26, 8:46am     ↓ dislike (0)   quote   flag      

BayArea says
You just tell them it will be your primary... then you rent it out after it closes. Come on, it’s banks you are dealing with here, not starving children.


Lots of people do that. I think it's called mortgage fraud. Might trigger a clause where the bank can call in the loan as well. Not that they would if payments are being made etc.,.

WookieMan says
y'all need to get better banking relationships.


Why? I'm quite happy with the 25% I put down on my rentals. They cash flow that much better. Plus these are nearly new 200K houses so not a huge amount.
26   HeadSet   ignore (3)   2020 Mar 26, 12:16pm     ↓ dislike (0)   quote   flag      

Lots of people do that. I think it's called mortgage fraud. Might trigger a clause where the bank can call in the loan as well. Not that they would if payments are being made etc.,.

Fraud is right. And the bank will call the loan if you make the place a rental, as the loan was likely government backed on the provision that it was for owner occupancy only.
27   Malcolm   ignore (2)   2020 Mar 26, 5:41pm     ↓ dislike (0)   quote   flag      

HeadSet says
Fraud is right. And the bank will call the loan if you make the place a rental, as the loan was likely government backed on the provision that it was for owner occupancy only.


Times may be different, but when I was buying, that clause was for the first year.
28   just_passing_through   ignore (8)   2020 Mar 26, 7:25pm     ↓ dislike (0)   quote   flag      

I learn something new every day on here.
29   EBGuy   ignore (0)   2020 Mar 26, 7:52pm     ↓ dislike (0)   quote   flag      

Remember, it's only fraud if you get caught... Bear mind, this guy was elected to the SF Board of Supervisors.
But in January 2005, McCarthy testified, Jew applied for a real estate loan in Arizona saying he intended to live in a home he planned to buy in Phoenix. In that application, Jew said he had lived at a home at 2116 Roosevelt Ave., Burlingame, for the past six years, McCarthy said.
30   BayArea   ignore (1)   2020 Mar 26, 10:16pm     ↓ dislike (0)   quote   flag      

just_dregalicious says
Might trigger a clause where the bank can call in the loan as well.


Call the loan? Lol

No, as long as they are getting paid on time, nobody is calling any loans.

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