I was speaking with a prospective client a few days ago about the loan for the purchase of his new home. One of the first and most important questions that I ask at the beginning is always, "how long do you plan to live in the home"? He was reasonably sure that he would get transfer ed again within a 4 year time frame. He followed with, "but I don't want any type of adjustable rate mortgage, just in case".
So I laid out a couple of options on the same 30 year fixed rate mortgage. We have a purchase price of around $250,000.00 and he said he can do 20% down payment, leaving a loan amount of $200,000.00 (to avoid mortgage insurance). Option #1 was pretty similar to what he had seen before 4.75% interest rate with a 1% loan fee. Option #2 was the same 30 year loan but at an interest rate of 5% and NO loan fee.
He looked puzzled and asked who in their right mind would take a loan with a higher interest rate? So I did the math for him. The lower rate loan had a principle and interest payment of $1,043.30 and the higher rate loan had a principle and interest amount of $1,073.64. The difference in the payment amount was $30,35 per month. The 1% fee on the higher interest rate loan was $2,000.00. At $30.35 per month it would take 65.9 months to see the benefit of the lower payment. If he sells the home 4 years from today he will have thrown away $543.65.
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