Blog :: 04-2014

Fixed or Adjustable Rate - It Depends!


mortgage rate comparison chart 2013

In 2013, the Types of Mortgages Acquired Shows the Trend...But Should You Follow Suit?

 Fixed or Adjustable Rate - IT DEPENDS! 94% of purchasers last year opted for a fixed-rate mortgage at some of the lowest rates in home buying history. Yet, some of them will pay more in interest than necessary, based on the time theyll own the home. For how long do you plan to own your home? Let the answer play a large role in your decision making between mortgage options. If a person only plans to be in the home a few years, the adjustable-rate can offer significant savings. Not only is the interest rate on the adjustable-rate lower than the fixed in the initial period, amortization on a lower interest rate amortizes faster than a higher interest rate. In the example shown below, a $200,000 mortgage for 30 years is compared using a 4.25% fixed-rate to a 3.25% 5/1 FHA adjustable rate. The first five years of the ARM generates a $113.47 a month savings which accumulates to $6,808.20. In addition, due to faster amortization on lower interest rate loans, the unpaid balance at the end of five years will be $3,001 lower on the ARM for a total savings of $9,801. Assuming the adjustable-rate mortgage was to escalate the maximum allowed at each period, the breakeven would occur in 8 years and 6 months. If a person were to sell the home prior to this point, the ARM would provide a lower cost of housing for the homeowner. When will your breakeven occur? Define your intents to make the best decision. You'll find a helpful calculator here, to compare financial outcomes dependent upon several variables. For some people, the uncertainty of how the interest rate may change is not acceptable. On the other hand, for the risk tolerant individual who may be more confident in financial matters or who may know when theyll be moving next, the ARM can be a smart choice. To make projections using your individual numbers, see the Adjustable Rate Comparison. rate comparison One Scenario - Ask, What Are the Variables in Your Decision on Rate?


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    Section 1031: How Exchanges May Help Your Real Estate Investments Grow

    example, sale and exchange table

    Your taxes may have been filed, but here's an opportunity for Real Estate Investors, to grow their proceeds through the Section 1031 exchange. Section 1031 exchange for rental and investment real estate, is a tool that allows investors to move the gain from one property to another without immediate income tax consequences. An instant benefit is to postpone the tax due which gives the investor a larger amount of proceeds to invest.

    In the example shown, the investor has 21% more proceeds to invest and grow over time than if he had paid the taxes due instead of exchanging. A legitimate long-term goal might be to make qualified exchanges from one property to another until the investor dies. The heirs would then receive a stepped-up basis on the property based on the market value at the time of the decedents death and possibly avoiding taxes altogether. There are specific requirements to be met in order for the exchange to qualify.

    For more information on exchanges, see IRS publication 544; the Sales and Exchanges explanations begin at the end of page 2. In addition to enlisting the services of a real estate professional familiar with investment property, seek the help of a Qualified Intermediary to facilitate the intricacies of the exchange.

    Is the Window Closing on Record Low Interest Rates?

    Window With interest rates lower than they've been in over 40 years, it may be difficult to think of a window of opportunity closing. Consider this - rates will only go up from here. It may be a slow rise, but a steady one (the rise of home prices illustrates the same trend). Zillow recently reported results from a nationwide study that home values are expected to appreciate by 4.5% through the end of the year.

    Coupled with Freddie Macs projection that rates are going up, the cost of housing for buyers by the end of the year will be higher than it is now. While the uncertainty of the future can stagnate some people, the fear of loss can be much more devastating when a person realizes that the amount they pay to live and enjoy a home could have been considerably lower had they acted when prices and mortgage rates were lower.

    The following example considers a $250,000 purchase today with an FHA mortgage compared to what it might be at the end of the year with a higher price and interest rate as discussed earlier. The net effect is that it will cost $191.87 more per month to live in the very same home if you wait. To see what the cost might be for your price range, use this Cost of Waiting to Buy spreadsheet.


    cost of waiting to buy


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