Published: Sunday, December 14, 2008
Weigh your needs when deciding loan options
Question: We are buying a second home in Arizona and are debating whether to combine the loan with our first mortgage on our home in the Seattle area or having two loans.
Combining would save $650 per month. $2,700 vs. $3,350.
What are the pluses and minuses? We also may rent out the Arizona house until we sell in this area and move to Arizona in two to five years.
M.W., Everett
Answer: There is no right or wrong answer to this question -- it just depends on your personal financial needs and goals. So let's consider the pros and cons of each possibility.
A strong reason to get a mortgage on the house you are buying in Arizona is that mortgage rates are at historically low levels. We have experienced a massive drop in mortgage rates since just before Thanksgiving.
In most cases, the mortgage interest rate for a second home is the same as the rate on a primary residence. You can get a 30-year fixed rate mortgage as low as 4.75 percent if you are willing to pay a couple points (one point equals 1 percentage point of your loan amount) or about 5.25 percent without paying any points. Those rates are so low that you should not pass them up -- unless you plan to own your home in Arizona free and clear of any mortgage.
If you plan to own your home in Arizona free and clear, then you might be better off taking out a loan on your current residence and paying it off when you sell your home in Everett. However, I am not sure how you came up with the estimated savings of $650 per month with a combined loan. That sounds unreasonably high to me.
Keep in mind that to get the absolute lowest mortgage rates, you must stay under the Fannie Mae (or Freddie Mac) loan limit of $417,000.
For example, let's say that four years ago you took out a $250,000 fixed-rate mortgage at 6 percent. Your payment would be about $1,500 per month. After 4 years of amortization, your loan balance is now down to $232,000.
And let's further assume that you need a new $200,000 mortgage to buy your second home in Arizona.
If you combined the $200,000 mortgage for the Arizona home with the $232,000 balance on your current home, you would be over the $417,000 Fannie Mae loan limit -- and that's before adding in your closing costs and prepaid escrows for your property taxes and homeowner's insurance, which most people add to their loan amount when they refinance.
That combined loan amount of $432,000 plus closing costs and prepaids puts you in the "conforming jumbo" loan category. That is a special loan category between the Fannie Mae conforming loan limit of $417,000 and the jumbo loan category, which is any loan amount of more than $506,000 on a home located in Snohomish County.
The conforming jumbo loan limit varies from county to county, depending on median home prices in the area.
The interest rate on conforming jumbo loans is slightly higher than the Fannie Mae loan rate. But if you get into the jumbo loan category, fixed-rate mortgages skyrocket into the 8 percent range.
So you can see that, unless you can keep your combined loan total under $417,000, you would be better off getting a new loan on your home in Arizona. If you plan to pay off the loan on the Arizona home when you sell your home in Everett, do not pay any points to buy your interest rate down because that would be wasted money. Paying points only makes sense if you plan to keep a loan long term (more than 7-8 years).
Mail your real estate questions to Steve Tytler, The Herald, P.O. Box, Everett, WA 98206, or e-mail him at economy@heraldnet.com.
Combining would save $650 per month. $2,700 vs. $3,350.
What are the pluses and minuses? We also may rent out the Arizona house until we sell in this area and move to Arizona in two to five years.
M.W., Everett
Answer: There is no right or wrong answer to this question -- it just depends on your personal financial needs and goals. So let's consider the pros and cons of each possibility.
A strong reason to get a mortgage on the house you are buying in Arizona is that mortgage rates are at historically low levels. We have experienced a massive drop in mortgage rates since just before Thanksgiving.
In most cases, the mortgage interest rate for a second home is the same as the rate on a primary residence. You can get a 30-year fixed rate mortgage as low as 4.75 percent if you are willing to pay a couple points (one point equals 1 percentage point of your loan amount) or about 5.25 percent without paying any points. Those rates are so low that you should not pass them up -- unless you plan to own your home in Arizona free and clear of any mortgage.
If you plan to own your home in Arizona free and clear, then you might be better off taking out a loan on your current residence and paying it off when you sell your home in Everett. However, I am not sure how you came up with the estimated savings of $650 per month with a combined loan. That sounds unreasonably high to me.
Keep in mind that to get the absolute lowest mortgage rates, you must stay under the Fannie Mae (or Freddie Mac) loan limit of $417,000.
For example, let's say that four years ago you took out a $250,000 fixed-rate mortgage at 6 percent. Your payment would be about $1,500 per month. After 4 years of amortization, your loan balance is now down to $232,000.
And let's further assume that you need a new $200,000 mortgage to buy your second home in Arizona.
If you combined the $200,000 mortgage for the Arizona home with the $232,000 balance on your current home, you would be over the $417,000 Fannie Mae loan limit -- and that's before adding in your closing costs and prepaid escrows for your property taxes and homeowner's insurance, which most people add to their loan amount when they refinance.
That combined loan amount of $432,000 plus closing costs and prepaids puts you in the "conforming jumbo" loan category. That is a special loan category between the Fannie Mae conforming loan limit of $417,000 and the jumbo loan category, which is any loan amount of more than $506,000 on a home located in Snohomish County.
The conforming jumbo loan limit varies from county to county, depending on median home prices in the area.
The interest rate on conforming jumbo loans is slightly higher than the Fannie Mae loan rate. But if you get into the jumbo loan category, fixed-rate mortgages skyrocket into the 8 percent range.
So you can see that, unless you can keep your combined loan total under $417,000, you would be better off getting a new loan on your home in Arizona. If you plan to pay off the loan on the Arizona home when you sell your home in Everett, do not pay any points to buy your interest rate down because that would be wasted money. Paying points only makes sense if you plan to keep a loan long term (more than 7-8 years).
Mail your real estate questions to Steve Tytler, The Herald, P.O. Box, Everett, WA 98206, or e-mail him at economy@heraldnet.com.
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