@pipeguy wrote:
Note: edited, forgot to spell check...
There is very little I agree with in that article because it looks at a real estate loan as a car loan or credit card loan - the point is 30 year loans are not designed to ever be paid off. Well, of course not - the bank makes more money that way.
First, interest and taxes are deductible so a 4 percent loan becomes a net 3 percent loan (depends on tax bracket, etc.). And by paying the same amount as points instead of a down payment, you're getting close to ZERO interest (.125%). Lets see...4% (net 3% thanks to my oh so generous government) or .125%...How is this NOT a 'no brainer'?
Second, the value of the house will increase - depends on location and a whole bunch of other factors, but historically the value of real estate doubles every 10 years -- this 2X factor is just a rule of thumb not an absolute. You can borrow against or refinance based on this increased market worth. Well, gee...it increases the same regardless of what loan product I'm using doesn't it? Paying 3% net for 30 years does not magically make it increase faster.
Third, real estate is probably the safest investment you can make - even the market balloon and crash of 2006-2009 was a temporary on paper gain-loss in the long term. I don't really see the relevence of this point - you're STILL purchasing real estate, are you not? You're just purchasing the equity much faster - how is that a bad thing?
Finally, you need a place to live and over time - not too much - your PITI mortgage payment will become as cheap or cheaper than the asking rent for other houses or apt's. I don't even see the relevance of this point at all - owning is almost always cheaper than renting - otherwise there would be no rental market.
Again, real estate loans are not credit card or fix term auto loans - paying off the loan is way down the list and getting the absolute cheapest interest rate is a goal, but it’s not the deal breaker you might think (most of us go to mortgage lenders hat in hand anyway). OK, so explain to me under what conditions you would find 3% money to be a better deal than .125% money? Assuming the down payment is equal to the amount paid for the points bought.
If you actually pay off the mortgage, your income taxes are going to take a major hit. Other the other hand I purchased a brand new condo at the beach in the mid 1990's, put $30k down, financed $50k, paid it off in just under 3 years and sold it after 5-6 years for $125k - but this was a vacation place at the beach, not a primary home. The value of the home mortgage deduction is highly overstated. On a $300K 3% (net) loan its worth about $3K per year, assuming the standard deduction is already met, but in the last years of a 30 year mortgage its only worth a few hundred dollars - so wheres the 'big hit'? And if you compare it to 15 year, .125% money, the value of the interest deduction doesn't even matter. Who cares about 3K in taxes, if you're getting 14K MORE equity in the first year of ownership? Thats on 300K, 30 year 3% net money, vs 300K, 15 year .125% money. IMO, the only reason the 30 year fixed is the 'product of choice' is not that its best for the consumer, its that its good for the real estate agents and mortgage brokers, who get bigger commissions selling more expensive properties.
Personally I think this is a pretty intriguing product, one I will definitely look at in the next year or so as my credit gets cleaned up.
