Second home, interest rate question

[NICUfello]

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Hello there

In 6 months I would like to buy another house. I would like some guidance on rates, your thoughts, rental etc.

Here is current home:
House #1
7/1 ARM
Current rate 3.625
Mortgage amount $1500
I will rent this property for $2100 per local market rate
This will be a permanent rental property. Since I purchase price has gone up on this unit $122,000 per recent sales


Here is what I would like to buy this fall:
House #2
Jumbo loan
I have received interest rate from 3 banks for 30 year fixed:
1) 3.5- payment $2918
2) 4 - payment $3103
3) 4

My questions:
1) does it make sense to refi my house 1 now to a fixed rate? If so I have seen offers of 3.8-4. I have not shopped it around on any credit unions or anything . My current lender offered to refi with $3,000 closing costs

2) on house 2 jumbo loan, would you guys recommend ARM vs conventional? I plan to stay in house 2, 5-7 years.

3) on jumbo loans (I have no experience with) is the discrepancy in interest rate very high between banks ?

Thank you

 

[bc65]

For house one, it seems to me that if you plan on having a mortgage for a long time, and the difference between the ARM and fixed is only 0.2%, then I would lock in that rate.

For a house which you plan on leaving in 5-7 years, you might be better off with the adjustable, but if the fixed is again only 0.2% more, I would go with the fixed myself, especially given that inflation is starting up, according to the news reports I heard yesterday.

Jumbo loans are more expensive, of course. I'm sure there are differences between banks. Definitely shop around local banks and online. I always got my quotes on my refinance mortgages as "zero cost", which made it easier to compare one loan to another.

Personally, I wouldn't buy a house that I planned on selling in 5 - 7 years. The market might be down when you'll need to sell.

 

[NICUfello]

Thank you for the help

I would like to pay off house 1 in the next 10 years or less

House 2 I wouldn't mind keeping after 5-7 years as a rental, but it won't be our forever home. Also due to house 2 size, I don't know it would be good as rental anyways as most people there would buy

Where do you recommend shopping around online for refi?

Appreciate the help

 

[bc65]

I'm not an expert on real estate. I'm just offering my opinion here. In my area, Wells Fargo has the best rates. Also try a local mortgage broker. For online, I have no experience, but you could start with Quicken Loans. If you Google mortgage interest rates, you'll be inundated with lots of ads for mortgage brokers and referral sites. Try them and see what you get. But do ask them all to quote the same type of mortgage i.e. no cost, or the same number of points if you want them (they are deductible, but only worth doing if you'll keep the mortgage for a number of years)

Full disclosure: I have two friends with adjustable rate mortgages. 10 years ago, I was urging them to refinance into fixed mortgages. Neither was able to, but over the years, their rates have steadily gone down. So I don't have a great track record for predicting interest rates. Keep that in mind when evaluating my advice. 😉

 

[NICUfello]

Appreciate it

I will shop around this week

Thank you

 

[dpmd]

It will be a better interest rate to refinance while you are still living in the house than once it is a rental. As for the new house you just have to decide if you are willing to take the risk of the rates rising high enough to outweigh the benefit you get in a lower interest rate adjustable loan now.

 

[mgdsh]

Jumbo rates can actually be less expensive as they are getting a larger loan amount and the bank is doing about the same amount of work for a greater loan. It's almost like economies of scale.

I'd definitely consider some 10/1 ARMs for the house you are purchasing, even if you will end up being there for say 15-20 years. Interest rates will continue to be low for a while. Many other major countries and regions are flirting with negative interest rates and lately the fed has been asked to debate the same question.

To give you an example, for the house we're living in now we have a 10/1 ARM at 3%, we could easily rent it out when the house we're building is complete (10/1 ARM on the house we're building with an interest rate of 2.75%).

If you thought rates were going up in say 10 years you could aggressively pay down the loans, or refi at some point along the way (Ideally 8-10 years in).

For rates I'd look around: www.bankrate.com www.zillow.com and see who is the hungriest for your business when you are ready to pull the trigger. Banks ebb and flow the competitiveness of their rates depending on how much business they are currently getting and how much business is presently in the pipeline.

Finally if you must refi house #1, I'd wait until it's a rental property, say the first calendar year that you're in, as you can deduct your closing cost expenses as part of the rental property expenses.

 

[NICUfello]

I am a bit confused

One of you above says to refi first house while living in it yet someone else is saying to refi once it is a rental ?

I am thinking of going with a 7/1 ARM on house two
I will have to check their 10/1 Arm rates


So far Bank of America and bbva compass seem most aggressive on jumbo loan rates for house 2

 

[dpmd]

I am a bit confused

One of you above says to refi first house while living in it yet someone else is saying to refi once it is a rental ?

I am thinking of going with a 7/1 ARM on house two
I will have to check their 10/1 Arm rates


So far Bank of America and bbva compass seem most aggressive on jumbo loan rates for house 2

Ask the bank what your rate would be if the house is a rental versus if it is your primary home. Several lenders I looked at had rates that were half to a full percentage point higher. Saving a little money by being able to write closing costs off of your rental income doesn't seem worth it (especially since you can find low cost refi loans). Perhaps the other poster didn't know the rates were higher, or maybe they found a lender where they aren't.

 

[bc65]

Jumbo rates can actually be less expensive as they are getting a larger loan amount and the bank is doing about the same amount of work for a greater loan. It's almost like economies of scale.

Not true in my experience.

From Investopedia; "A jumbo loan is a mortgage with a loan amount exceeding the conforming loan limits set by the Office of Federal Housing Enterprise Oversight (OFHEO), and therefore, not eligible to be purchased, guaranteed or securitized by Fannie Mae or Freddie Mac. OFHEO sets the conforming loan limit size on an annual basis.
Jumbo loans are often securitized by institutions other than Fannie Mae or Freddie Mac. These securities carry more credit risk than those issued by Fannie Mae or Freddie Mac, and therefore, trade at a yield premium which translates into slightly higher interest rates. "

 

[mgdsh]

Not true in my experience.

From Investopedia; "A jumbo loan is a mortgage with a loan amount exceeding the conforming loan limits set by the Office of Federal Housing Enterprise Oversight (OFHEO), and therefore, not eligible to be purchased, guaranteed or securitized by Fannie Mae or Freddie Mac. OFHEO sets the conforming loan limit size on an annual basis.
Jumbo loans are often securitized by institutions other than Fannie Mae or Freddie Mac. These securities carry more credit risk than those issued by Fannie Mae or Freddie Mac, and therefore, trade at a yield premium which translates into slightly higher interest rates. "

Might be location dependent too. Living in the better parts of California those jumbo loans probably have a lower risk and thus why we've been able to get better rates than the standard conforming loan limit loans.

 

[bc65]

Might be location dependent too. Living in the better parts of California those jumbo loans probably have a lower risk and thus why we've been able to get better rates than the standard conforming loan limit loans.

I didn't realize that you were speaking from experience. That's useful information for me to know. Thanks! I live in an expensive part California as well, and when I was getting a mortgage the jumbos were about 1% higher. That was a while ago, however. I guess things have changed.