Weigh all your options when considering a home mortgage
Q: I have been divorced for a little over a year. My ex-husband kept our house and, for the last year, I’ve been renting an apartment. I have decided to buy. I’m going to buy a condo for about $200,000. I have a number of questions that I hope you can help me with. The first is whether I should pay cash or get a mortgage. I have the money to pay cash, but I would have to liquidate my stock investments. My second question is, if I do get a mortgage, should I get an adjustable-rate or a fixed-rate mortgage? A couple other things that may help you are that I’m in my late 40s and plan to work for at least another 15 years. I did get some bids for a mortgage and I will have no problem with the mortgage payment. Thanks.
A: When you consider whether you should pay cash for a mortgage or not, the first thing to consider is what the mortgage is actually costing you after taxes vs. what your investments could realistically earn. In the case at hand, your after-tax cost of your mortgage is somewhere in the 3 percent area. Since you are a long-term growth investor who is not afraid to invest in stocks, it would seem to me that the return you would get over a 15-year period would be substantially more than the cost of the mortgage. In fact, over the long run, I would expect your investment portfolio to return more than double what your mortgage has cost you. Therefore, from a purely financial standpoint, a mortgage looks like the way to go.
In determining whether someone should go fixed-rate or adjustable, I think one of the keys is how long you plan to be in your property. It is important to remember that we are in a time of rising interest rates, so adjustable-rate mortgages will increase in the not-so-distant future. The key to the type of mortgage you’re going to get is how long you plan to spend in your home. If someone told me that they were going to be in their house short term, three or four years, I would lean toward an adjustable-rate mortgage. If someone was going to be in their house for five years or longer, in today’s environment, I would lock into a fixed-rate mortgage. Let’s not forget that interest rates on mortgages are still near historical lows.
It is important to shop around for a mortgage and you just can’t shop interest rates. What you also have to be concerned with is the cost. Interest rates among mortgage companies may be pretty close to the same, but there could be a wide difference in the cost. It’s always a good idea to shop not only rates, but also the total cost. Some mortgage companies will have different types of fees and may call them different things. The bottom line is, if you’re paying for it, it’s a cost and you have a right to know what it is.
In shopping for mortgages, don’t limit your search to large banks or the well-known mortgage companies; also consider your credit union and the smaller mortgage companies. If you can save some money on your mortgage, why not? The money you save looks better in your pocket than it does anywhere else.
Good luck!
Rick Bloom is a fee-only financial adviser. His website is www.bloomassetmanagement.com. If you would like him to respond to questions, email rick@bloomassetmanagement.com.