CNC Mortgage Blog

Consider that the average person stays in a home 7 years. This is typical in the US, but extends to other countries as well. When you are thinking of buying a property, you should think of how long you will keep it. Real estate agents charge between 5% and 7% to sell a property. Closing costs on a mortgage range between 3% on a $100,000 loan to 1.7% on a $400,000 loan. To start making a profit on the sale of your investment it must appreciate enough to cover both costs, the sales commission and the closing costs. At a bare minimum you would need an appreciation of 8%.

If you plan to stay in the house two or three years you should consider if homeownership makes sense. There are other considerations that come into play, not just financials. Think of life style, children’s education, distance to work (important with gas at $4 gallon), neighborhoods?

A young person or a new couple will probably live less time in their new home than an older homebuyer. Some people when asked how long they will stay in the house answer “probably until I die”. In today’s market a 30 year fixed rate would be around 6.375% while a 5/1 arm (fixed for five years) is at 5.5%. The difference of 0.8375% per year on a $200,000 loan is $1,675, a savings of $8,375 over the five year period. So, if you think that you will not be in that property over six years, you would probably be better off getting a five year adjustable rate mortgage ( ARM).

Another option the borrower has is to buy the rate up or down. When quoting interest rates banks can offer a range of rates. If the person accepts a slightly higher rate, the bank would be willing to pay part of the closing costs, or the buyer could offer to pay a fee to get a lower rate. The higher rate with reduced closing costs makes sense for short term ownership. Buying down the rate should be considered if the person is going to be in the property for a long time period. Going back to the example above with a 6.375% 30 year fixed rate. You could pay a rate of 6.875% and avoid the 1% loan origination fee. This makes sense if you will be in the property less than two years.

If you plan to be in the property for an extended period then think of buying down the rate. Your regular rate would be 6.375% but for 2 points (2 %) you could get a rate of 5.875%. The difference between the two rates is 0.5% and it costs 2 % to get it, so the payback for this extra cost is four years. You would be saving money if you keep that loan more than four years.

Your Minnesota mortgage broker should be able to work with you to define all these options since different banks offer different fees for buying rates up and down.