Nicole and Josh will soon celebrate five years of marriage with the purchase of their very own home. Both employed in stable, satisfying careers,
the couple enjoys a comfortable lifestyle on a combined annual income
of $120,000. Because theyve chosen to remain childless, they do not have to worry about the $295,560 that middle-income families spend on average raising each kid to the age of 18. Nor do they need to set aside $12,110 per year of money to cover college tuition at a public university, and fees for room and board, or $13,380 per year should their child get into a private college. Instead, they can travel, save for retirement and put a healthy down payment on the home of their dreams.
With plenty of income to aid in the loan qualification process, the best mortgage for Nicole and Josh will primarily depend on current interest rates.
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Borrowing In A Low-Rate Environment
Nicole and Josh want a modern, newly built home with a large master bedroom suite, generous closets and a three-car attached garage. Their realtor finds the perfect property in an up-and-coming neighborhood thats a short distance from the city. The list price is $315,000, but the agent is pretty certain she can get the builder to come down to $300,000 in the current market.
The couples lender qualifies them for two mortgage options: fixed rate,
with a monthly principal and interest payment that will remain the same for the life of the loan, and an adjustable rate,
where the interest and payment will eventually begin to fluctuate. They have excellent credit, so the terms that the lender offers are optimal for either loan though, as is usually the case, the initial teaser rate on the ARM is slightly lower.
Based on the offer alone, the obvious choice seems to be the ARM loan. However, when rates are low, thechance of an interest increase outweighs
that of a further decrease. As such, a fixed-rate mortgage makes the greatest financial sense for Nicole and Josh.
Borrowing In A High-Rate Environment
If interest rates were higher, the adjustable-rate mortgage would be the better option. This is because its more likely that interest rates would decrease rather than increase further.
As rates begin to fall, Nicole and Josh could take advantage of both decreasing interest and monthly payments
without a refinance. A high-rate environment would also make the lower initial teaser rate on the ARM more attractive.
Dangers Of Overspending
Regardless of the type of mortgage the couple chooses, they must be careful not to overspend
on their mortgage. Their healthy combined income and sizable down payment will enable them to qualify for a $300,000 loanpossibly even more.
However, should one lose a job due to layoffs, illness or another unforeseen event, an obligation that size could quickly put them in financial hot water.
SEE ALSO: Changing Jobs? It May Kill Your Mortgage Chances
A Look At The Numbers
Nicole and Josh have $60,000 saved up for the down payment on their home, plus cash for closing costs and fees. Their lender offers them a 30-year fixed-rate mortgage at 3.62 percent, or an adjustable rate loan for 2.72 percent. The home they select is $300,000, so they will need to finance $240,000. Monthly principal and interest on the fixed rate product will be $1,093.85, compared to $975.97 on the ARM, a difference of $117.88.
Regardless of the couples final decision, taking the time to explore their mortgage options fully
before committing to a loan is the best move they can make to ensure a lifetime of happy homeowner anniversaries.