Question: I plan on building a house in 3 years on some vacant property I own. I wanted to buy a less expensive house now and live there for three years. I was going to get a 0% down 30 year loan at 5.75% to buy the house. A mortgage broker recommend that I get a 5/1 ARM mortgage at 4.5% and wait for interest rates to come down and then convert to a 30 year loan. I had asked what it took to convert and he stated I just needed a new appraisal.
The question is, am I missing something? I guess that the worst case is that interest rates shoot up and I if I don’t build I could get stuck with a 11% mortgage potentially when it goes variable rate in 5 years….
Thanks,
Answer: My question is if it makes sense to buy if you are only looking at 3 years. The closing costs, mortgage origination fee, and the mortgage insurance are likely going to cost more than what the property could possibly earn in 3 years, and then you take the big hit on sales commission when you sell it. I think you are far better off to rent until you are ready to build. It just doesn’t make sense to buy a house for this short of term, unless you are planning to keep it afterwards as a rental unit. Even then, a single family home is not my favorite type of rental, you could likely buy something that is much better suited to be that future rental property.
If you do buy, and you plan to sell right away, look for a loan that gets you the money in the cheapest possible manner, and don’t worry about paying back any principal. I have seen interest only balloon loans advertised locally for around 4% that might work for you.
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