Interest-only rates are as low as 1.875% on large, adjustable-rate loans, making it cheaper to buy than rent — but only for the first three years.
By Jeff Lazerson | email@example.com | MortgageGrader.com | September 19, 2021
What is stopping you?
Maybe you, too, can afford a Southern California McMansion. How about paying just interest, not principal, at a rock bottom 1.875% mortgage rate for the first three years?
For a $1.5 million loan on a $2 million home, your house payment is locked down at $2,344. Assuming monthly property taxes of $2,083 (1.25% annual property tax rate) and $250 for monthly homeowners’ insurance, your total house payment is $4,677.
It would cost you about $6,000 per month to rent a $2 million Southern California home, said Lance Siegel, president of Lake Forest-based HVCC Appraisal Ordering.
Yes, you need good credit. You have to income qualify, cough-up $500,000 for a down payment and more than $30,000 in settlement charges. And be sure to have plan B ready in three years when your mortgage amortization schedule kicks in and your principal, interest, tax and insurance payment jumps to almost $9,300 a month.
But the financing charges are ridiculously low at the outset.
If rate and payment uncertainty gives you too much heartburn, you can find longer interest-only lock terms of five, seven or 10 years in the 2% to 3% interest rate range on 30-year mortgages.
Even 30-year jumbo fixed rates are super cheap. I’ve found rates as low as 2.375% for Inland Empire properties, where jumbos start at $548,250. In Los Angeles and Orange counties, where jumbos start at $822,375, rates are as low as 2.625%.
What’s up with all this easy rate mortgage money?
It’s like water finding its lowest level. There is so much private capital out there just looking for a place to park and earn some type of return.
The three-year interest-only program is particularly cheap now because people are investing in mortgages as a hedge against a possible spike in inflation, with the expectation that short-term rates will climb in the next few years.
Investors get something now and some protection for the long term as well since adjustable-rate mortgages recalculate based on the Secured Overnight Financing Rate, or SOFR, the common benchmark that replaced the corrupted London Interbank Offering Rate index, or LIBOR.
For the 1.875% start rate, the 30-day average SOFR sits at 0.50. The profit margin added to the index is 2.75%. Should nothing change during the three-year introductory period, the mortgage interest rate would jump to 3.25%.
Assuming no principal was added, the total payment on that $2 million McMansion would almost double to $9,293 a month. That’s the “amortized” payment for $1.5 million on the remaining 27 years at 3.25%, plus taxes and insurance.
Rents continue to soar. More and more, I receive complaints from readers and clients who say there are no reasonable rental properties out there — much less bargains.
If you buy now instead of renting, you might look like a genius in three years because home prices continue to climb to the sky. And you could enjoy a big equity gain on cheap and easy money. Or, if the housing boom becomes a bust, you just might regret such a ploy.
It’s a tough call. But one thing is for sure: cheap, nearly free money would be guaranteed for the next three years.
Freddie Mac rate news: The 30-year fixed rate averaged 2.86%, 2 basis points lower than last week. The 15-year fixed rate averaged 2.12%, 7 basis points lower than last week.
The Mortgage Bankers Association reported mortgage application volume was unchanged from the previous week.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $548,250 loan, last year’s payment was $3 more than this week’s payment of $2,270.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with 1-point cost: A 30-year FHA at 2.125%, a 15-year conventional at 1.875%, a 30-year conventional at 2.5%, a 15-year conventional high-balance ($548,251 to $822,375) at 1.99%, a 30-year conventional high-balance at 2.69% and a 30-year fixed jumbo at 2.625%.
Eye catcher loan of the week: A 15-year fixed rate at 2.375% without cost.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or firstname.lastname@example.org. His website is www.mortgagegrader.com.
Jeff Lazerson - Mortgage Columnist since 2011