Maxing out your home loan: 100% financing
In my post “Against the grain: Why we chose an interest-only mortgage“, I told you why we didn’t get a normal 30-year mortgage when we bought our home 3 years ago. I explained why I don’t think it was a stupid decision for our situation, but I recognize it’s not for everyone.
Now for another shocker: We fully financed our home.
That means we didn’t put any money down towards our mortgage at closing. We have 2 loans:
- 80% – interest-only mortgage at 5.25% for 5 years
- 20% – 30-year mortgage at 7.875%
After 5 years, the main loan stays interest-only, but the rate resets to prime plus something big, hence why we need to figure out what to do with the home or loan in 2 more years.
Why did we fully finance?
As I mentioned in the first article, we didn’t think we would be in this home longer than 5 years. If so, then why bother putting any money towards the loan? Yes, it would lower our monthly payments, but on an almost $400,000 home, the little bit we could muster up would do nothing against those payments.
Also, we had other debts higher than 5.25% interest (not 7.875%), but we wanted to get rid of those loans first. In addition, the market was still rising, our home is in a great location and neighborhood, and we figured we could at least break even if we needed to sell the house.
However, as with the interest-only loan, not everyone can or should fully finance their home purchase. Honestly, some people just need to wait to be homeowners. We were in a position where we had stable jobs and decent salaries. Granted, it could all come crashing down any minute, but that’s a risk even if we put 20% down.
So basically we put down the least money, and took one of the lowest cost loans because we didn’t think we would be in this home very long. However, we like the house, the neighborhood, and the location, so our decision to stay or leave is getting harder to make. I’ll guess you need to check back in 2 years to find out what we decided!
Young and blissful. Wow. Where is the 2nd on your debt scale? You are really on the edge. If the market sours or something happens to your income streams you’re screwed. Of course if things go good you could could make a tidy profit. That’s the law of risk and reward. Good thing you’re paying down your debt, that’ll help you refi.
BTW – If you’re not planning on selling in the next 6 months, I look into a refi today to a fixed rate. If rates go up to 8-9%, you’ll kick yourself. Plus you never know what’s going to happen after the subprime crisis dust settles.
Ted, I don’t have the first loan in there either. I don’t consider my mortgage the same as my other debts. Partially it’s because the amount is so huge that I feel “what’s the point?” by tracking it.
If the market sours (which it has, but could still go down further), or we lose our jobs, then yes, we’d be in some deep doodoo. However, I’m in a high-demand field, and we have enough savings to cover 6 months of expenses. I can get a new paycheck within 2 though.