Consider All Options for Home Financing

San Antonio has always been known as a big city with a small-town friendly atmosphere. San Antonio’s luxury home market continues to grow at a strong pace with existing homeowners moving up to larger homes and relocating families who are new to the community. San Antonio offers a thriving variety of luxury homes ranging from historical to new custom-built modern homes to high rise condominiums overlooking the Alamo.

With a higher sale price also comes a higher loan amount (also called Jumbo Loans when they exceed $510,400). Based on a purchase price of $1,300,000, a typical loan amount would be based on a 20% to 25% down payment for a loan amount of $1,040,000 to $975,000. Like all buyers, luxury home buyers are interested in the funds to close, interest rate and the monthly payment. Although a 30-year fixed rate jumbo loan provides the security of a long-term fixed rate, most lenders unfortunately do not provide the necessary cost benefits analysis with an adjustable rate mortgage or ARM. A long-term fixed rate mortgage for a homeowner who is more than likely going to pay off the mortgage by selling and moving on to another home, would benefit the lender more than it would benefit the homeowner.

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An ARM when responsibly implemented, can save a tremendous amount of money for a luxury homeowner during the initial fixed rate period. After the initial fixed rate period, ARMs can adjust to a higher rate, thus increasing the homeowner’s monthly payment so it always important to understand the risks. Hybrid ARM’s are the most popular and have an initial fixed rate period followed by an adjustable period which typically have 1 year increments for their remaining 30 year term. The initial fixed rate periods can be 10, 7 and 5 years (other combinations are available depending on the lender).

Here is a quick review of the differences between a current 30-year fixed rate of 3.625% vs a 10-1 ARM at 3.125% and based on a purchase price of $1,300,000 with a $1,040,000 mortgage over the first 10 years.

  30 Year Fixed Rate  10-1 ARM
|30-Year Payment 
Rate  3.625%  3.1250%  0.500% 
Interest Expense First 10 Years  $337,969  $288,925  $49,045 
Balance At Year 10  $808,817  $794,312  $14,505 

Not only is the cost of the interest over $49,000 less for the ARM over the fixed rate but the overall balance is over $14,000 lower as well.  It is true that in a worst case situation the benefits of the initial lower ARM rate can be offset if interest rates rise after the initial fixed rate period. In the case of a 10-1 ARM that time period can typically be 3 to 4 years after the rate adjusts. Keep in mind that ARMS do offer maximum initial rate adjustments, annual adjustments and lifetime caps. Your mortgage loan officer can provide a detailed breakdown of each of the ARM parameters. Despite the risk, the benefits of the ARM particularly on luxury home financing can be significant.

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