Location: 9885 Bellasera Circle, Myrtle Beach, SC 29579
Listing price: $699,000
Down payment: 20% or $139,800
Mortgage amount: $559,200
Homeowner’s Insurance: $1,500/annually
Closing costs: $5,500
Financing options: 30-year fixed-rate mortgage at 3.50% with no points or 7-year fixed-rate balloon mortgage at 3.00% with no points http://www.realtor.com/realestateandhomes-detail/9885-Bellasera-Cir_Myrtle-Beach_SC_29579_M66328-29653?ex=SC556934382&source=web John Smith is considering the possibility of a property purchase in Myrtle Beach, South Carolina that will be evaluated on the basis of two financing options such as a 30-year fixed-rate mortgage and a 7-year fixed-rate balloon mortgage. In addition, the different mortgage options will be considered from the buyer, Mr. Smith’s, and the lender, Citibank’s, perspective. Both financing options have advantages and disadvantages. Each will be defined in detail from both perspectives. However, both Mr. Smith and Citibank need to conclude with what financing option best fits their individual or organizational need.
Thus, Mr. Smith is interested in relocating to Myrtle Beach, South Carolina with his family. The listing price of the house is $699,000 but Citibank requires that he puts down 20% of the listing price for a loan-to-value ratio of 80%. The down payment equates to $139,800. Fortunately, Mr. Smith was able to sell his house in CT with enough equity to afford the down payment. Therefore, the mortgage would be for $559,200. As a result, Citibank has offered Mr. Smith and his family two financing options: (1) 30-year fixed-rate mortgage at 3.50% or (2) 7-year fixed-rate balloon mortgage at 3.00%. Both offer advantages and disadvantages for Mr. Smith and his family.
For example, a 30-year fixed-rate mortgage is attractive because his family will know exactly what the monthly mortgage payment will be over the course of the 30-year loan. No changes, no emotional roller-coasters. However, although interest rates are at historic lows, there is always the possibility that during the course of the 30-year loan, the interest rate could drop even lower, leaving Mr. Smith and his family to pay a higher monthly mortgage payment than what the market calls for. On the other hand, in this particular case, Mr. Smith believes it’s not much of a concern seeing how he and his wife, Celine, qualify for 3.50% over 30 years. Mr. Smith personally does not foresee 30-year mortgage rates dropping much lower than 3.50%; if anything, rates are subject to increase as the economy continues to improve.
But there’s always the option of the 7-year fixed-rate balloon mortgage, as well. Balloon mortgages typically are of concern for many borrowers because after the initial period of 7 years, the unpaid balance is due; however, in the case of Mr. Smith and his family, they will be coming into a substantial amount of money within the next 5 years from a Family Trust account. Thus, the advantage of proceeding with the 7-year fixed-rate balloon mortgage would be that it offers both a lower interest rate and monthly mortgage payment compared to the 30-year fixed-rate mortgage.
In truth, due to the fact that Mr. Smith and his family will be receiving a substantial amount of money within the next 5 years, the balloon mortgage makes the most financial sense. Not only would their monthly mortgage payment be $153.45/month less but the amount of interested paid over 7 years would be $18,831.08 less compared to the 30-year fixed-rate mortgage. In addition, Mr. Smith does not plan escrowing either the property tax nor homeowner’s insurance. In fact, he intends to pay for both, as well as the closing costs out of pocket.