Ask Cornerstone: How do I know if it makes sense to take a mortgage on my property?

Mortgage Finance Decision

I bought a duplex in Pittsburgh with cash. Now I am applying for a delayed financing exception mortgage. How do I know if I should get this loan or just keep my cash in the investment?

These are the terms I received from my local bank. Would doing this be too expensive?

The duplex appraisal value is $60,000. I’m applying for a 70% LTV 30 year fixed conforming loan of $42,000. The interest rate is 5.00% with 0.125 points. Total closing costs are approximately $3,140.


Response:

Assuming that this is best 30 year loan one can get in your area and you are not going to hold the property as a rental, then it strictly depends on what would you plan to do with $42,000 in next 12 months.

To find the best terms, get multiple quotes from local and online lenders with good reputations like QuickenLoans.com. If you haven’t shopped around for a loan because you are worried about the inquiries affecting your credit score, scores are not affected by multiple inquiries from auto, mortgage or student loan lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on your credit scores1.

If you can flip another property and make about $12,000 then getting a loan makes sense. You would be making about 16% return on your money. However if you were asking if it is too expensive for a long term hold the answer is definitely not. Generation X and Millennials think that 4% rate is normal because they never have experienced 8%, 9%, 10%, 11%, 12%, 13% and yes 16% rates for conventional loans. Many experts believe interest rates are heading up. Even though there have been modest interest rate increases recently, rates are still relatively low. If the duplex makes good cash flow with 5% loan, I would recommend keeping it.

 

 

References:
1 – http://www.myfico.com/crediteducation/creditchecks/inquiries.aspx

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