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Is a higher mortgage rate worth the extra liquidity?

When purchasing real estate, there are several financing approaches a buyer might take. 

For someone interested in a long-term commitment, it may make sense to make a sizable down payment in order to qualify for the lowest interest rates on a 20-year or even 30-year mortgage. 

For other buyers who don't want to establish permanent roots, other mortgage options may make sense. There are a variety of options, but any purchaser that puts less than 20 percent down may find that he or she is facing higher interest rates. In addition, a buyer in that situation may be required to take out mortgage insurance, although some lenders waive this requirement for borrowers with a very high credit score.

An adjustable rate mortgage may have the next-to-lowest rates as long-term mortgages, but it may also require a buyer to have faith in the market. Specifically, a buyer may need to be confident of his or her ability to sell or obtain a favorable refinancing when the term of the three, five or seven-year ARM runs out.

According to a recent article, however, there may be another interest to put less money down on a purchase, even if it means paying a higher interest rate. Specifically, preserving one's liquidity, or cash on hand, may be a money management strategy. Instead of tying funds up in a real estate purchase, some individuals may prefer to invest their extra savings in securities.

Although a real estate agent may have some insight into the various borrowing options, an attorney that focuses on real estate law will generally have a much deeper understanding of industry trends and the legal issues that may arise when purchasing real property or attempting to refinancing a mortgage. Since a mortgage can represent a significant liability, we recommend you take your questions about real estate to a lawyer.

Source: The Wall Street Journal, "Low Down Payments Mean Higher Interest Rates," Anya Martin, Jan. 22, 2015

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