downpayment Archives - Page 2 of 2

The Cost of Free

Written by Elise Loan Tucson on June 25, 2018. Posted in Real Estate Statistics. Leave a Comment

Lately, I have had a number of borrowers come to me specifically with the desire to purchase a home using a down-payment-assistance program. These programs take on many different looks, but the gist is basically the same: someone is willing to give a borrower a percentage of the purchase price of a home to be used as a down payment, and the obligation is forgiven when the borrower has lived in the home for a certain period of time.

A lot of these borrowers who come to me call it “free money” –and that always makes me pause for a moment before I remind them that nothing is free and that there are two major factors that accompany these programs that MUST be considered and always have a direct effect on the amount of money a buyer can borrow:

When someone uses a down-payment-assistance program, the banks who are lending the money will increase the interest rate, usually, by about 1.5%. Obviously, the reason is the banks feel there’s more risk, so they require a little more from the borrower –and the other reason, let’s be honest, is the banks are legally allowed to charge that increased rate, so they do.
The debt-to-income ratio, when compared to other options like an FHA loan, is significantly lower –this means that banks aren’t willing to lend as much money based on the borrower’s income.

After I explained this to a couple I recently met to discuss mortgage options, they asked me what this meant in “real” numbers, so I presented them with exactly that:

Based on their income, with the interest rate increase that the DPA program entails and the lower debt-to-income ratio, they would qualify for a mortgage of roughly $112,000. Conversely, with the same income, if they came up with the down payment themselves (3.5% of the purchase price), the interest rate would be lower, and the debt-to-income ratio allowed would be higher –this means that they would qualify for a mortgage of roughly $193,000. Before I could get that second number completely out of my mouth, one of the borrowers said, “That’s an $81,000 difference! Are you serious?”

While I assured the couple that I was serious, I then asked them which option they would prefer: buy a smaller house so they could get “free” money or look into ways they could put together the 3.5% needed to make the down payment themselves so they could afford a larger house and have more choice of houses. They decided to find the money to make the down payment themselves –the $81,000 cost of “free” was a lot more expensive than $6,755 (which is 3.5% of $193,000). Can’t argue with that!

Home Ownership – It’s in Our American DNA

Written by Elise Loan Tucson on May 21, 2018. Posted in Home Ownership. Leave a Comment

Home Ownership

Each week, I’ve tried to take both simple and complex mortgage-related topics/issues and put them into terms here in this newsletter that make them more easily understood. Since I’ve been doing that for quite a while, I have to be honest and admit this: I’ve come up dry this week on what to talk about, so I thought I’d do a little internet research (I believe the technical term is Googling) into what mortgages are like in other parts of the world –and after a relatively brief Googling, I’ve found that we here in the United States, well, have it pretty good. True story!

Home Ownership in other countries

In a lot of other developed countries, mortgage interest isn’t tax deductible at all or there’s only a very limited tax benefit to be enjoyed from it –in Germany, they give tax incentives to encourage people to continue RENTING! In many of those same countries, a 30-year fixed mortgage is only a thing of myths. What? How do they afford a mortgage in other countries? Here’s a breakdown of what is most common in some of these countries:

Canada, Britain, Australia, New Zealand: no fixed-rate loans, only Adjustable Rate Mortgages and Hybrid ARMs with fixed rates for only 10 years.

Germany: fixed-rate loans up to only 15 years, ARMs and interest-only loans.

Japan: fixed-rate loans up to only 20 years, ARMs.

Switzerland: generally, it’s a first and second mortgage; the first has an indefinite repayment period while the second has a fixed repayment period up to 15 years (or until an individual’s retirement age) at a higher interest rate.

I learned two other interesting tidbits:

Prepayment Penalty: in the US, you can get a loan with NO prepayment penalty; in other countries, the banks/lenders have a guarantee that they get their interest even if you pay off your mortgage early.

Non-Recourse Loans: these are available in the US, which means you can lose the property if you default on payment, but the lender cannot seek further compensation from the borrower even if the property’s value doesn’t cover the full value of the defaulted amount; in other counties, they can come after you and your assets and metaphorically bleed you dry to get back the full value.

As difficult as it is to save for a down payment –whether it’s 5% or 20% –the sacrifice is worth it because home ownership isn’t just possible, it’s encouraged here in the United States. If this doesn’t convince you that it’s better to buy than rent, maybe it’s time to learn German and move.

For anymore information you may need at Priority Lending LLC we can help make things clearer for you.

Run, Don’t Walk!

Written by Elise Loan Tucson on May 14, 2018. Posted in Home Loan. Leave a Comment

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Full disclosure: this is a reprint from a few years back – I’ve updated the numbers to reflect the conditions occurring in the market today.

The New York Federal Reserve’s economists conducted a study and published the results: changes in down payment requirements have MORE influence over homebuyers’ willingness to buy than changes in rates. Surveying both buyers and renters, the Fed found that the effect of interest rates may be overrated when compared to even small changes in down payment requirements. The study found:

• Dropping the down payment from 20% to 5% increases the willingness to purchase, on average, by 15% among buyers and 40% among renters

• Decreasing the interest rate on a 30-year fixed-rate loan only raised the willingness to purchase by 5%, on average

As you straddle the fence between BUY RIGHT NOW with a higher interest rate and WAIT AN UNKNOWN PERIOD OF TIME to save 20% of the purchase price, here’s an example to give you a push. Take a look at the numbers for a house with the purchase price of $250,000 with a 30-year fixed mortgage: (1) WAIT: $50,000 down payment, $200,000 total loan amount, 4.5% interest rate, monthly mortgage (P&I) payment – $1013.37; OR, (2) BUY NOW: $12,500 down payment, $237,500 total loan amount, 4.875% interest rate, monthly mortgage (P&A) payment – $1256.86.

No doubt $1013.37 is better than $1256.86 for a monthly payment – that’s not what’s at stake here. The difference between those two payments is $243.49. In order for a person to save the additional $37,500 to go from a 5% down payment to a 20% down payment at the rate of $243.49/month, it would take 154 months – 12 years and 10 months! – to get to that point, which is almost half the life of a 30-year mortgage. Obviously, for many prospective buyers, that additional $244issignificant. We have a number of strategies to help make up that difference so you can get into a home as soon as possible!

When this was originally written, interest rates were fairly steady –even stagnant –so the scenario of waiting to amass a larger down payment to get a better interest rate was much more plausible. As we’ve seen recently, though, rates are not going to be stagnant –this is not a pronouncement that they’re going to skyrocket overnight –so this has taken on a greater sense of immediacy to get into a home rather than sitting on the rental sidelines for who knows how long.

Tag: downpayment

The Cost of Free

Home Ownership – It’s in Our American DNA

Home Ownership in other countries

Run, Don’t Walk!