About to buy a house [Archive] - Two Plus Two Older Archives

moondogg

07-27-2005, 02:44 PM

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Make sure that, if you don't have 20% for a down payment, that you get an 80/20 loan (or put 5% down and get an 80/15, etc). You do NOT want to be stuck throwing away money on PMI.

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Or get an 80/10/10. Get a mortgage for 80%, put 10% down, and get a Home Equity against that 10% for the remaining 10%. You can probably get a better rate on the HELOC than on the mortgage (so you're paying less interest against that 10%), and you don't have to pay PMI.

PMI definitely blows, do what you can avoid it.

ThisHo

07-27-2005, 02:46 PM

if its a new build find out if the builder has a mortgage company they "work with". They usually do, they also usually have some incentive to go with them - find out what that is and if its worth it.

Be VERY REALISTIC about how long you plan to live in the house. I'm in my 2nd place in 4 years and probably will be moving in the next 12 months. Both places my wife and I figured we'd be in for AT LEAST 5 - 10 years, so we got conventional 30yr fixed .. we would have saved a TON of $$$ if we had been realistic about the good/bad of the home and how long we'd stay and gotten 5yr variable or some other shorter term loan. Be realistic! There are a TON of finance options out there -- talk to your lender and pic the one that really meets your needs.

Not sure exactly where you are or the property tax laws where you are, but find out if you're going to be hit with a "supplemental property tax" within 12mo of moving in.

ThisHo

Cased Heel

07-27-2005, 03:05 PM

What is an 80/20 loan?

What percentage is Property Mortgage Insurance tax?

moondogg

07-27-2005, 03:14 PM

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What is an 80/20 loan?

What percentage is Property Mortgage Insurance tax?

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80/20 means you put 20% down, and get a mortgage for the remaining 80%.

Generally speaking, if you take out a mortgage for more than 80% of the property value, the lender will require you to pay mortgage insurance.

The reason for mortgage insurance is that if you default and they need to forclose on the property, there's a good chance that they will not recover the full value of the property in an auction, especially after the costs of forclosing and seizing the property.

So, because you are mortgaging more than 80%, they are going out on a limb with you, because if you default early in the mortgage (before you've paid much off), they stand to lose money on the deal. Mortgage insurance insures the lender against this loss, but you have to pay the premiums for it.

You'll get a fee attached to your money payment, and you will have to pay it periodically until you owe the lender less than 80% of the property value.

In recent years, many people have gotten their properties reappraised a year or two after the mortgage is closed, because even though they have not paid much off, the value has increased, which puts them below the 80% threshold and gets them out a mortgage insurance.

Some lenders offer 95/5 or 90/10 mortgages the do not require mortgage insurance, but these are usually special programs. Either they are backed by FHA (which will probably require you to be poor), or they screw you with interest or terms.

Patrick del Poker Grande

07-27-2005, 03:18 PM

[ QUOTE ]
[ QUOTE ]
What is an 80/20 loan?

What percentage is Property Mortgage Insurance tax?

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80/20 means you put 20% down, and get a mortgage for the remaining 80%.

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This is not what an 80/20 loan is. The 20 part is a second loan for 20% of what you're paying. It lets you get around PMI, which you have to pay up until you have 20% equity in your home. Basically, think of it as you're getting your mortgage for 80% and then you're borrowing the other 20% (at a higher interest rate) to put up as your 20% down so you don't have to pay PMI.

chaas4747

07-27-2005, 03:21 PM

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
What is an 80/20 loan?

What percentage is Property Mortgage Insurance tax?

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80/20 means you put 20% down, and get a mortgage for the remaining 80%.

[/ QUOTE ]
This is not what an 80/20 loan is. The 20 part is a second loan for 20% of what you're paying. It lets you get around PMI, which you have to pay up until you have 20% equity in your home. Basically, think of it as you're getting your mortgage for 80% and then you're borrowing the other 20% (at a higher interest rate) to put up as your 20% down so you don't have to pay PMI.

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This is correct. The mortgage that you put up 20% (or more) for the down payment is known as a conventional home loan.

Hiding

07-27-2005, 03:21 PM

Expanding on PMI... Its not tax deductable, while the 20%HELOC or 2nd mtrg would be.

Cased Heel

07-27-2005, 03:26 PM

So this just boils down to going to another lender and talking them into loaning you 20%?

Seems like they'd be hesitant to do this, knowing what you're getting it for (simply to forego the PMI).

Basically, you're trying to get a cash loan from another bank?

James Boston

07-27-2005, 03:27 PM

Not to sidetrack too much, but can you get around PMI with the equity in property you already own, pending its sale? In other words, if I find a house I like, can I get another mortgage and postpone the downpayment until I sell the house I'm in now?

Patrick del Poker Grande

07-27-2005, 03:29 PM

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So this just boils down to going to another lender and talking them into loaning you 20%?

Seems like they'd be hesitant to do this, knowing what you're getting it for (simply to forego the PMI).

Basically, you're trying to get a cash loan from another bank?

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No. You work it out all with the same lender/agent. The reason you need PMI if you're under 20% equity is because they're risking quite a bit giving you this money, so you have to buy insurance against you defaulting. In lieu of that, they'll loan you the 20% at a higher interest rate (to account for their higher risk - that there's no equity in the house when they repo).

I'm with you on this one. It's all a bunch of hijinx and hand waving as far as I'm concerned. If you think 80/20s are weird, wait until your agent gets into more exotic and creative financing. There's a few 'new' products out there that I don't even remember how they worked now that it's been a while since I bought my house.

chaas4747

07-27-2005, 03:30 PM

You must owe 20% less than the appraised value of your home to avoid PMI insurance.

James Boston

07-27-2005, 03:37 PM

So if your current home appraises for $100K, you can borrow $80K, or do I have it backwards?

Patrick del Poker Grande

07-27-2005, 03:41 PM

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So if your current home appraises for $100K, you can borrow $80K, or do I have it backwards?

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Right. Without getting into other crazy things, you can borrow up to $80k before you have to pay PMI.

ThisHo

07-27-2005, 03:43 PM

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So if your current home appraises for $100K, you can borrow $80K, or do I have it backwards?

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in San Diego you can get exactly NOTHING for $100k. I hope these are made up numbers just for example purposes.

There are a LOT of ways to avoid PMI. We did a "piggy back" where we put 10% down, got a "2nd" mort for 10% at a higher interest rate and then 80% on the standard. Of course, we refid 3mo after moving in and our home appraised for 50% more than what we paid for it (to clarify - we locked in the price 7mo before moving in because it was a new build, but in 10mo the value was 1.5x what we paid for it)... such is the SD housing market.

ericd

07-27-2005, 03:44 PM

Hire a decent attorney and listen to their advice. If all goes well then you might feel you wasted some money. But if not...

HDPM

07-27-2005, 03:58 PM

Ignore all the new fancy financing and advice to borrow a ton of money. If you can't put 20% down you cant afford the house. (Yes, I have violated this rule.) If you are going to move quickly it might be a problem. People underestimate how bad mortgage debt is and overestimate its benefits IMO. Think in terms of owning outright sooner rather than later. You may not be able to do it right now, but don't think you'll have a mortgage forever and don't think in terms of paying for 30 years IMO. (That doesn't mean don't get a 30 yr. mortgage tho.) I understand people are looking at 40 year mortgages now. that's nuts IMO. Most people carry too much debt, avoid that if you can.

Cased Heel

07-27-2005, 03:59 PM

seems like you need to find out if borrowing the other 20% at a higher interest rate is better or worse than paying the PMI.

I wouldn't be surprised if it was worse.

chaas4747

07-27-2005, 04:02 PM

Always worse. The PMI is not tax deductible. Also you are paying for insurance you will never use on your house unless you default. The 80/20 you are actually paying down the price of your home, at a higher interest rate that is tax deductible. You are still applying payments to 20% of the equity in you home in the second scenario.

Cased Heel

07-27-2005, 04:05 PM

yeah me and my GF are moving into an apartment this weekend and her dad was going on and on and on about how we should buy a house and that we're "throwing money away" by renting. Blah blah blah.

I tried to explain to him that I'm not ready for a house yet, I don't want the responsibility, I don't have a down payment, I don't know where I'd want to live, and me and her aren't even MARRIED yet. lol.

He's like "buy a house--you're building equity". Well I ran the numbers and a $140,000 loan at 7% for 30 years yield about a $950/mo payment (of which only $120 goes to the principal. $830 to interest).

Yeah...nice "equity". We're moving into an apartment for $730/mo. right now which means we're paying $220/mo. less (of which will go to our future equity, as we are saving right now).

not to mention a large downpayment in the future will mean we pay less to the bank (AND if we wait 5 years it means we'll have a 5-year newer house than if we buy today).

This all coming from a guy who just invested thousands of dollars into remodelling his 30-year old home.

I wish I could tell him what I really think. But I just say "I'm not ready for the responsibility yet."

HDPM

07-27-2005, 04:15 PM

Good thinking. A lot of people have done great buying houses for just a little down and then having prices skyrocket. If you can do this mortgage debt makes more sense obviously. But a lot of people haven't done as well. I know our first house didn't appreciate much. We came out OK, but I was surprised at how little equity we had after a 5% down payment and 5 years of payments, sometimes extra payments. I doubt our second house will appreciate a ton given the market we are in, but so what. A house is something to live in, and we aren't crippled by debt. Borrowing a ton for something that is more of a consumer purchase/lifestyle choice than a real investment doesn't make sense to me. If you can time your purchase and sale in a hot market and make a ton, well, then I am wrong. Your grandparents knew somethig when they put a bunch down and got it paid off.

swolfe

07-27-2005, 04:24 PM

- don't get a 30 year fixed

- get interest only if possible; talk to a broker about it

- there are a lot of good mortgage programs for financing over 80% without having to pay PMI

- have the seller pay 3% of the price to closing costs. this will raise the purchase price and amount financed, but save you money out of pocket

- ignore the guy that said mortgage debt is bad

- think about how long you're going to be in the house when deciding on mortgage terms. less than 5 years? do a 5/1 ARM

- even if you will be in the house for a million years, you'll probably refinance every few years to shorten your term, get cash out, or take advantage of rate changes

- try not to use a realtor, you'll pay too much

- definitely get an inspection...walk around with the inspector while he looks

- my favorite loan program is the interest only 1st position HELOC from countrywide (FlexSaver). finance up to 95% with no PMI. interest only at prime rate.

i'm about to buy my 5th house. i have 3 rentals and the house that i live in, which will become a rental as soon as i close on the new place. my fiance has been a mortgage processor, underwriter, and loan officer.

astroglide

07-27-2005, 04:34 PM

i think people that tell renters they're wasting money either got help with their down payment or bought before housing costs were so ridiculous. i own a condo, but i think that renting is fine and everybody who talks about how their "payments are the same" probably had their parents pay their down payment and aren't factoring taxes, repairs, etc.

Jersey Nick

07-27-2005, 04:34 PM

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Yeah...nice "equity". We're moving into an apartment for $730/mo. right now which means we're paying $220/mo. less (of which will go to our future equity, as we are saving right now).

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-You'll only save $13,200 in 5 years
-Historically 7% ain't a bad mortgage rate
-4% annual increase in your housing market means a $155,000 house will be worth >$181,000, or more than $26,000 in equity

Or the housing market could take a dive, the girl could dump you, and you could work 3 jobs trying to stay out of bankruptcy. /images/graemlins/smile.gif

adios

07-27-2005, 04:42 PM

A think alot of your numbers are fuzzy but your take that owning a home is usually a long term committment (if you were lucky enough to have a home skyrocket in value right away sell in two years, it's tax free gains basically) is right and that's probably as important as anything. I've done pretty well owning homes but I've owned for long stretches and the market has gone through some soft times.

Lottery Larry

07-27-2005, 04:47 PM

"There's a few 'new' products out there that I don't even remember how they worked now that it's been a while since I bought my house"

From what I remember, it's best to stay away from those products if you'll be in the home long-term.

Patrick del Poker Grande

07-27-2005, 04:48 PM

[ QUOTE ]
"There's a few 'new' products out there that I don't even remember how they worked now that it's been a while since I bought my house"

From what I remember, it's best to stay away from those products if you'll be in the home long-term.

[/ QUOTE ]
I think that was my general feeling as well.

Lottery Larry

07-27-2005, 04:49 PM

Where did you get that animated Vanilla Ice avatar?

smokingrobot

07-27-2005, 04:51 PM

im a mortgage broker:

for the best rate, you might consider paying a 1 point, but make sure you get quotes from 3 people.

ask them ALL to send you a GFE (good faith estimate). That GFE should be pretty close to what you would be looking at at closing. Also, a good comparison is your APR rate. The APR will include all the fees and is the % rate you use to compare one loan against another in terms of fees. Be weary of APR's less than or exactly at your interest rate. Your interest will/should always be lower than your APR. This does not mean you interest rate IS the APR however.

You'll also want to supply as much as possible up front so you dont get into a back and forth with them asking for more crap. Dont just cough it up, but ask the broker or whoever you are dealing with to supply you with a list of things you will need to give them.

it will include things like 2 pay stubs, 2 months bank statements, W-2's or 1099's etc etc.

Inevitably, the underwriter's will then ask for a few more things down the road, but it will make things easier.

Dont give out your SS to everyone. If there are 3 companies that you are talking to that seem to not be BSing you, then go with them.

An 80/20 is not 20% down. An 80/20 means a first and a second mortgage: 80% 1st, 20% 2nd.

This avoids PMI if you are a FNMA Prime borrower (middle FICO above 600 usually).

PMI comes into play when you borrow above 80% of the value (as determined by the purchase price) in a FNMA loan. If you go with a subprime, there is no PMI, but the rate is higher, so you're pretty much in the same situation as if you paid PMI. A higher rate means you'll be paying that till you refinance or sell your home, PMI will fall off after the mortgaged amount reaches 80% of the value of the home. If your area is appreciating, you may end up only having to pay PMI for 6 mo's to 1 year.

PMI amounts vary depending upon your downpayment and the coverage demanded by the PMI company. There is no exact science to it.

If you are not getting a prime loan, go for a 2/28, dont demand a fixed. 2/28 means you have a fixed rate for 2 years, after which it adjusts upwards.

Right before the adjusment period, refinane, and hopefully by then your credit will have improved etc.

If you have any other questions, PM me. What state are you purchasing in?

Another good idea is to get quotes from a direct lender, like Wells Fargo, a mortgage brokerage outfit, and your Bank, if they are willing to write you a loan.

If during the process you have any questions, feel free to write me and i can help you out all you want.

smokingrobot

07-27-2005, 04:54 PM

They are the pay option ARMs. If you're a rich dude who gets above 12% returns on investments, you can use the money you'd be paying (deffered interest payment) to invest. If you are not super wealthy, dont let them talk you into it.

Lottery Larry

07-27-2005, 04:55 PM

Have you already done things such as:

Close out old credit cards and reduce the number of active ones you have accounts with?

Gotten credit history checks yourself from 2-3 of the companies, to make sure there are no surprises you need to fix first?

Gotten some information on housing resell values, both for the builder and the area that you're in?

Gotten a ranking and history of the school district you're in, which could affect your resell ability?

Gotten an estimate on taxes for the residence and compared them to neighboring areas?

I hope this place is going to be bigger than your current place? Will the builder have any problems configuring the gaming room?

Think very hard about the loan you'll get. I don't see interest rates dropping in the next few years, but how high they go, and how long you estimate you'll be there, is a key factor in your loan type.

We went from an apartment, to a twin (because of A-man) to an apartment, to the current location (because of Z-man)
We sold the twin for what we paid for it, and felt lucky to do so given the area/school district, so we lost money on that.

BTW- are you *ahem* buying this with anyone?

Lottery Larry

07-27-2005, 04:56 PM

As I remember it, when I bought AND when I refinanced, most of the products being offered weren't being offered to me for MY benefit...

swolfe

07-27-2005, 04:58 PM

subprime doesn't necessarily mean that the interest rate will be higher, it just means that the loan doesn't conform to Fannie Mae guidelines.

if you have good credit, but want something unusual (no doc, interest only, high LTV with no PMI), you're going to have to get that from a subprime lender, but the rates are basically determined by your credit.

sleepyjoeyt

07-27-2005, 05:01 PM

1. Once the sale price is established and you have a mortgage broker / bank picked out, ask them about financing the closing costs. Generally the closing costs could run anywhere from 3K - 10K, depending if you are paying points, etc. The banks will NOT finance closing costs. However, if you make an agreement with the Seller to increase the sale price by X, then he agrees to give you a Closing Cost Credit for that same amount, you can essentially finance your closing costs. This will save you from having to pay that money at the closing.

2. Be prepared for unexpected costs that come up at the closing. For instance, in MA, any taxes due within 60 days of the closing date have to be paid at the closing. Depending on how frequently taxes are paid in the town where you are buying, this could be a good chunk of change. For instance, if your town only collects taxes twice a year, you may have to come up with 6 months worth of taxes at the closing, which could be a grand or two.

3. MANY mortgage brokers think it is okay to add [censored] at the last minute, knowing that once you are this far into this lengthy ordeal you are unlikely to back out. Make it clear to them from the beginning that you have to see the whole picture NOW and that you will not tolerate any last minute additions, etc.

These are the ones that quickly come to mind.

I'm an attorney in MA and 95% of what I do is real estate. Feel free to PM me with any questions.

Good luck.

Lottery Larry

07-27-2005, 05:11 PM

" However, if you make an agreement with the Seller to increase the sale price by X, then he agrees to give you a Closing Cost Credit for that same amount,"

How does this affect the commissions fees and the taxes?

Bulldog

07-27-2005, 06:04 PM

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Have you already done things such as:

Close out old credit cards and reduce the number of active ones you have accounts with?

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No CC debt and no open accounts.

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Gotten credit history checks yourself from 2-3 of the companies, to make sure there are no surprises you need to fix first?

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I'm pretty sure I'm good here. Also, I learned that checking your credit actually lowers your credit score!

[ QUOTE ]
Gotten some information on housing resell values, both for the builder and the area that you're in?

Gotten a ranking and history of the school district you're in, which could affect your resell ability?

Gotten an estimate on taxes for the residence and compared them to neighboring areas?

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I'll look into all of these.

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I hope this place is going to be bigger than your current place? Will the builder have any problems configuring the gaming room?

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DPC West. Well, not five tables, but maybe three.

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Think very hard about the loan you'll get. I don't see interest rates dropping in the next few years, but how high they go, and how long you estimate you'll be there, is a key factor in your loan type.

We went from an apartment, to a twin (because of A-man) to an apartment, to the current location (because of Z-man)
We sold the twin for what we paid for it, and felt lucky to do so given the area/school district, so we lost money on that.

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So I'm learning, about the resale and the points.

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BTW- are you *ahem* buying this with anyone?

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Nope. I might pick up a roommate (probably get a three-bedroom duplex), but I'm working out a budget to cover things without one.

Cased Heel

07-27-2005, 06:31 PM

Yeah, don't you just love bankers?

Go rent "Nothing But Trouble" Now that's a guy who hates bankers!

Cased Heel

07-27-2005, 06:38 PM

We will save more than 13K in 5 years. You are just including the saving from renting and not buying now.

However, in addition to thosse savings, her and I can put away 2K/month right now (finally, after paying of thousands in credit debt, thank god). So in 5 years, we'll have a lot more than 13K. (knock on wood). Plus, I will be able to put some poker earnings towards that as well. Although I cannot successfully predict or forecast how much my bankroll will be in 5 years.

Right now I just got out of "serious" debt (still have student loans, but at low interest rates so I'm not "bogged down" like the 24% cash-advance credit card interest I was paying (Holy S.hit).) So since i just got out of debt, I have no capital, which means its not a good time to buy. If I wait 5 years, I'll have plenty of capital to put down, and a newer house.

Plus, I'm an architect, and I may want do design/build my first home. Another reason for waiting/saving.

Renting isn't horrible IF you have a "plan". Which I do.

And yes, she could dump me any day. haha.

Cased Heel

07-27-2005, 06:39 PM

At this point in my life I'm not "investing" in homes. I'm not looking to "turn a profit".

I do know people who buy run-down homes in high land-value areas and fix them up and re-sell them for a nice profit, but I'm years away from ventures like that.

EDIT: What numbers are fuzzy? I refute your claim.

sleepyjoeyt

07-27-2005, 06:40 PM

Commissions - usually does not affect the commission (most realtors will agree that the commission is based on the original sales price)

taxes (I assume you mean the transfer tax that is paid in most if not all states) - you must pay the transfer tax based on the increased price. In MA the seller pays $4.56 per thousand of the sale price, so if you increased the sale price by $5K, then the transfer tax would be increased by $22.80. The amount of the transfer tax varies state to state (as does who pays it) but the tax amount will have to be paid based on the new sale price (as that is the amount that will be on the deed, which is what controls the tax). In some states, like NH, the tax is $15.00 per thousand of the sale price, so a 5K increase in sale price would mean $75 increase in the transfer tax.

If the seller complained about the increased cost the buyer could always agree to cover the increased cost OUTSIDE of the closing (by handing a check for $25 or whatever) but this "increased sale price" CANNOT be revealed to the bank. It happens all the time but the bank can't be informed that this was done.

One other thing: understand that the bank will only allow the credit going from the Seller to the Buyer to be as much as the ACTUAL closing costs. So it is important to have a pretty good idea of what the closing costs will be and to make sure that the closing cost credit is equal to or less than that amount.

If you guess $5K and there are only 4K in closing costs then the bank will only allow the 4K in a credit from seller to buyer. The other $1K will have to be given from the Seller to the Buyer after the closing, and the Seller is under no obligation to follow thru and give back the money (although it is clearly the decent thing to do, as the sales price was increased by 5K and they only gave a 4K credit at the closing).

The attorney that does the closing will know this is going on but is not supposed to have any actual knowledge that this is happening, so avoid having any discussion about this infront of him.

Cased Heel

07-27-2005, 06:46 PM

Exactly. I'd have to buy a lawnmower, pay taxes, get insurance, pay for every repair in the home.. all that nonsense.

At an apartment your washer/dryer breaks...get maintenance to fix it. They cut your grass, they fix everything. It's their property. No worries.

He cited an article in the local paper that said young 20-somethings were buying homes. Yeah.. kids whom are either really rich, or really dumb, or pro baseball players.

I figure you could easily live in an apartment until your first kid is 5 years old (at which point it would be nice to live in a neighborhood).

I've got a friend who rents right now, is 27 years old, and claims that by age 35 he will own a home. I believe him too. He listens to Dave Ramsey everyday at work. haha.
How many people who buy at 25, own at 35? Probably less than 1%. He can rent all these years, and own by age 35.