Mortgage Help

[spiderman]

Question about a home purchase.

 

I am considering a few different townhomes currently, and am looking at one that is priced as follows:

Town Home Price: $209,000

Taxes (Yearly): $3,564.00

Assessment: $120.00

 

Here is my situation - I would like to obviously keep my total mortgage payment as low as possible, and understand there is some risk with interest only loans. I don't want to take on some much risk that it blows up in my face, but is there anything you could suggest that could help me.

 

My goal would be to have a mortage payment in the $1500-1600 range, if at all possible.

 

For this place, I would be putting 5% down ($10,495), and, as of now, would be doing the 80-15-5, where 80% goes to a 10 year interest only loan at a rate of 6.625% (I've been told that this rate should be about right), and the 15% goes to a fixed loan for 15 years at about 8.325%.

 

I have figured that this would cost me $1,723.57...$944.55 for the 80% loan, $306 for the 15% loan, and then $297 monthly for taxes, along with $120.00 monthly for assessments.

 

Any ideas on how to make this more affordable without taking on a ridiculous amount of risk.

If so, can you please offer up suggestions - I am learning my financial options, but, am hardly an expert in this.

 

Thanks in advance!

[kapkomet]

You'll get better responses from others, but one thing I can say is if it's not fixed right now, there's going to be a LOT of volitility in the markets over the next 3-5 years as the mortgage adjusts. If you don't lock in, good luck - a short term vs. long term issue - just be very careful to not be too shortsighted.

 

If you can't pay for it now, there's probably a reason.

[AbeFroman]

Spiderman, if you evaluate this from a broader perspective, you actually could be very lucky. I'm an attorney and part-time economist... My most successful clients follow a formula for buying that is roughly what I will write below.

 

*** Note beforehand***The next Fed meeting (called the FOMC) is on September 20th. At that time, its possible that Bernanke will raise interest rates. ***

 

You're lucky... in the real estate cycle, September tends to start the largest downturn in housing demand. July and August tend to be the heaviest month for buyers. The present real estate market already favors buyers... it HEAVILY favors buyer who have no home of their own to sell before closing (called a home-sale contingency).

 

I presume since you're buying a townhome with relatively low capital, this is your first home. If you can time this correctly, you can take advantage of a favorable market. Generally towards the beginning of September, sellers are more starting to get nervous. Summer has passed, School has started, and buyers have typically found something to hold on to or taken themselves out of the market until next year. This effect will probably be exagerated this year because of rising interest rates and lower demand for housing.

 

Given all these factors, I would take the following course of action:

1) Evaluate your real estate market. Begin prioritizing which townhomes you prefer. Know beforehand what you want your mortgage payment to be... you'll want to be certain that you can act fast with confidence.

2) Towards the beginning of September, begin to bid aggressively. Start with your first choice and take at least 10-15% of the asking price. If they want 220,000, start in the 190s's.... or even 180's. Remember that realtors are chatty... make sure you convince your guy that you know its a buyers market and are not afraid to move on to other homes. He will convey that to the seller... and that rhetoric helps you.

3) If you can't get the first choice below 202,000 (or something even lower), move on to the next house. Remember that you CAN make your offers contingent on reaching an agreement within 24 or 48 hours... this puts more pressure on the otherside to wheel and deal. They will panic, and will want to keep you happy to get the thing closed.

4) Try to have a deal in place by September 10-13th. The Fed will meet on the 20th. These means he could (and very well may) raise interest rates further. MAKE SURE YOU GET YOUR MORTGAGE LOCK BEFORE SEPT. 20TH!!!

 

In a market like this, timing can be everything! If you don't presently own, the sellers are going to much prefer to sell to you... since there's no contingency, you can use time and market conditions to leverage a good deal. You'll find that the best way to lower your mortgage payment is to lower the price... and you're lucky enough to be one of the few buyers in the last ten years who will actually hold the cards in the deal.

 

 

*** Edit***

One last thing in case you already have a contract....

 

Those mortgage rates seem a tad high to me. One great little trick is to get three or four mortgage brokers working for you. Let them know that they are competing. When the compete, they will often offer lower closing costs and even lower rates... particularly on that 15 year fixed 15% loan.

 

I'd even go so far as to tell them "hey, countrywide can do this for 6.625, can you go lower?" or "Wells Fargo will go at 6.5 also... can you cut your closing costs?

 

This industry is disgustingly lucrative... They want your mortgage... and the brokers make a pretty good commission... They will knock off real dollars to make a deal happen.

 

You'll get better responses from others, but one thing I can say is if it's not fixed right now, there's going to be a LOT of volitility in the markets over the next 3-5 years as the mortgage adjusts. If you don't lock in, good luck - a short term vs. long term issue - just be very careful to not be too shortsighted.

 

If you can't pay for it now, there's probably a reason.

 

This is a fair point. Personally, I'm not crazy about ARM's... and even less so about no-interest mortgagess. However, I'm becoming a minority on this issue... Even Greenspan, in his closing statements as Fed chair, stated that the premium on a 30 fixed rate is too high. Essentially he endorsed ARM's as a more cost-effective means of home financing for the macroeconomic America. And ARM's and No-interest mortgages have been used in England for almost a century... and thats certainly a sophisticated real estate market... even more than here in Chicago.

 

A ten year product is probably fairly safe. I agree with Kapkomet that 3-5 looks uncertain. With a 10 year mortgage, you give yourself the chance to refinance if interest rates appear headed for 12%... or even sell before the rate resets. So the risk is really your choice.

 

Also... remember, if there actually is a real estate bubble, that no-interest loan could bite you in the ass. If housing values plummet, and you sell your townhouse, you could actually wind up oweing more than the value of the house. You will have built very little equity, and you may be susceptible to a loss if there ever is a devasting market bubble.

 

But again, risk is a question of personal preference. Its all your decision.

Edited August 15, 2006 by AbeFroman

[mmmmmbeeer]

Those mortgage rates seem a tad high to me. One great little trick is to get three or four mortgage brokers working for you. Let them know that they are competing. When the compete, they will often offer lower closing costs and even lower rates... particularly on that 15 year fixed 15% loan.

 

We just went through this with a couple of lenders. We ended up knocking off 5/8pts off of our 30 year fixed with no down payment, no origination fees, and miniscule costs. My wife had the pleasure of bargaining with these two, had one on each line and kept clicking back and forth until she got an offer the other couldn't beat.

 

I agree, those interest rates seem really high, especially on the 15 year fixed.

[Queen Prawn]

You'll get better responses from others, but one thing I can say is if it's not fixed right now, there's going to be a LOT of volitility in the markets over the next 3-5 years as the mortgage adjusts. If you don't lock in, good luck - a short term vs. long term issue - just be very careful to not be too shortsighted.

 

If you can't pay for it now, there's probably a reason.

 

I agree with Kap. Our mortgage was for about $192000 and taxes are about $2K (and going up) each year. We have a fixed mortgage, but we have a great rate about 5.6% (lucked out when combining our pre-existing mortgage and construction loan). Our monthly payment is about $1250. We pay our home insurance separately.

 

My cousin was our loan guy and he warned us against the adjustable as it could sky rocket and there isn't much you can do other than wait for it to come back down a little and then re-finance to a fixed. He said adjustables are ok/something to consider if you do not plan to be in your home for more than a few years (and a couple other reasons that I cannot remember).

 

Just from a personal point of view, I would stay far away from the interest only loans, unless again, you plan on being gone soon from the house you are mortgaging.

[southsider2k5]

Get a fixed rate. From a historical perspective it is insane that the shortterm rates and the longterm rates are as close to each other as they are right now. I don't know why there is no incentive for long term lending, but it isn't going to stay like that forever. If you get an ARM or interest only loan, 3-5 years from now you will regret it, unless something awful happens and the fed has to aggressively cut interest rates quickly ala 2001-2. Get your basic 30 year fixed rate mortgage, if you plan on being there for any amount of time at all.

[NorthSideSox72]

Go fixed. Go fixed. Go fixed.

 

And 8.325% does seem pretty high, even for that home equity/2nd. I just happen to be looking at some things right now too, and I saw a number of rates much lower than that.

 

One thing that might be causing you that rate is that you are going 95% debt. Try to get below 95% if you can, or even better, below 90%. Rates will be better below each of those thresholds.

[Finkelstein]

You may be interested in a 40 year fixed. This is now offered through most lenders. These types of programs are good for people in your situation. They keep the payments down while keeping a fixed rate. The only down side to this type of loan is that it amortizes over 30 years, so if you plan on staying in this townhome for that long you will have a balloon payment at the end. Most likely this is just a starter home for you and you won't have to worry about the balloon.

[RockRaines]

Stay away from interest only loans.

[spiderman]

You'll get better responses from others, but one thing I can say is if it's not fixed right now, there's going to be a LOT of volitility in the markets over the next 3-5 years as the mortgage adjusts. If you don't lock in, good luck - a short term vs. long term issue - just be very careful to not be too shortsighted.

 

If you can't pay for it now, there's probably a reason.

 

What kind of interest rate would I receive for a 80-15-5, where the 80% is fixed on a 30 year ?

 

 

2) Towards the beginning of September, begin to bid aggressively. Start with your first choice and take at least 10-15% of the asking price. If they want 220,000, start in the 190s's.... or even 180's. Remember that realtors are chatty... make sure you convince your guy that you know its a buyers market and are not afraid to move on to other homes. He will convey that to the seller... and that rhetoric helps you.

 

The townhome that I am considering costs $209,000, and, some similar ones are going for about $214,000 or so....Do you still suggest an offer below $200,000 ?

 

Those mortgage rates seem a tad high to me.

 

If I were to do an interest only 10 year, and a fixed mortgage on the smaller loan for 15 years, what interest rates do you think I could get for those ?

 

A friend of mine with great credit, recently bought a home in Mt. Greenwood for 260,000, and had a 6.75% interest rate on his 10 year interest only loan, and 8.325% on his 15 year fixed rate...

 

A ten year product is probably fairly safe. I agree with Kapkomet that 3-5 looks uncertain. With a 10 year mortgage, you give yourself the chance to refinance if interest rates appear headed for 12%... or even sell before the rate resets. So the risk is really your choice.

 

This was my thought process in thinking about going with the interest only loan. If the rates start to rise, I could always get it fixed, and, at the same time, I can pay off the more than the amount due on the fixed 15 year deal because the amount will be low each month.

[Steff]

The townhome that I am considering costs $209,000, and, some similar ones are going for about $214,000 or so....Do you still suggest an offer below $200,000 ?

 

 

 

Only if you don't really want it.

 

And I would look at the interest only loans a bit more before you decide against them. If this is a starter house (

[LosMediasBlancas]

Only if you don't really want it.

 

And I would look at the interest only loans a bit more before you decide against them. If this is a starter house (

 

 

totally agree, the payment will be lowest that way and who cares about 25-30 years down the road, you'll be long gone by then.

[AbeFroman]

I would say that most people expect that a house will sell between 5 and 10% less than the asking price. If they are asking 209, I see no harm in an offer that is in the 190's. In fact, if they are asking for 209, it means they probably really want about 200.

 

I would not exactly say that 6.75% is a great rate on a 10 year interest only. I would think that lower rates are out there.

 

Obviously, fixed is safer... I won't criticize you for taking an interest only... its simply a question of how risk averse you are. It is a more risky loan.

 

Also, don't forget that your interest on your home is tax deductible. If you are a single taxpayer, the government will return a percentage of your interest on your tax return. So if you make > 29,000 annually, you'll get 15% of your interest back... 25% if you make 29,k - 70k, 28% for 70k to 146k and so on. If you are married, simply use the married tax brackets.

Edited August 15, 2006 by AbeFroman

[spiderman]

I would say that most people expect that a house will sell between 5 and 10% less than the asking price. If they are asking 209, I see no harm in an offer that is in the 190's. In fact, if they are asking for 209, it means they probably really want about 200.

 

I would not exactly say that 6.75% is a great rate on a 10 year interest only. I would think that lower rates are out there.

 

Obviously, fixed is safer... I won't criticize you for taking an interest only... its simply a question of how risk averse you are. It is a more risky loan.

 

Also, don't forget that your interest on your home is tax deductible. If you are a single taxpayer, the government will return a percentage of your interest on your tax return. So if you make > 29,000 annually, you'll get 15% of your interest back... 25% if you make 29,k - 70k, 28% for 70k to 146k and so on. If you are married, simply use the married tax brackets.

 

If I make about $60,000 a year....how much would I expect back ?

 

I think there may be a 6.625% out there right now for the 10 year...Does that sound more in line ?

[Chisoxfn]

Only if you don't really want it.

 

And I would look at the interest only loans a bit more before you decide against them. If this is a starter house (

I concur

[kapkomet]

True, if FOR SURE you're only going to be there for a very short period of time.

[Chisoxfn]

True, if FOR SURE you're only going to be there for a very short period of time.

Also, I don't know your age, but I assume your younger. If you expect to be making more money over time (and relatively confident in that) this is another good option since a few years from now you'll have more money and may be interested in selling or could always afford to refi and than start putting in some principal.

 

In general I think people get caught up because I still say ARM's >>>> Fixed because if you get a good ARM you'll be a nice amount lower than the Fixed Year rate and assuming you aren't planning on staying for 15-20 years, even if rates go up a bit you'll still be in very good shape because you aren't quite down as much from the start.

 

Of course if your planning on staying 15-30 years than I am a fan of going the fixed route. I can't possibly help you on the negotiation though because every market is different. I know that if the market is hot in Cali you will never get a house if your offering under market price, but once the market slows down (and in a more typical market) people usually don't get full price offers and if they get even more than that it typically means the agent screwed up and underpriced your house.

[AbeFroman]

If I make about $60,000 a year....how much would I expect back ?

[/quote

 

Let me preface this by saying that I am NOT an accountant or tax attorney. Any guess I would give you is just that... a guess.

 

Assuming you pay 1200 a month * 12 months = 14400 in interest annually.

 

you're in the 25% tax bracket (if you are single)... .25 * 14400 = $3600 in tax returned to you. Essentially, the government would be paying $3600 of your mortgage in a lump sum check to you after you prepare and file your tax return.

 

Remember that tax deductions reduce the amount of taxable income. So instead of being taxed at 60k, you'll be taxed on about 45-46k.

 

I think there may be a 6.625% out there right now for the 10 year...Does that sound more in line ?

 

I'm not going to spend a lot of time researching a loan for you. But I did just go to Wells Fargo online. Their interest rates are generally higher than most because they are one of the safest and most financially secure banks in the world... They are probably the gold standard in banking worldwide. Presently the Wells Fargo 30 year fixed rate is 6.375.

 

That a lot lower and less risky than an interest only. Search around. It wouldn't shock me to find interest only loans in the 5% range actually.

 

At this point, if you are working with a mortgage company and they are telling you that 6.625 interest only and 8.275 is the best you can do, they are lying. Start researching more.... I would not agree to those terms unless I had investigated 10 different brokers and they all told me the same thing.

[Chisoxfn]

I'm not going to spend a lot of time researching a loan for you. But I did just go to Wells Fargo online. Their interest rates are generally higher than most because they are one of the safest and most financially secure banks in the world... They are probably the gold standard in banking worldwide. Presently the Wells Fargo 30 year fixed rate is 6.375.

 

That a lot lower and less risky than an interest only. Search around. It wouldn't shock me to find interest only loans in the 5% range actually.

 

At this point, if you are working with a mortgage company and they are telling you that 6.625 interest only and 8.275 is the best you can do, they are lying. Start researching more.... I would not agree to those terms unless I had investigated 10 different brokers and they all told me the same thing.

Its hard to say though, but they may be getting a fatty rebate somewhere in there and thats why "YOU" are paying a higher rate. Make sure you trust your mortgage broker. That or there could be an issue somewhere with the credit or something like that, which means your forced to pay a higher rate.

 

Without looking at the package I couldn't really say for sure, but its likely one of those two.

[Steff]

True, if FOR SURE you're only going to be there for a very short period of time.

 

 

 

Short period could be from a year to 5. The pros and cons depend on his financial situation. I don't understand why you guys are trying to scare him from an interest only loan

 

Spider, sit down with your potential lender and go over all the options. IOL's are not as bad as they are being made out to be here.

 

 

Also, WF for a repeat customer is in the low 5% range right now - being a repeat get's you somewhere between .5 to .8 of a point off prime so the rates you quoted do seem a bit high - though I am basing it someone with a high 700 credit score.

[Balta1701]

Short period could be from a year to 5. The pros and cons depend on his financial situation. I don't understand why you guys are trying to scare him from an interest only loan

 

Spider, sit down with your potential lender and go over all the options. IOL's are not as bad as they are being made out to be here.

Also, WF for a repeat customer is in the low 5% range right now - being a repeat get's you somewhere between .5 to .8 of a point off prime so the rates you quoted do seem a bit high - though I am basing it someone with a high 700 credit score.

An interest-only loan makes sense, IMO, if you can expect one of 2 conditions to be prevalent over the term of the loan. 1. Housing prices will increase. If this happens while you're holding the loan, you pay a limited amount in interest, but you sell the house for more than you paid for it after a few years, and thus you pocket the difference between what you paid in interest and the price of the house. And 2. interest rates must stay relatively low, as increasing interest rates would increase the amount of interest you'd pay overall.

 

If you took out an interest only loan in about the year 2000-2001, you'd be in excellent shape right now, as the interest rates at the time were going down rapidly, and housing prices were going through the roof accordingly. However, right now, at least to my eyes, both of those situation are reversing. Right now there is a glut of housing on the market, and that glut may in fact get worse as people who purchased real estate for speculation in the last few years get nervous. Likewise, interest rates are on their way up to counteract inflation.

 

If the price of the town house were to decline, and you were only on an interest-only loan, if you went to sell the house in a few years, you wouldn't have any equity at all built up in order to cover the decrease in price. So if you didn't have extra cash around, you'd be in pretty bad shape, and you'd be out all of the money you spent in interest.

 

An interest only loan is a gamble. In the right circumstances it can be a profitable one. But I think the others who have said that a fixed-rate right now is a good idea are completely correct...build up some equity, lock in rates while they're still relatively low, and if a storm does come in the next few years in the housing market, you'll be in a much better position to weather it.

[kapkomet]

Short period could be from a year to 5. The pros and cons depend on his financial situation. I don't understand why you guys are trying to scare him from an interest only loan

 

Spider, sit down with your potential lender and go over all the options. IOL's are not as bad as they are being made out to be here.

Also, WF for a repeat customer is in the low 5% range right now - being a repeat get's you somewhere between .5 to .8 of a point off prime so the rates you quoted do seem a bit high - though I am basing it someone with a high 700 credit score.

I'll tell you why, because in this environment, it can eat your lunch if you can't come up with the money should interest rates go much higher then they are right now. Inflation. It's a baaaaaaaaad word right now, and it could really devastate a person trying to come up with 25%-50% more of a payment in three years after the IOL's adjust. From a very short-term perspective, it doesn't matter. The longer you go out, the more it does matter. We're at historical lows right now, still, and it might not get much better.

[southsider2k5]

Short period could be from a year to 5. The pros and cons depend on his financial situation. I don't understand why you guys are trying to scare him from an interest only loan

 

Spider, sit down with your potential lender and go over all the options. IOL's are not as bad as they are being made out to be here.

Also, WF for a repeat customer is in the low 5% range right now - being a repeat get's you somewhere between .5 to .8 of a point off prime so the rates you quoted do seem a bit high - though I am basing it someone with a high 700 credit score.

 

One very big reason is that we could be looking at a period of flat to declining house prices, especially in areas where there was a very large run up in prices, simply because of the 17 straight raises in interest rates. If you get locked into a loan like that, you could end up losing money on your house because you never paid a dime in principle meanwhile your asset is worth less than you what you owe. IOL's were safer when you had a pretty safe ROR annually on your place. Now with rates rising quickly, and historical prospects being that the gap between short term and long term rates will return probably meaning even higher rates, those gains aren't as guarenteed. Higher rates mean a slower housing market, which could mean a period of flat to declining prices.

 

That's my problem with no interest loans right now.

[Steff]

I'll tell you why, because in this environment, it can eat your lunch if you can't come up with the money should interest rates go much higher then they are right now. Inflation. It's a baaaaaaaaad word right now, and it could really devastate a person trying to come up with 25%-50% more of a payment in three years after the IOL's adjust. From a very short-term perspective, it doesn't matter. The longer you go out, the more it does matter. We're at historical lows right now, still, and it might not get much better.

 

 

 

You're giving advice with a very broad brush stroke.

[NorthSideSox72]

There seems to be some confusion here between two independent concepts - interest only loans (versus traditional prin+int), and variable (versus fixed) interest rates.

 

An interest only loan is NOT NECESSARILY a variable rate loan (though often they are). For example... your 80% #1 mortgage could be interest only AND be at a FIXED RATE. That is possible. The point is... consider those dynamics distinctly, not as one combined thing.

 

Let's put that in connection with the two main fears brought up here: declining home prices, and rising interest rates. Interest only loans DO put you at risk if home prices decline - regardless of whether or not they have a fixed interest rate. That is because you could quickly end up upside-down in the mortgage (more debt than value - which is bad). On the other hand, interest only loans are not effected by interest rate fluctuations whatsoever, IF they are fixed.

 

Now, the other equation (fixed versus variable) is where the inflation and interest rate risk comes into play. if rates go up, and you have a variable rate loan (with some fixed period at first, usually), then when the rates update, you could suddenly have larger bills. And they could keep growing. On the other hand, variable rate loans are often lower to start (since you take on the risk), and if rates go down (unlikely anytime soon), you could make out nicely.

 

So, be clear here - these are two seperate concepts, not one.