OK, found a house -- Need advice on loan

[Megamorph]

OK, guys, as some of you may remember, I've been shopping for a home and it looks like I've found what I want. Now I need some input on the loan. Here's the situation:

The home I want is $260,000. Should I put 5% down and drain my savings (I'll need about $21K to close) OR should I do an 80/20 loan and finance the entire amount? I have enough cash to perform without 100% financing; however, I would feel better about keeping the cash in the bank for a few months and then putting the money into the house (i.e. upgrades). If I do not put a down payment on the home, I will NOT use the cash for something else...it will go back into the house at some point. I just hate to jump into a new mortgage with my cash savings depleted.

On the 80/20 loan, I am able to get 5.5% on the 80 and 7.5% on the 20. Does this sound like a good rate?

On a traditional loan with 5% down, I am able to get 5.875% (30yr fixed).

Now, I think it is highly unlikely that I'll be in the home for more than 7 years. Should I do a 7/1 ARM? Would this be a better option than any other?

 

[wyvrn]

The 7/1 arm is a great solution if you know you will be moving before then, you get the benefit of a lower rate and the new buyer gets to chose his/her own financing. Win/win. I would suggest make sure you know that you will be leaving, because interest rates are going up and you aren't going to want to finance in 7 years at a higher rate.

As far as down payment, you have to look at both sides. The less you put down, the higher your monthly payment. So, is the reduction in your monthly payment MORE or LESS than the 5% in savings? From a pure financial standpoing, a dollar today is worth more than a dollar tomorrow, so I would lean toward keeping the cash. But, you will pay more in interest expense up front and will have less equity as a result of financing the whole enchilada. It's a really complicated assessment.

Other considerations are the stability of your income and your needs. I feel my family's income is relatively stable, so I feel like we can afford a $260k house. Plus we have a growing family and this is not our first home. In your case, do you feel like you need the room and is this a reasonable size house for your first purchase (is this even your first home?)?

Responses in my thread might also help you.

 

[Megamorph]

wyvrn, that's a nice home that you're looking at. Good luck.

 

[Torghn]

5.875% seems a little high on a 30y fixed. Off of todays rates you should be 5.375-5.5%


<-Former mortage broker that still has access to wholesale price sheets.

 

[Vic]

Putting 5% down and draining your savings is pointless. It will cost you a minimum of 6% to get out of the house anyway.
Plus, that 95% loan at 5.875% probably comes with some hefty PMI, which is not tax-deductible.
The 80/20 is the better deal. It requires no down payment (although do be prepared for some standard closing costs), all of the interest is tax-deductible, and I bet the combined payment is very similar to the 95% payment after you adjust for the PMI.
And yes, 5.5% and 7.5% are good rates for that program.

 

[Megamorph]

Originally posted by: Vic
Putting 5% down and draining your savings is pointless. It will cost you a minimum of 6% to get out of the house anyway.
Plus, that 95% loan at 5.875% probably comes with some hefty PMI, which is not tax-deductible.
The 80/20 is the better deal. It requires no down payment (although do be prepared for some standard closing costs), all of the interest is tax-deductible, and I bet the combined payment is very similar to the 95% payment after you adjust for the PMI.
And yes, 5.5% and 7.5% are good rates for that program.

Thanks...that is great info. What are your feelings on a 7/1 ARM?

 

[Vic]

7/1 ARMs are very good loans. Most people don't keep their mortgages for 7 years anyway. Just be aware that interest rates are currently still near historical lows, so it is likely that rates will be higher 7 years from now than they are now.

 

[Megamorph]

Does anyone know anything about PLO or LPMI? One lender is trying to convince me that this is the way to go, but I'm not sure that I quite understand it.

 

[Megamorph]

Originally posted by: Megamorph
Does anyone know anything about PLO or LPMI? One lender is trying to convince me that this is the way to go, but I'm not sure that I quite understand it.