Buying 1st House.. need help

[aekdbbop]

Well, the wife and I are going to be buying our first house this year, which is exciting,...

but also scary.

Anyone ever heard of taking out 2 mortgages (80%/20%) in order to avoid paying PMI?

Any other things you much wiser fellows out there have learned over the year would be great also..

We are looking at 175,000ish with 5% down, and a 30y fixed rate mortgage..

thanks!

 

[amishland]

i did a 80/20 with zero down last summer on my house, fixed rate 30 year mortgage.

I am happy with how it turned out, although I need to start thinking about refinancing with the rate drops.

 

[the_bird]

I know it's a LOT harder to get banks to do that these days. It used to be pretty common to get both loans from the same bank, but lending standards have tightened up a lot. Some banks do offer first-time homebuyer "specials," we got into one from one of the local credit unions that offered 100% financing without PMI and paying us up to $2,000 towards closing fees. So, we borrowed the entire amount (we actually walked out of the closing with a check in OUR hand), but we also bought a place at a 20% discount to its appraised value.

The risk of not having a ton of equity in the place, I believe, is mostly related to if you need to sell the place fairly soon (moving across country, etc). Otherwise, mortgage debt is not "bad debt" in the sense that CC debt is. Being able to deduct the mortgage interest is REAL nice, your effective interest rate's a lot lower than the nominal rate. The people who are boned today are the people who can't sell because they're underwater - but if it's a given that you'll be there for ten years anyway, I wouldn't stress about 5% down versus 15% down except for the issue of PMI.

 

[DUCCCC]

That's not an uncommon scenario. Fortunately I get the VA guarantee on my home loan, so I didn't have to do that, but it was mentioned by more than one lender who didn't want to do VA loans.

 

[EdWort]

I did an 80/10/10 (10% down) and both are fixed. I'm a happy camper with it.

No PMI and the sum payment is cheaper, plus you get the interest deduction (you can't deduct PMI fees).

 

[aekdbbop]

glad to hear so many of you have done the split and are happy with it. I was first told about it a few weeks ago, and was kinda sceptical about it. But it makes sense.

I was told that most banks wont offer both loans though, so you do have to get it from 2 different sources.

Were all your lower loans fixed?

 

[c.n.budz]

You can avoid PMI by doing an 80/20 but the rate on the 20% portion is typically alot higher than the 80% portion so you should make sure that doesn't add up to more than what you would pay on one loan w/ PMI.

Also, you should check into First Time Buyer programs through Fannie Mae and FHA programs. You may qualify for an FHA loan which will have PMI but will also have low rate and no pre-payment penalty. The FHA programs go up to 97% of the purchase price and allows for seller concessions to help you pay closing costs leaving you with only a 3% down payment to come up with.

If you are able to make a larger down payment, do it, you get better rates.

 

[BierMuncher]

...Anyone ever heard of taking out 2 mortgages (80%/20%) in order to avoid paying PMI?

That's called a "combo" or piggy back loan.

Definitely has it's advantages. Many banks are backing off of those now since there is much less equity in the housing market. (And equity is required for that 20% portion).

 

[Soulive]

My mortgage is 30yr Fixed not ARM. We put 10% down IIRC. My interest rate was amazing (and not adjustable) so it'll offset the PMI. Two things, try to enjoy the process and see the big picture AND make sure you get a very good real estate lawyer. You want them watching your back...

 

[the_bird]

What the hell's a "Fixed ARM"?

BTW - congrats! It's a LOT easier to write a check to the bank than to the landlord!

 

[Soulive]

What the hell's a "Fixed ARM"?

BTW - congrats! It's a LOT easier to write a check to the bank than to the landlord!

Thanks, I fixed it. Stupid end of the day crashing. Onto my next cup of joe!

 

[c.n.budz]

...AND make sure you get a very good real estate lawyer. You want them watching your back...

I couldn't agree more. Don't use the family lawyer that does general practice law, use someone that specializes in real estate.

 

[Soulive]

I don't know if it'll apply to your situation - but one other thing I plan on doing next time is buying something I can add onto. Buying something that needs fixing-up is automatic for me, but I also want to buy smaller and add on. Congrats too, building equity is much better than throwing your money into someone else's bank account...

 

[the_bird]

Not all ARMs are made the same. The program I'm in was a 3/3 ARM, meaning that my rate was locked in for three years, adjusts every three years subsequently, but has a 2.0% periodic cap. So, I started out at 3.875%, and I'm now at 5.875%, and in another two years could theoretically be at 7.875% (if short-term rates rise significantly between now and then). Even what I'm paying now, after one rate bump, is lower than what I would have been able to lock in at for a 30-year fixed, and I plan to be out of the house in two or three years. My average interest rate over what I expect to be the seven years I live there will be only ~5.3%, worst-case. I'll have to be in the house for a decade - with interest rates shooting through the roof - before having taken the ARM loan ends up costing me money, based on where rates were when we bought the house.

So, don't immediately dismiss ARMs just because they get a lot of bad press - you've got to understand the details (and the worst-case scenario for you).

 

[aekdbbop]

BTW - congrats! It's a LOT easier to write a check to the bank than to the landlord!

Yeah, right now I am paying 950 a month in rent. Kinda feel like we are throwing away money, and plus we have the wolf dog that needs a back yard.

 

[drunkatuw]

I wouldn't worry about getting an 80/20 loan. Just get one loan because PMI has been tax deductable since 2006! (if you make under $100,000)

http://www.choicefinance.net/blog/tag/pmi-tax-write-off/

This way you have one loan with a low interest rate instead of two loans and one being quite a bit higher.

 

[c.n.budz]

So, don't immediately dismiss ARMs just because they get a lot of bad press - you've got to understand the details (and the worst-case scenario for you).

Also a very good point. ARMs are meant to be short term loans that you need to follow a plan with. If your rate is fixed for 3 years, make sure you maintain good credit for those three years so you can refinance out of the loan before it adjusts. I'm not certain of the regulations in Tenn. are but in CT ARMs can go up a total of 6% over the originally note rate and they can only increase a certain amount at a time. Unfortunately the first adjustment is 3%, and that caused problems for many people.

Many of the people in trouble with ARMs right now overextended themselves and didn't take into account what the adjusted payments would be

 

[the_bird]

They actually mis-wrote my contract - it was supposed to be a 3% periodic, 6% lifetime cap - but they wrote it instead as 2%/6%. Oops!

 

[The Pol]

My wife and I put exactly 20% down on our home to get out of the PMI... our financial advisor, based on our ability and history of saving and investing, recommended an interest only loan so that we could invest the extra money in the market. (homes are not a good place to have money tied up considering thier poor appreciation rate) 100% of our payment now is deductible as mortgage interest, we will have the home paid off in 10 years (when the interest only term ends) and a good portion of that payoff money will have been earned in the market. Not for everyone, I agree, and alot of people disagree (though most financial advisors sing the praises of this sort of leveraging of funds) but it worked for us.
Buying a home is a big deal, and how you finance it is just as big a deal. If you had $500,000 to pay off a home, would you pay it off or invest that money and mortgage the home at a much lower rate to leverage your funds? It is basically taking out a $500,000 loan at 5.5% SIMPLE interest and INVESTING it at 8-9% COMPOUND interest. Plus if you pay off a home, you no longer get the tax benefits... a mortgage can actually be a beneficial tool in BUILDING wealth instead of draining it. Just make sure you dont get into more house than what you should. It is always best to CHOOSE not to put much money down than to be in a situation where you CANNOT put money down. If you cannot save for a home, how will you ever afford one after you finance 100% of it? Thus the mortgage crisis...

I do have to thank the persons who are defaulting on thier mortgages, driving the economy into the pooper though. My wife and I are about to invest the money from our old home sale into the market, and even some of the best funds are at thier 52 week lows... good time to buy!

 

[c.n.budz]

Those interest only loans take a lot of discipline. If you aren't making extra payments to knock down the principle, you're basically renting from the bank. The Pol, you seem to have a good plan, just pray the stock market doesn't totally tank.

 

[Soulive]

Those interest only loans take a lot of discipline.

Yeah, I personally would not recommend one. I want as much principle as possible being knocked down...

 

[The Pol]

Pray the stock market doesnt totally tank? You mean like home values have? The market has a much better track record than home values when it comes to an investment. Homes have never, and never will, provide the returns that the market can in a good managed fund. Our funds are long term investments, there is risk in anything, but you have to take some chances or risk not earning anything. The safest bet is burying your money where no one will find it, but will only leave you broke.

It does take alot of discipline, it is called a budget... you live by it, dont spend over it, interest only or not. Figure out what youd spend if you have a principle and interest, and live that same way with an interest only loan.

 

[The Pol]

Paying down principle is fine, but you are "investing" money in a home that will appreciate what, 3-4% a year... what does the market average? 8-9 more in a good managed fund? Add the fact that market returns are compounded returns and not simple, like mortgage interest...

I will bet on the market before I bet on my home sending me to retirement.

 

[aekdbbop]

OK, we are looking at a balloon mortgage..

it is a 10 year balloon (we only plan on being there 5-8 years)

it is a 90/10 to avoid PMI

the interest rate is 5.4%

any concerns with this type of mortgage?

 

[Soulive]

OK, we are looking at a balloon mortgage..

it is a 10 year balloon (we only plan on being there 5-8 years)

it is a 90/10 to avoid PMI

the interest rate is 5.4%

any concerns with this type of mortgage?

I wouldn't recommend balloons, but do what ya gotta do. Just do yourself the favor and make sure to sell the house before the balloon payment is due. Avoiding PMI is good, but I'm also not a fan of split mortgages. The good news is your interest rate...

 

[cheezydemon]

Never get a baloon. NO ONE knows what will be going on in 10 years.

What if in 9 years you are still there and you are in a horrible car wreck? You can't pay your bills and your credit tanks? Not a good place to be unless you have crystal balls.......

 

[c.n.budz]

5.4% is pretty good especially since you're financing 100%. What is the rate on the 2nd mrtg?

I just checked a couple different banks wholesale rate sheets for TN and for you to do much better than what you found you'd have to either put money down or pay more in discount points than would be worth it for the amount of time you plan on living in the house.

 

[ohiobrewtus]

A balloon payment would scare the beejebus out of me.

 

[Moonshae]

Two things, try to enjoy the process and see the big picture AND make sure you get a very good real estate lawyer. You want them watching your back...

+1 Get a lawyer. Even if it isn't "required" in your state, having a lawyer look at your agreements will make sure there's nothing hidden in them. Your lawyer should explain everything to you as it exists in the contracts you'll be signing.

For most people, a home purchase is their biggest single investment. Spending $800 for a lawyer is 1) a drop in the bucket and 2) totally worth making sure you understand all of the implications.

Still not sure? Ask someone who didn't understand their ARM, signed anyway, and is now facing foreclosure.

 

[Soulive]

I will bet on the market before I bet on my home sending me to retirement.

Who the hell's trying to retire on their home value?

 

[Moonshae]

it is a 10 year balloon (we only plan on being there 5-8 years)

Your plan is to be there 5-8 years, but what if something happens down the road and you can't move? IMHO, It's better to get something you can afford to pay back over the whole life of the loan, just in case, than to take the risk.

 

[drunkatuw]

Who the hell's trying to retire on their home value?

My guess is about half of California. They plan to sell their million dollar homes and move somewhere cheaper.

 

[Bobby_M]

Real estate can be a great investment due to leverage. If you're willing to buy the red headed step child of the block, make improvements, then do it all over again every 2-3 years you can retire in your "dream house" with no mortgage. Of course sometimes the market tanks a bit, just like the stock market but it's about making steady returns over time.

Compare this to the stock market. Say you have 20k liquid and you find that great "fund" that is hitting 18% on average. Ok, great, 18% a year on 20k and then you pay cap gains.

Take a home at $200k that you put 40k down on. Even if it modestly appreciates at 5% a year, that 5% is on 200k so the appreciation on your 40k is actually 25% (minus your mortgage payments). When you sell, the gains are tax free and you've been deducting interest the whole time too.

 

[aekdbbop]

Your plan is to be there 5-8 years, but what if something happens down the road and you can't move? IMHO, It's better to get something you can afford to pay back over the whole life of the loan, just in case, than to take the risk.

there is no early buy out penalty. so if it is starting to get close to the 10 year mark.. we can refinance.

 

[aekdbbop]

My guess is about half of California. They plan to sell their million dollar homes and move somewhere cheaper.

in nashville, nissan just moved their corporate offices down here.. their employees have been finding that they can buy twice the house for half the cost.

 

[Bobby_M]

Isn't PMI tax deductible now? Turbo tax asked me if I have paid any qualified PMI last year.... not sure what qualified means.

Have you ever heard of Suze Ormond? I can't really stand her but she has one great point that she makes about buying a home. If you currently rent and are thinking about buying, look at whatever the mortgage is going to cost you (based on the price you're looking at) out the door (principal, interest, insurance and prop tax). Subtract that amount from how much you're paying in rent. Whatever that amount is, practice for 3-6 months putting that amount into an account that you don't touch. The excercise is meant to test if you can really afford the house based on your current lifestyle or not. If it's cutting into your emergency savings, you can't afford it. If you can, the bonus is a bunch of extra money in an account towards the house.

 

[Soulive]

Isn't PMI tax deductible now? Turbo tax asked me if I have paid any qualified PMI last year.... not sure what qualified means.

Do you recommend Turbo Tax?

 

[aekdbbop]

Do you recommend Turbo Tax?

heck yeah.. did ours last night.. was really easy and saved us 200 bucks in deductions.

we are getting 2500 back this year.. kinda a nice surprise, although i could have used that extra money during the year.

 

[Soulive]

heck yeah.. did ours last night.. was really easy and saved us 200 bucks in deductions.

we are getting 2500 back this year.. kinda a nice surprise, although i could have used that extra money during the year.

Online or from the box?

 

[aekdbbop]

Isn't PMI tax deductible now? Turbo tax asked me if I have paid any qualified PMI last year.... not sure what qualified means.

Have you ever heard of Suze Ormond? I can't really stand her but she has one great point that she makes about buying a home. If you currently rent and are thinking about buying, look at whatever the mortgage is going to cost you (based on the price you're looking at) out the door (principal, interest, insurance and prop tax). Subtract that amount from how much you're paying in rent. Whatever that amount is, practice for 3-6 months putting that amount into an account that you don't touch. The excercise is meant to test if you can really afford the house based on your current lifestyle or not. If it's cutting into your emergency savings, you can't afford it. If you can, the bonus is a bunch of extra money in an account towards the house.

actually, its about 100 bucks more for us.

we are paying 935 in rent each month.. and our house payment would be 1093 "out the door"

We are doing really well for our age I think, we will have all our student loans paid off in a year, after being out of school since may of 07.

we are tired of throwing out 935 each month.