which is the better mortgage for us?

Question

My boyfriend and I would like to buy a house. We have no money down. We are looking between 130k-190k. We want to roll this into obviously a 100% financing mortgage, including closing costs. I am not sure for this finance amount how much PMI would be. I would like to avoid PMI and maybe get an 80/20 loan. The thing is...in 3 years my boyfriend will have his bosses job, which ups his salary quite a bit. I was thinking if we took the 80/20, once he got that job we could pay the 20% part off rather quickly, then be left with the 80%. Is this a good idea? Or is the PMI a much simpler way? How much does doing the 80/20 up the rate? I need some suggestions!

thank you to those of you who understood what i meant by 2 loans (80/20). And though i do appreciate the concern about buying a house with a boyfriend and not a husband, the question was about mortgages, not my personal life.

thanks for all your help everyone....we did get pre-approved already for much over what we are looking for, and we both have excellent credit scores......so i think the 80/20 is the way to go! THANKS!

Answer 1

Hello, and Happy Holidays to you and your boyfriend.

Now to the loan question. Sounds like you have done some homework already, by knowing about the PMI or MI as some call it.

Do you know how your credit is? If it is great, you go conforming or FHA or My Community program at 100 percent. These do have PMI (ok), if your credit is lower like 580 - 600 middle score, than you go sub-prime and that is a 1 loan (or 2, you choose) and the 1 loan HAS NO MI OR PMI. Believe it or not, sub-prime rates for a 1 loan is running in the 7's, so that is not bad at all with no PMI. FHA does have MI, but VA loans so not have MI.

Talk with a Mortgage Broker, on that underwrites of many companies - that will give you more choices to choose from. Ask how long they have been in the business, so you knwo you are getting one that is knowledgeable, and one that knows the various programs out there. You may want a fixed rate at a 50 yr, 40 yt, 50 yr, a interest only, option payment plan, just to name a few programs (believe me, there are many programs out there).

130,000 at a 8 rate is 908.98 no MI One loan
130,000 at a 7 rate is 864.89 with mi of 104.01 for a total payment of 968.90

130,000 as a 80/20 (80) 104,000 at 6.5 rate = 657.35 (Rate is estimate only)
(20) 26,000 at a 9 + rate = 206.20 = total payment of 863.55 P&I no MI (rate is a estimate only)

190,000 1 Loan = 1,326.51 NO MI (rate is higher, but you have no MI)
190,000 1 Loan with mi of MI = 1,200.93 MI is 279.59 for a payment of 1480.52

80/20 152,000 = 960.74
38,000 = 305.76 Total Payment 1266.50

I know it can be confusing, so talk with a Mortgage Broker (ok) Also, a broker underwrites for many company's (I underwrite for 150 companies) so I only have to pull credit 1 time, and they look at my credit. A single lender (not a broker) has programs available, but they may not be able to help you and your situation, so you go elsewhere, and than that person pulls your credit (see what I mean.) FHA/VA approved too. If you shop, your credit is pulled and that is considered a soft pull, for a 30 day period. Just like shopping for a auto, it is good for 30 days. If you apply for a credit card, that is considered a "hard" pull and it drags down your credit score. When looking for a home, please do not apply for a credit card, Department Charge Card, Gasoline Card or make any major purchases, like a auto, etc. This will pull your credit down.

ALSO -
When you Decide to buy, decide on how much you want to spend, if you want to escrow the taxes and insurance. Say the taxes are 1200 a YR and insurance 800 a year (just an estimate, ok) That is 2,000 a year divided by 12 = 166.66 If you paid 1,000 a month now - (166.66) your P/I Principle and Interest would be 833.34. Now you decided on the price range you are looking into. If you have great credit, a 1 loan at 130,000 at a rate of 7 percent over a 30 year time would be 864.89 - This is just a estimate - ok -

It greatly depends if you need help with closing cost, (The seller could do Seller Help toward your closing cost). If that is the case, I normally tell my clients NOT to hackle over the price, since you are asking for closing cost help - especially if the home is thru a realtor, and the seller has to pay the realtor their fee which runs from 3-6 percent of the selling price, and you ask for 3-5 percent toward closing cost -assistance) Follow me so far?? You may find a For Sale By Owner, they are sometimes more willing to help you with closing cost(s) associated with your loan, since there is no realtor fees.


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Answer 2

There are several issues yet to be pointed out so I shall, the 80 / 20 makes good sense due to pmi costing you a large portion of the 20% loan payment and theres no principal reduction. Another aspect untouched as yet is while the 2 of you can be co-borrowers the one with the best current income will likely be viewed as the primary borrower and thats who's credit score will matter most. There are some subprime products that can allow the highest score but they will be of a worse rate. Another thing to consider is what if the promotion never occurs as hoped for. You will want a good rate you can afford either way. Look at some 5 year fixed loans and perhaps some equity lines of credit seconds that will allow all closing costs. Your rate on the first will buffer a bit the higher rate second and give you a blended rate that will be less than a 100% first with PMI. Best wishes on realizing your dream, and for a great future with your special man.

Answer 3

If both of you have good credit and income to support 100% financing you are better off getting an 80/20. You seem to understand what that is, some others that answered did not. An 80/20 is simply taking an 80% first mortgage and 20% second mortgage at the same time. Sometimes the same bank will hold both mortgages. The reason this is more beneficial to taking a single loan for 100% with PMI is that PMI is not deductible. The interest on both your first and second mortgages are.

I know that Well Fargo, for example is a bank that is willing to do this. Easy explanation why they would do it. If they want to sell off your mortgage, 80% is much easier for them to unload than 100%. As usual for second mortgages, the interest rate is higher.

The rate on the 80% loan will be the same as it would if you had 20% cash to put down. The rate is always higher on subordinate loans, but again, that interest is deductible and, in my opinion, preferable to PMI.

Additional: There was a comment about financing closing costs and that you would then be financing about 105%. That is not necessarily true. If you buy the house for $150,000 and the appraisal comes in at $160,000 and you finance $155,000 (first, second, and closing costs) that would be just about 96%. Percentage of financing comes from loan value to appraised value, not loan value to purchase price. I take 100% financing from you as no money coming out of your pocket, hence you financed 100% of the transaction, not necessarily 100% of the property value.

Answer 4

What she is talking about re: the 80/20 loan means that she will be financing 100% of the house with two separate loans, the primary loan will be for 80% and the second will be for the 20%. This will allow you to finance 100% and not be required to pay PMI. Typically, when you do a 80/20 loan, the second will be at a higher interest rate, since they are secondary if anything happens and they have to foreclose. The primary will get all their money first, and then what's left is used to pay off the second. If you're looking at being able to finance the closing costs as well, then you're not looking at a 100% loan. It is more like a 105% loan. This obviously makes it a bit more difficult to get approved. You will need to have better credit, and you will be looking at a higher interest rate (since the lender has to accept greater risk). Since it is become a buyer's market, you may want to consider getting the seller to do a seller's concession...i.e. bump up the contract price of the home to include closing costs, and have the seller basically pay for the closing costs.

Answer 5

You never said where you'd get the 20%. If you borrow it, the bank isn't going to give you full credit for it. Besides, if you're in a market where real estate is appreciating rapidly, then your house will go up in value in a short amount of time, until it reaches the point where what you owe on it is less than 80% of its value. Then you can ask the bank to consider removing PMI. They will make you get the house appraised again. Example. Say your house costs 150,000 and you put no money down. Say real estate appreciates at 10 percent a year in your market. In three years, your house is now worth $199,650. And lets say you paid down $1000 in interest in those three years. So you owe $149,000. That's only 74% of what the home's worth, so the bank should remove PMI... In other words, pay the PMI for a few years. It's really not that much money, as a percentage of your total mortgage payment. Just make sure you go with a lender that has generous policies for removing PMI.

Answer 6

There's almost no reason to not get the 80/20 loan scenario - you should be able to write off the interest from both loans on your taxes each year if you go this route. The only reason to go with a single loan of 100% would be if the interest rate is so much lower than the blended rate for the 80/20 that you would save a bunch of money each month, and that amount would add up to more than you could save on your taxes each year.

Please, please, please go see a qualified mortgage representative who can give you spreadsheets with the payments for both scenarios - then you can see the differences.

BTW, as for the people who think you shouldn't live together until you're married - mind your own business. It may or may not be the best thing to do on a moral side of things (again, not our business) but there's protection for both of you thru legal channels if you purchase the home together. Maybe you want to purchase as Tenants In Common (% ownership for each of you). See an attorney for advice on this and it may save some troubles down the road.

Best of luck to you!

Answer 7

No, investing into infrastructure and alternative energy/efficiency will benefit all of us with long term improvements. Thus, the stimulus will put folks to work and provide returns Paying off mortgages only helps a select few, many of whom couldn't afford their house or were speculators/flippers. A better alternative that would cost the taxpayers NOTHING, is to simply automatically re-write ALL mortgages for 4%. This would limit the amount of future foreclosures and reward folks like me, who never had a problem in the first place. Further, most of us would then see several hundred dollars each month with lower interest rates, which would further stimulate the economy. Think about it and pester your Congressperson...

Answer 8

I don't think you can get an 80/20 mortgage WITHOUT the 20% down up front. That's a "conventional loan" and with 20% down ,it doesn't require private mortgage insurance. Maybe on some sort of lease/option where you lease with option to buy, having a percentage of the monthly rent going towards a down payment. Then after you reach the 20% down go for a conventional loan. A realtor can or your bank (where you want to get prequalified for a loan) can give you more options.

Answer 9

I must say that I agree with the person who indicates buying a house without being married is not a good idea. Besides if you have no money to put down on a house, then should you get into a financial bind, i.e. loose your job, get sick, or breakup with your friend, you could end up loosing the house, which will ruin your credit. If your young, save your money toward a down payment on a house or rent with option to purchase with it only in one name and have the other pay you rent.

Answer 10

Apparently it's my job to tell you it is foolish for an unmarried couple to buy a house together. What if the relationship falls apart? What if he decideds to let his parents or brother or his best friend move in? You can't stop him from doing that.

This is a very bad plan. If you're going to live together either you or he should buy the house and charge the other person rent according to a signed rental agreement. That is the only way you should handle this.