$260K for $1,200 monthly, is it possible?

Question

I was pre-approval by another financial company it quoted me of paying $2,000 monthly if I were to borrow $260K with an interest rate of 6.625% plus cost of insurance and property taxes.

Now, after searching for different lenders I see something like an interest rate of 5.875% with a monthly payment of $1,230.40 (closing cost = $6,677.00).

The confusing part is this: "We have broken your loan into an 80% 1st loan amount of $208,000 and a 2nd loan amount of $52,000 to avoid PMI. The quote below is for the 1st only. Your $52,000 2nd could have a payment as low as $347. Please call a loan consultant to get a customized quote for the 2nd."

What does the 80% means? I'm borrowing $208K first to reduce monthly payment?

Answer 1

You are talking about a jumbo loan with perfect credit and a standard down payment. You have none of those.


I don't even think I would qualify and my credit score is 820.

Answer 2

OK, here you go. The terms might confuse you so I'd be very careful in explaining them to you.

For a loan of $260K with a $1,200/mo. payment is possible. You are getting an "Interest Only" loan. This means that you are not paying down the loan. You are just paying the interest.

How you get that is multiply the principal (main loan) against the interest rate, then divide it by 12 (months in year).

As for the $260K, with the 6.625% rate with the $2K/mo. payment inclusive of the taxes and insurance, it could be a fixed loan.

OK a primer on mortgage terms:
Fixed rate - your rate stays the same in the duration of the loan. i.e. 15 year fixed, 30 year fixed.....
Interest only - you never pay down the principal, it’s only the interest that you pay
Principal - your loan amount
PMI - Private Mortgage Insurance (this is imposed by the federal gov't. on loans that go above 80% of the Loan to Value - LTV)
LTV - Loan to Value - loan amount divided by the Purchase Price
CLTV - Combined Loan to Value - same as LTV, although this comprises of two (2) loans.
MV - Market Value
HELOC - Home Equity Line of Credit
HELOAN - Home Equity Loan
ARM - Adjustable Rate Mortgage

If the MV of the property you're buying is $260k, and you want to do a 100% financing, then your LTV = 100%

You then get the highest percentage of PMI. There are several companies that provide this. Their rate only differs in small increments (I'd say about .01-.03%). To avoid having PMI, a loan officer will suggest that you take two loans. Get a 1st loan that is 80% of the MV and the 2nd loan would be 20%. The rate for the 1st loan is reliant on what the bank or the financial institution has to offer that day. Rates for 1st mortgages changes everyday.

However the 2nd loan could be two things. A HELOC or a HELOAN. The rates for these two depend on certain things. Your credit score for one, loan amount, term, owner occupancy..etc... It is also based on the Prime Rate.

A HELOC is an interest only loan. So that means you only pay interest. A HELOAN however is like a fixed rate loan.

Buying a home really depends on what your plan is. If you have a positive outlook on the future and that you have a good idea that your house might be worth more in 5 years, or 10 or so, then right there you could decide what loan to get.

An interest only loan could work to your advantage if you are buying a rental property, since it will lower your payments against a fixed rate loan. On a fixed rate loan, you know your payments will be the same every month.

Interest Only loans have expiry dates (as I prefer to call them). Since the terms ranges from 5, 7, 10 years. Some brokers have weird programs that the terms are good for 6 mos., or even 3 mos. then the rate will adjust (be careful with those). Interest Only Loans are called ARMs.

There is another ARM our there that is called an Option ARM. This is a negatively amortizing loan. Meaning you only pay the minimal payments, and the rest of the interest that you do not pay adds to your principal (I won't go into that for it might confuse you more).

That's why the loan consultant tells you to call to get a customized rate quote for the 2nd because he/she needs to know specifics on your loan. (Especially to pull your credit).

Be wary though. In these market times, an 80/20 loan might be a good idea or a bad one. Be sure to attend a first time homebuyers seminar (it’s free btw - ask your realtor or a loan consultant - plus there's free chow). It’s very informative and you can ask questions.

If you're a bit savvy and you have a better grasp of the real estate market, then it’s up to you. Just read the GFE (Good Faith Estimate), purchase contract, Addendum to Loan Application, Terms and Conditions..... (we call them 3 day docs). You'll receive this from the financial institution that you're applying with within 3 days, as dictated by federal regulations.

Hope that helps.

Answer 3

You are being quoted an 80-20 type of mortgage. The first mortgage is for 80% of your borrowing needs, and thusly does not incur the requirement of PMI. You will also have a second loan (at a different rate) which WILL incur PMI. The $1.230.00 ONLY covers the 80% loan. You will also have a payment of about $350 or more to cover the remaining 20% loan.

Insure that you get all figures for BOTH mortgages before you dive into this deal, and do not forget to allow 'space' for your monthly tax and insurance escrows, which could easily add several hundred dollars more per month to your payment.

Answer 4

That second mortgage you are referring to is commonly called an 80/20. Basically, you have a fix loan rate for 80% of the total mortgage cost ($260k) and a variable loan rate for the remaining 20%. This is done to alleviate the need for PMI (also as you noted). Going by your numbers you would be paying at a minimum of $1,600. I would guess since it isn't stated that that number wouldn't include property taxes and insurance either.

Personally, if your PMI is low on the first mortgage I would certainly view that as the better option. Plus, if you needed to, you could always take out a second mortgage. With the 2nd option you presented you already have 2 outstanding mortgages against your house with one being a variable rate.

In short, that $1,200 is merely used as a sticker shock amount to get you to look into it. After doing any amount of research you'll realize you won't be paying that amount (even with perfect credit as the above poster stated).

Answer 5

Your big mistake, in my opinion is using the Internet to apply for a mortgage loan. There are lots of honest wonderful loan officers on the Internet but it is also a wonderful medium for crooks to steal your money.

You need to be face to face in person with your loan officer and ask them these questions. They are all getting their money from the same sources. Investors all want the same money in exchange for the same risks. Every mortgage company should be charging very close to the same rate for the same program and a good loan officer can help you figure out which program makes the most sense for you.

I don't make loans. I am a Realtor that has seen very intelligent people signed up for horrible mortgage programs they did not fully understand. Meet with someone face to face. Ask your friends and family who they have borrowed from and if they were happy with the program and service.

This program you are talking about is proposing to make two loans to you rather than one. The larger one sounds pretty straight forward. The second is usually the one that is a balloon note or maybe interest only. If you get this kind of loan I would use any extra money you come up with to reduce the dangerous second lien.

Answer 6

Don''t do this until you have had all of your options explained to you. You should be choosing the way your loan is structured, not them. If they don't want to take the time to educate you so that you can make informed decisions, they are not who you want to work with.

You have a number of options here, 80/20 is only one of them. Make them give you Good Faith Estimates and Truth In Lending Disclosures for all of your options, or, at a minimum 3 choices. Or, better yet, find someone who is more concerned abut helping you get the right loan for you than they are about the amount of commission they will make on your loan.

30 year fixed rates are running about 5.875 today. Whomever quoted you 6.625 was going to make a killing.

For heaven's sake, be careful!

Answer 7

They split your loan. You are basically taking out two loans. The 20% is the payment your using on the 80% loan. The terms of the 80% sounds decent (is it fixed or variable rate, also pay attention to your closing costs) the 20% terms will not be near as good. I doubt the $347 quote will be that close to your actual payment.

Make sure to know how much you will actually pay during the entire life of the loan

Answer 8

james ,
pleas pickup a copy of 'house buying for dummies'. visit ur local banker to teach u what a bad deal this is.
visit daveramsey.com to learn ur hard lessons from others big mistakes.
in todays market a 80/20 loan will hurt u soon.