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standard mortgage or no money down?
Old 09-12-2006, 02:27 PM   #1
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standard mortgage or no money down?

Nords remembered well about me being in the military.* Well, that is no longer since the official sepration last month so the wife and I have settled back in the US.* Where?* It doesn't matter, I don't need any razzing on where we moved to, but I do have a serious question about mortgages, considering this is our first purchase of this magnitude.

We haven't found the house yet, but let's just use the number $350,000.* For a 30 year fixed, would you:

a) conventional putting 20% down and get an APR of 6.07% (today's rate #s)

OR

b) 100% financing and get an APR of 6.467% (also today's rate)

This is from Navy Federal - navyfcu.org.* Option B is like a VA loan but in-house.* There would be a funding fee of 1.5% of the loan that would go on top of the loan but could be added into the loan.

My gut tells me to go with B.* Why give up 70K in one pop if I don't have to?* Plus, I could make extra payments on the principal whenever I please.

If you need more financial info, I will give it (to a certain degree)

eyetri2
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Re: standard mortgage or no money down?
Old 09-12-2006, 02:32 PM   #2
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Re: standard mortgage or no money down?

Would you have PMI with option b?

How old are you, and how long do you intend to stay in the house.
If you are young and plan to stay in the house 10 years or longer
I'd go for option a)
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Re: standard mortgage or no money down?
Old 09-12-2006, 02:50 PM   #3
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Re: standard mortgage or no money down?

Money-wise, you can get a very precise answer with a spreadsheet. Just make realistic assumptions about how much you could make on the 70K that you invest.

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Re: standard mortgage or no money down?
Old 09-12-2006, 03:08 PM   #4
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Re: standard mortgage or no money down?

Hmm, looks like you would be paying about 8% on the incremental 70k. That would motivate me to put down the 70k.

How I got the rate:

- Get payments for both loans (2204.65 and 1691.36)
- Subtract one from the other to get the implied payment on the 70k (2204.65-1691.36 = 513.29)
- plug the implied payment, 70k, 360 payments and terminal value of zeero into my financial calculator and solve for the rate. Voila ~8%.
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Re: standard mortgage or no money down?
Old 09-12-2006, 03:10 PM   #5
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Re: standard mortgage or no money down?

Are you receiving a VA disability. *If you are then the funding fee for a VA loan is waived. *From what I've seen, the VA loans without the funding fee are rather competitive.
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Re: standard mortgage or no money down?
Old 09-12-2006, 03:48 PM   #6
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Re: standard mortgage or no money down?

Let's assume that NFCU greets you with open arms and that you qualify for all of the loans. If that's the case, you still need to crunch those numbers into a mortgage calculator (like the ones at http://www.navyfcu.org/calcs/index.html) and figure out how the monthly payments affect your budget.

Any loan of more than 80% of the home's value will require an escrow account and you won't be able to invest those funds on your own. IIRC NFCU will want two months' property taxes & home insurance up front and will continue to raise your monthly escrow payment by their estimate of inflation in property taxes and insurance fees. They may want lower deductibles on the insurance and you may end up paying a higher premium than you wish. So if you're getting a 100% loan then your closing costs & mortgage payments will be higher than just P&I.

You also need to check whether or not NFCU requires PMI. It used to be required for all loans over 90% but they may waive that for a VA or even a qualifying FHA loan. Again the 100% financing may have that additional PMI payment into an escrow account.

Note that your interest rates come with some fine print: "Rates quoted below require a 0.75% loan origination fee. The origination fee may be waived for a 0.25% increase in the interest rate."

Generally, paying points up front is a losing proposition. You're betting the mortgage company that rates during the life of your loan won't go any lower, and they're happy to accept that bet because you'll pay them even more money to refinance when you're wrong. Even if you're right, they'll make their money off the spread of investing your points (instead of letting you profit from keeping that money).

When you don’t have a low-low interest rate, I tend to favor a lower payment. This is especially true if your monthly mortgage payment is coming from your savings or something less reliable than a U.S. govt pension. The 20% down with a lower payment will save you a substantial amount of interest over the life of the loan and will free up additional cash flow for whatever you want-- investing, emergencies, fantasy vacations, your choice. You could even pay down more of the principal with the extra cash flow or you could boost your funds with a HELOC.

The 100% loan will not only have a higher monthly payment (plus the PMI and the loss of the use of the money for the escrow account) but you won't have any discretion over its use. You'll have to make that monthly payment EVERY month whether or not you had a temporary cash-flow crisis.

As Nun mentions, another issue is how long you'll be staying there. If you're owning fewer than five years then you probably will pay more in closing costs (on both ends of the ownership) than you'll build in equity. This is especially likely in a topped-out market. The median period of home ownership between moves is only seven years, so you have to decide if this is your final home or if there's a risk that your company (or you!) will want you to relocate to enhance your career.
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Re: standard mortgage or no money down?
Old 09-12-2006, 04:20 PM   #7
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Re: standard mortgage or no money down?

Not paying PMI is a BIG reason to put 20% down.

The lower rate is a second reason.

Being able to refi in the event of lower rates is a third reason.

Back in the early 90's I carried several 100% financed properties. Prices - and rates - tanked during a recession. And we were stuck paying too much (including PMI) because the equity wasn't there to allow a re-fi. Haven't done 100% financing since.
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Re: standard mortgage or no money down?
Old 09-12-2006, 09:10 PM   #8
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Re: standard mortgage or no money down?

Option A is a better deal - lower rate
Unless you can get a return significantly higher than 6.5% and sure that you do not have to pay PMI, stay away from option B.
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Re: standard mortgage or no money down?
Old 09-13-2006, 09:47 AM   #9
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Re: standard mortgage or no money down?

Thanks for the info. To fill in some gaps:

for 100% financing - no PMI
The rates were for 0 points
stated documentation of salary
both wife and I have excellent credit scores
Estimated escrow payments by NFCU for our area were just a touch over 1000/month

Until we find the house, I know it is all theoretical and thus, can't answer if it is a starter house or a starte house that is also Stage II and could be there for easily 10 years.

Will update and thanks to all.

eyetri2
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Re: standard mortgage or no money down?
Old 09-13-2006, 01:51 PM   #10
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Re: standard mortgage or no money down?

Quote:
Originally Posted by eyetri2
Thanks for the info. To fill in some gaps:

for 100% financing - no PMI
The rates were for 0 points
stated documentation of salary
both wife and I have excellent credit scores
Estimated escrow payments by NFCU for our area were just a touch over 1000/month

Until we find the house, I know it is all theoretical and thus, can't answer if it is a starter house or a starte house that is also Stage II and could be there for easily 10 years.

Will update and thanks to all.

eyetri2
The no PMI at 100% loan is great! However, if you don't need that $70k for a while I'd still go for the lower rate. If you are young (under 50) you'll appreciate the smaller mortgage in years to come. Think of it like this, you aren't spending the $70k, you're investing it in the house and you get a better rate and smaller monthly payments.

Of course if $70k is your entire savings I wouldn't put it all into the house, maybe I'd do $35k, but if you have a savings cushion over and above the $70k I'd put it down and get the lower rate.

FYI maybe waiting a few months will be a good move so that you buy in Feb when the market should have come down quite a bit and will also be depressed by the time of year.
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