Feb
6
What type of Morgage should I get and should I put any money down?
Filed Under Renting & Real Estate
landkruzer asked:
I am about to go to contract on building a new home. I am not really sure what type of loan is best for me. I have the 20% to put down on the property but not sure if thats the right thing to do. Part of me says put the 20% down to get around PMI and reduce the payment so I could cash flow and the other side of me says to keep that 80,000.00 in the bank. I would plan on staying in the home maybe 3-5 or 6 years. If I 100% finance is that better or just what should I do?
LEO
I am about to go to contract on building a new home. I am not really sure what type of loan is best for me. I have the 20% to put down on the property but not sure if thats the right thing to do. Part of me says put the 20% down to get around PMI and reduce the payment so I could cash flow and the other side of me says to keep that 80,000.00 in the bank. I would plan on staying in the home maybe 3-5 or 6 years. If I 100% finance is that better or just what should I do?
LEO
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5 Responses to “What type of Morgage should I get and should I put any money down?”
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100% finance *****.. seriously. Unless you have some high interest debt somewhere that could use that money I suggest you put the cash down on the home and get a fixed rate. You will save a TON of money in the long run and if interest rates lower in the next few years feel free to refinance with a lower fixed rate.
Before you sign any contract having to do with a construction loan I STRONGLY urge you to contact me.
I am a mortgage broker and I specialize in residential construction financing. There are really many many things you need to know first!
That being said, when getting a construction loan it is possible to do it with NO MONEY OUT OF POCKET. This is because the value is based on the after constructed appraised value of the home which typically is much higher than the cost of construction, the land, loan payments, and reserves combined. This of course depends on what part of the country you are in and the value of your land, your credit rating, and many other things. You may also be forced to have that liquidity depending on the terms of your new loan.
So really your question is impossible to answer without knowing more information, such as:
Where are you building?
Do you own the land?
What is your credit rating?
Have you owned a house before?
Do you have a contractor or are you owner builder?
Do you have construction plans completed?
Do you have your plans appraised?
Do you require a septic or a well?
These are just some of the questions ANYONE would need to give you any kind of intelligent answer to your question.
Again, I’m always happy to help!
I would talk to your mortgage officer (make sure it is someone you feel comfortable with - remember that most mortgage/loan officers work on commission and when you’re talking the numbers you have they are going to say cha-ching!). Also, find out if whomever you go through will continue to service your mortgage (your mortgage will probably be sold several times - that’s actually normal but some lenders will retain the rights to service it) unless you don’t mind some of the complications that can go along with the servicing being passed along, too.
If you are positive that you are going to be out of the house in 3-6 years you could consider an options ARM. Those can be dangerous if not handled correctly or if you end up being in the house longer than anticipated, though. It’s too easy to slack on them during hard times or if you want to purchase other things with the money. Do you have any other debt that could or should be paid off with a portion of that money? If so, even paying off a couple of credit cards may boost your credit score enough to get you a better rate. If your score is in the mid 700’s or higher you probably don’t have anything to worry about anyway - just stay aware of it.
A fixed mortgage is a safer route and rates are still nice and low. Remember that you can negotiate the closing costs - there are a lot of costs that are not fixed, they just make the company a few extra $$. The loan officer’s rate is negotiable also - he/she will deal if it means keeping your business. There are also ‘back end’ points (where the company really makes their money) to watch out for. Most officers will steer you toward whatever loan is going to make them the most money on those points (this is, of course, in addition to their cut).
I would seriously evaluate the expected growth in the area you are building in. Is there any chance the value of the home will go down rather than up? How secure is your future income? Are you building more home than what you really need? If cash flow is a concern now what would happen if things get really tight at some point? When you get up over 250k for housing you are pretty much just building to impress - unless this will be a place of business for you also. I would cut out a bit of the square footage (if possible), be a bit more frugal on the upgrades, etc.
If you want to keep part of that 80k in reserve, for emergencies (smart in this day and age), you could do an 80/20 deal to avoid the PMI. Basically would be taking out a second mortgage on the extra 20% (although in your case I wouldn’t do the whole 20%). Though you would have 2 payments it would still be less than PMI and you wouldn’t just be throwing that money away (PMI is such a waste!).
My husband and I built a house 5 yrs. ago and we were able to get a great rate with no money down because of our credit scores and the equity we already had in the land (plus the expected appraised value of the finished product). We had to search for a lender initially because we have rural acreage (sometimes more acreage = harder time finding a suitable lender). This combined with much of what Harley mentions can make a huge difference in your choices.
Just my 2 cents - I had taken a Residential Lending course awhile ago (I wished I had taken it 17 yrs. ago before buying my first house).
Harley D has a very very good answer. You could also read my book ” When Bad Credit Happens to Good People” It will cover this question, as well as help answer many of your credit questions.
Good luck.
Well to tell you the truth, the whole PMI thing is a little over rated. As a loan officer, I always advise my clients to save their money. It is extremely important that you do not deplete your savings!
This is what you do. As opposed to getting the average 30 year mortgage, get a 15 year. Take about $15,000 from your savings and buy down the rate. You can do a temporary buy down which will probably cost about $5,000 more (or less, depending on the price of the home) and it will bring your rate down drastically! If you do a permanent buy down, your rate will be fixed throughout the life of the loan. The cost of a permanent buy down is 1% of the price of the home (which only brings it down 1/2 a point). If you want to bring your interest rate down by 2%, you’d basically pay 4% of the price of the home. Which would still save you 16%!
Doing this, you can fully afford to pay the full PITI (principal, interest, taxes & insurance) with an extremely lesser monthly payment than you anticipated, and the equity on your home will increase drastically since you’re doing a 15 year mortgage as opposed to a 30 year, which really works for you since you only plan to live ther for up to 6 years. Feel free to visit my website and / or give me a call via my contact details if you need to talk more specifics. All consultations are free and your name can be John Doe.
Most investors are extremely wealthy because they spend their money wisely and never deplete their savings.
Oh forgot to mention. If your home is within the FHA guidelines, you don’t have to put down 20%. It’s more like 5% or if it’s not within the FHA guidelines, chances are, it may be within Fannie Mae or Freddie Mac.