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Thinking outside that box…. What to do with the sellers concessions & where to apply the money. Buying down the rate vs the buydown…..Part 2

homework

Okay, I am back again to finish up 'thinking outside the box'.

Summary of the first section: I talked about the difference between buying down an interest rate vs a buydown. The conclusion was that a buydown would be your best bet. But I also talked about goals and what this would mean to the whole equation. Again, we do know that you can't predict the future, but we certainly can have a good idea depending where we are in our lives. So that being said, the buydown would work for anyone even if they were to move in 4 years or so. And if you got the seller to pay for your closing costs, even better. And you can still write off the points, even if the seller's contribution paid for this part.

Have you done your homework yet? Stop shopping the rate and shop for that loan officer that will help you build wealth. Here is why.....

Here is the example from Part 1:

2/1 buydown : This will be based on a $200,000 loan amount with 10% down, which would mean that the purchase price was $222,250. And the seller is going to contribute $5,250.

So we have a 10% down payment and we decided to use the buydown, because I plan on living in this house for the next 10 years. But I am going to have mortgage insurance because I am not putting 20% or more down. PMI (Private Mortgage Insurance); why you need it and the different types of PMI Because of this, your mortgage insurance payment would be $86.67 per month. In the first part of this series, we used $2,750 to use it for the 2/1 buydown. Your total payment for arguments sake would be a total of $9,639 for 3 years, by using this 2/1 buydown. It would take about 87 months or 7 years for this mortgage insurance to fall off. So, if it would take 7 years for the mortgage insurance to fall off, you would be paying an additional $7,540 in this time frame.

Your total payment with buydown for these 7 years would be $95,628 + $7,540 (PMI paid out in 7 yrs) = $103,168

New scenario without PMI :

You can keep the buydown, because as I said, it's cheaper for the buydown than the 30 yr fixed rate. But let's make your monthly payment cheaper. I could add $4,500 onto your loan as a One-Time Mortgage Premium. If I did this, you would be borrowing $204,500.

Your new monthly payment for the total of the next 7 years would be $97,476.

Conclusion: Your best money is spent if you do a 2/1 buydown and pay the PMI upfront and include it in the loan. You end up saving $5,692 in payment. And keep in mind, you added $4,500 onto your loan. You still saved $1,192. And if you remember correctly from Part one, you would save $2,400 in 7 years, just compared to a 30 year fixed rate. This would make your grand savings of $3,592 which would equate to a savings of $42.76 a month. If you were comparing apples to apples and sold the house in 7 years. So even if you moved or refinanced in half that time, you still save money. This goes back to the theory that your true 30 year fixed rate is not always your best solution. It might mean stability to you and your family, but leave it up to the experts. As long as it is explained to you and that individual has done their numbers correctly, it's a win / win situation. It just shows you how much work can go into these types of programs.

And I am adding this as of 11/30/06: Your monthly mortgage insurance is not tax deductible. But if you add it itno the loan, you can write some of this off also.

By Jeff Belonger of Assured Lending Corp. "Meeting all of your financial needs for home ownership" jbelonger@assuredlendingcorp.com

Posted by Jeff Belonger -- The FHA Expert.com -- FHA Loans -- FHA mortgages - USDA loans on 11/29/2006 08:43 PM

Comments (34)

mortgage insurance, buydowns, jeff belonger, new jersey, jeffmortgageman, fha, buyers, real estate

34 Comments on Thinking outside that box…. What to do with the sellers concessions & where to apply the money. Buying down the rate vs the buydown…..Part 2

NOV

2006

Jeff, this post is awesome! I am so glad youtake the time to investigate and explain all the options, and the resulting implications. I workwith a couple of good loan officers, but they can learn a thing or two from you.

Excellent advise. Some borrowers are not going to get it however, so you have to gain their confidence and just show them the savings. They will get that. Give us some more!!

Jeff,

Good post as always, well almost always.

I like thinking outside the box, in fact, I like to blow the box up from time to time just to see what new things can be done. Keep up the good posts and thanks for adding this post to the Mortgage Planning Strategies group. It is a perfect post for that group.

Great post Jeff. Very educational. Thanks. I really liked your statement "Stop shopping the rate and shop for that loan officer that will help you build wealth." It is right on!

This blog definitely needed to be up there on the featureds... (even though you bumped me down to featured blog #4 :( but hey, this really deserves to be up there) You are making such a big difference!

Not just a comment on this post, but some of your others as well....i love the informative examples!

Man, Jeff, I have to say this stuff is way over my head. Glad I don't have to explain it. Good stuff! I think:)

NOV

2006

Many builders in this area are offering pools as part of their incentive package. Verrado is offering a GEM electric car as a "bonus". I spoke with the local Saturn dealer today to suggest they contact builders to offer a new Saturn with every home....

Now this is a really excellent and informative post! I'm grateful you took the time to detail the issue and at least one potential solution. Thanks for the post!

Nice explanation, but I have a question. Why not use the money for the buydown on the first and then do a 80/10/10? Although the rate on the second is higher, it would be less expensive in the long run vs. paying the mortgage insurance whether it was being paid separately or financed.

goose you are the man it couldnt of been explained any better. You should explain PMU vs Lender paid PMI

Michael...... I really do appreciate that compliment. Thanks and thanks for stopping by.

David...... thanks.... and yes, you are right. Not all of them will get it. But trust me, a while back, I always would get upset when I would lose a client because of this. But if I were able to do every loan out there, I don't think I would have time for Active Rain.... ;o)

Robert...... lol....funny. Sure, that word usually. I use that often to make my points also.... usually. ;o) And thanks for the compliment.

Yael.... thanks for that awesome compliment and for pointing out that one sentence. I am glad someone caught it. Isn't it the truth. And as I start my 15 year in this business, I have gained the confidence to just come out and tell the client this. I try not to come across as it being personal, but an element that they need to factor into their decision making process.... and not just, well..."they gave me this rate with no points."

thanks again for the great comments and compliments.

Yael......

It is really comforting to know you can at least explain what you do...

Kaushik..... overall....thanks for that compliment. It's much appreciated. And thanks for stopping by this one and for your on others.

Bryant...... first off...thanks for stopping by and just the hello means a lot. 2nd... do you think I understand every concept that a realtor talks about? ;o) Besides, aren't you a tall guy? So for this to go over your head, I really have to elevate this... lol Again, thanks for stopping by.

Tony...... interesting..... many of us know this is going on. And in all honesty, is it helping the borrower though?

Renee Burrows wrote a blog the other day that brings up some good points relating to this issue, but in another format. Basically.... builders will use what ever means to sell a property, but at what cost to the buyer? HUD Cracking Down on use of Builder's Preferred Lender?

And I wrote this blog a while back that talks about what you just mentioned... Misleading advertisement, at what expense to your client or the client in general.........

Tony... you bring up a good issue.... thanks

Suzanne...... thanks a lot for that awesome compliment. And thanks for stopping by...

Patrick..... I broke this up on purpose so I can answer your question.....

First off, thanks for the compliment, but also for stepping up an asking this question....

"Why not use the money for the buydown on the first and then do a 80/10/10? Although the rate on the second is higher, it would be less expensive in the long run vs. paying the mortgage insurance whether it was being paid separately or financed."

My answer..... down below and I did a blog in regards to PMI....

PMI (Private Mortgage Insurance); why you need it and the different types of PMI I explained that an 80/10's payment is almost the same as paying the PMI into the loan..financing it. By not doing the 80/10, you do two things that would stand out. 1st: You now have only one payment and not two. Many people I talk to, want one payment, but they want the best of both worlds. 2nd: There are a few more costs when doing a 2nd mortgage, because most companies will charge around $325 for a 2nd mortgage and you have to do a 2nd note & mortgage, which the title company will charge for this. And more recording fees.

Patrick...again, thanks for thinking outside the box to ask that question.

Eddy...... thanks for the compliment and I kind of had that in my previous blog about PMI.... But I could do a more detailed blog. I just don't want to keep boring people. I want to do some fun blogs as broker Bryant and get more people.... ;o)

Kristal..... explain what? I clean carpets. ;o) Thanks....thanks for making that comment, it means something to me. I just take a lot of pride in what I do... and I guess it's the passion within me also, to take the time to explain this to clients.

Yes, I like this Blog. I teach peole this all the time. We must think outside the box all the time. I do my busines with high ethics, and get a wierd look at people when I do things that they have never heard of before. I say to them they can checkit out or I can do it a different way. I am just trying to do what is best for my client.

Thanks,

dave

Dave..... thanks for the great input of what we go through with clients and the compliment. If we gave clients what they wanted all the time,just because the other lender is, many would lose more money than they think they would.

Jeff, good explanation. The only problem that I run into in paying the PMI upfront is the PMI companies that we deal with require a minimum of 10% down before they let me do that on a loan, and most of the time the Borrowers don't have the money for both. But it is a great idea, I which I could do it on loans more often.

If I could just add on thing, and put my 2 cents worth on answering Patrick’s question. The PMI multiplier with 10% down is only .52, and even less if they can pay it upfront as you suggest so in some cases it can even be cheaper than the monthly payment on the second loan.

Second if you put 10% down, then the Buyer only has to have another 10% to 12% equity in the property, depending on the loan, for the PMI to drop off the payment. So if property values go up even just 5% per year, the Buyer will only have to pay the PMI for two years or however long it takes to get that additional 10% to !2% equity. If they do a second they will always have that loan until they pay it off or refinance out of it. So if they can do 10% down they are much better off with the PMI in my opinion.

Thanks Jeff for putting all this information together in an easy to understand format.

George..... great point. I wanted to double check, but if you read 3/4% of the way down, I stated that I am including this PMI into the loan and I raised the loan amount. Most of these PMI companies are the same and they run the same with fannie mae and freddie mac. If I have a client that wants to do a one-time mortgage insurance loan and their LTV is 95%, 5% down, then they have to pay for this out of pocket. If my down payment is 10%, you have 3 options. Pay for all of it upfront, pay half upfront and include the rest in the loan, or include all of it in the loan. No matter what way you go, by adding this PMI into the loan amount does not affect your LTV. I evev had agruments with processors telling me that it doesn't. Why? because they assumed, because not too many people use this type of financing.

In regards to your second part. I am trying to follow that. Sometimes writing is harder to explain. We at least agree on the 10% down, that your monthly PMI will be .52% of your loan amount. But I am still not sure about the 2nd loan?

You are correct about value. But this is the part of the crystal ball that doesn't always work for me. And as a loan officer, if you express this to the client and sell it this way, .... look at what's happening now in many markets. Your last statement...

So if they can do 10% down they are much better off with the PMI in my opinion.

Again... I like opinions... but this is where the goals come into play. Keeping in mind that the average person buys a new home every 6.2 to 6.7 years. And refinancing is a little lower than that. And you can recoup all of your PMI costs, if paid into the loan.

SECRET If I put $4,500 onto my loan by doing the financed, upfront mortgage insurance.... and I refinanced or moved in 2 years, I get a percentage of that back...automatically. So your loss is very minimal, as oppposed to paying an extra $66 a month out of pocket.

And in regards to getting the appraisal done in 5 years, if values went up..... that is still 5 years of a higher payment. And...AND ...if you ever read the fine print of monthly mortgage insurance. It's the discretion of that PMI company if they will drop the PMI. If you miss a payment or multiple payments, are late on the mortgage, they don't have to drop it at all. Doesn't matter what the reasoning is.

And my last point.... don't forget loan officers.... that this loan still have to be approved by the PMI company also. If you do a One-times mortgage insurance, financed, it's the DU approval and that's it. But if you do monthly, again, that PMI company has to approve the loan also. And there have been a few times when these loans have been denied.

GEORGE>.... thanks for your opinion... because I was able to throw some more facts in there. This is just food for thought and why I like the upfront PMI financed. And one last thing.... this works better on loan amounts greater than $170,000. If I was closing a $80,000 loan and the clients goals were different, 9 out of 10 times, the monthly might be better for them.

Dave.... wow, I just noticed that I skipped right over you. Sorry....thanks for stopping by. And thanks for the compliment.... nice to see you around.

Jeff, we agree on this, or at the very least we agree on the upfront option, so let me clarify what I meant be the PMI option being better.

If they can do 10% with me and still have enough to pay the PMI upfront that is the best option. I have to check to see if our loan programs will allow me to do the one time upfront payment, and also let me roll it into the loan. Not all my programs will even let me do the one time upfront PMI payment.

So, if I can't do that, I then feel that the PMI as a monthly payment is still a better option then the 2nd loan. I agree that if they miss a payment the option to get rid of the PMI at 80% or 78% LTV may not be an option any longer. But if they don't miss a payment my PMI companies will let them drop the PMI at 80% or 78% LTV depending on the program. This is a disclosure that we give out with every loan with PMI. In my opinion property values, even in today’s market, are not going to take 4-5 years to acquire another 10% to 12% in equity. Property values have slowed down around here, but they are still going up. So they could get rid of the PMI as early as 2 years when that option is first available.

In order to refinance and get rid of the second loan and not pay points, the Borrower needs to be a 75% LTV with me if it is a Rate & Term, and 70% if it is a Cash Out, plus the closing costs of the refinance.

So going back to my statement, for these reasons I feel that either PMI option is a better way to go than the 80/10/10. With the upfront option being the better of the two.

Hope this clarifies what I meat, because you’re right, sometimes it is not easy to get it across in a post.

George..... aaaarrrgghhhh I love a good discussion and debate.... and I should be finishing up my work.... lol And you keep bringing up good points.

If you Du your loans and use fannie mae guidelines, just like Wells Fargo and Countrywide... and most of us, then you can do exactly what I mentioned. You can roll the PMI, depending on the LTV, etc etc

Getting back to the PMI options and dropping the PMI if house values go up. I agree.... BUT Let's say you do get the mortgage insurance dropped in 3 years. And I am using 3 years, because 2 years is definitely cutting it close in any market..... And in my example, you are paying $86 a month. That's $3,096 that you just paid. The one time mortgage insurance was $4,500, but it's tax deductible..... And, you are still at the mercy of the mortgage company. On that particular scenario that I used, it would take 7 years for it to fall off..... so the break even point would be about 3 3/4 years in regards to what we are talking about.

And as I said before.... if they sell the house or refinance, they get a percentage back, they don't lose that much. In 2 yrs, it's like 85% back...which would be $3,800 back. They only wasted $700 as opposed to $2,030 in 2 years by paying PMI....

Again...I understand where you are coming from. But I am certainly not going to predict a 2 to 5 year history and explain this to these clients... just because the last 5 years where awesome.

Jeff, Sorry it took so long to get back to you, but work keeps on getting in the way. I also enjoy our debates, but this time we don't have anything to debate because as I said before, I agree with you. The one time PMI payment is a better deal, then the monthly PMI payments, I guess once again did not make that clear.

My reference to the refinance was toward the 80/10/10. The monthly payment with the PMI, and the combined monthly payment for the combo loan are close. So my point was that I would prefer to pay a slightly higher payment on the PMI loan and get rid of it (by requesting a new appraisal) lets say 3 years later (equity should be at 78 to 80 LTV) , at which point my monthly payments would become less then the combo loan (no more PMI on). Then to pay the combo loan with slightly lower monthly payment for first 3 years, but then at this point (no more PMI on the other loan) it would have a higher monthly payment for the life time of the loan. (does this re-wording make it clearer)

I am basing my assumption on a borrower who plans on being in the house long term 10 years or more. If the borrower’s plans are going to be short term like 1 - 3 years then they would be better off with a combo loan.

Again this comparison is between the monthly PMI and the combo loan, and NOT between the one time PMI payment.

So I am still misunderstanding you or were you misunderstanding me before?

George... don't apologize for taking so long. Busy is good. I worked from home today.

Sure..we aren't really debating or in disagreement. But in regards to your second paragraph though.... now I am confused again. When you say get rid of such and such... refinancing it ?? Let me know, I am curious... that's all.

than I can answer the other question. Isn't this fun now.... ;o) This is actually good for the mind also. If I can always learn something from this....great.

Great informative stuff Jeff! Keep it up!

DEC

2006

Renee.... thanks for the polite compliment...

Here is Part 1 again, for those of you that didn't read it and it helps to put all of this together.Thinking outside that box…. What to do with the sellers concessions & where to apply the money. Buying down the rate vs the buydown…..Part 1.

Jeff, I have gone back over the last few days and read all the posts and I have learned a lot. Thanks for all the great info. These posts of yours are always informative. I have not spent a lot of time here and I think I should. I can see I have missed some great things. Again, thanks for all the great info.

DEC

2006

Very interesting. I can get lost with this stuff, but if it saves me money, all the better. Thanks for posting this.

Steve.... thanks for the polite comment. And yes, you should stop by more often. As I have been telling you, this is a great community.

Jim... thanks. And yes, there are other ways of saving money than the traditional ways.

The seller concession can be a great tool for each real estate purchase. Having the seller pay the upfront PMI is another benefit. Most of the PMI companies require the 10% down to pay the one time premium. HAving the seller pay it may get the buyer closer to having the 10% down. When putting theee deals together, I have noticed some of my loan officers giving up when they can't get the full concession. If you can get your borrower a portion of the allowable concession you are doing them a great service.

John... thanks for stopping by and thanks for your comments. Basically what you had mentioned, being creative is key. thanks

DEC

2006

Bang, zoom...go Jeff. My favorite line in the entire blog, which is excellent, is "stop shopping for rate and look for a loan officer who will help you build wealth."

When we operate our businesses like financial practices we develop clientele and not borrowers.

Great post.

John....... Thanks a lot for the enthusiastic compliment. And thanks for stopping by.

DEC

2006

From working along side of you, you are one person that certainly knows how to think outside the box..... great job.

Neil.... thanks for the awesome compliment. Looking forward to working with you.

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