This is one of the most overlooked questions when considering loan options, since the lower rate includes mortgage insurance and the higher rate does NOT.
For clients who are putting low down payments of 10% or less, it is a reality to consider.
Lenders now offer multiple solutions for mortgage insurance, one of which is lender paid (where the lender makes the monthly payment in return for the client taking a higher interest rate).
Another choice is to do a combination of two loans, a first mortgage at 80% and a second to 10%, which allows the client to get the lowest market rate on the first, and the second then is a equity line.
So, what are the numbers inside the numbers? Here are some example calculations to review:
1) client putting 5% down, and considering paying mortgage insurance (MI) vs. lender paid MI conventional -
purchase price of $300,000
New first mortgage with MI (factor used is .85% in this example) - loan is $285,000 and rate is 4.25% (APR is 4.36%) the monthly payment breakdown:
$1402.03 principal and interest
$201.88 mortgage insurance
$1603.91 combined
versus
new 1st mortgage of $285,000 - at a rate of 4.75% (APR of 4.81%)and the monthly payment -
$1486.70 principal and interest
In this example, the monthly savings of NOT having MI is $117.22. Even at the HIGHER interest rate!
The difference is even MORE when considering FHA loans, where the MI factors are higher due to offsetting the risk of lower credit scores.
2) client putting down 10%, and considering a purchase of $300,000
We use one loan of $270,000 to begin with, and include mortgage insurance. Lenders charge a higher interest rate for the higher equity usage, and the mortgage insurance is on top of this.
The interest rate used for this example is 4.375% (APR is 4.48%). The monthly payment breakdown is as follows -
$1348.07 is the payment
$191 is the mortgage insurance
$1539.32 is the TOTAL payment
versus
Combo deal - 80% on 1st mortgage and 10% on 2nd mortgage
1st mortgage would be $240,000 at 4.25% (APR is 4.37%)
$1180 principal and interest
2nd mortgage is interest only at 5.24% ($30,000 loan amount) - (APR is 5.35%)
$131
$1311 is the TOTAL payment
In this scenario, the overall payment is $228 lower in the second option.
We like to use these comparisons as options to increase buying power, as well as demonstrate savings options that may bot be considered at first blush for prospective buyers. We also make sure that the realtor understands these in case the buyer is in multiple offer situations.
We also use this as a refinance reference point for all of your CLOSED clients for the following advantages-
1) The easy way to connect with the client by adding a great service to them.
2) A lever to help your client consider adding real estate or being able to buy up by using the monthly savings.
3) Create some monthly savings that can allow home improvements
All of these scenarios assumes the lender is paying the points, and the APR is assuming client pays escrow fees.
Summary -
There are many lending options currently that can produce a lower payment for your client, and in turn, allow them to either purchase more home or refinance to improve cash flow. Make sure that your loan officer is running each of these and reporting to you so you are well grounded in what your client can afford!
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