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Understanding different types of mortgages and benefits of each

IPABeerLover 994 306 January 18, 2016 at 08:04 PM
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So the wife and I are considering our first home purchase. I dislike going into anything not understanding what is going on and I really am finding a lack of information on the true variety of mortgage options. Everything comes up with fixed-term based, ARMs, and FHA/Ag based ones. We are both fairly well offer income wise and around 800 on the credit but we are a bit off of the 20% down for the house ranges we are looking at. I am looking at calculating out the difference costs and short/long term benefits each type can offer. I have found a little on piggy-back and jumbo (not applicable so not worried on this). My main thing is I want to be able to run the numbers on all the options and see what falls where (equity building vs out of pocket costs vs tax benefits vs etc). Can anyone point me to a detailed guide and possibly good way to calculate these things? I found a very detailed rent vs buy excel table but nothing for mortgage type comparisons.

thanks

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#2
Mortgage type as in ARM vs Fixed? It will be very difficult to compare ARM and fixed past the reset date.... you'd have to assume a worst and best case scenario. The ARM will have a cap, but one thing's for sure is that "rates", in general, aren't going lower. So, count on the ARM rate continuing to increase in the future and at every reset thereafter.

I've never had an ARM but I believe the whole idea is to get in on the "teaser" rate (the initial rates for ARMS are typically lower) and refinance or sell before the reset date. The horizon for that is usually 3-7 years. For example Amerisave is offering a 30yr fixed @ 3.25 w/ 3.6 pts but also a 5 year ARM @ 2% w/ 3.25 pts. Typical cap is 2% so it may be @ yr 5 your rate goes to 4%, then to 6% on yr 6, etc. The lifetime cap is 5% so your rate would top out @ 7% (or it could go lower, but I wouldn't bet on that.

The ARM will no doubt be cheaper in the first 5 years - similar pts but much lower rate - but after that, I'd say it's very likely to cost more, and the rate can shoot up pretty quickly, erasing your savings from the first 3-7 years. This is what stuck so many people in the housing bubble - they got in on ARMS with the intention to refi or sell before the reset, then values plummeted, and no lender would touch them for a refi (typically underwater), so they were stuck when the rates shot up.

FWIW FHA loans are more targeted to those with poor credit and little to no down payment.
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#3
Every borrowers scenario is truly unique and the options do change quite regularly with the introduction of new loan products, however, the more recent new loan products are conventional products directed towards making home ownership more possible to those who may not have qualified prior.

The reason you find little on Piggy backs (a 1st and 2nd) or Jumbo is due to those products being very specialized to the specific lender and falling outside of Conventional of HUD/FHA guidelines.

In respect to being a bit off the desired 20% down payment, depending on how far off, structuring the purchase with a seller's concession towards closing costs and preapaid expenses (i.e. escrows) may get you closer to achieving that 20% down payment; but if not, there are still options, especially for those with excellent credit scores.

When I have a client with credit 760+ , 99% of the time we close on a Conventional loan product.
In respect to down payments lower than 20% the two most common options are:
a) conventional loan with monthly Mortgage Insurance
b) conventional loan with Lender Paid Mortgage Insurance (LPMI)

You should weigh these two options against each other and see which works best for you.
Think of down payment in terms of 5% increments (5%, 10%, 15%, 20%, etc) as pricing adjustments for both rate and Mortgage Insurance premiums are based on Loan To Value (i.e. 80%, 85%, 90%, 95%) and credit score.

In addition, for those making this comparison of loans with less than 20% down, there are wholesale conduits that provide reduced conventional MI premiums for credit 740+ so a mortgage broker may be able to direct your loan to that conduit for additional savings. (FHA loan products are a whole other option for less than 20% down and possible credit issues, but I am not touching on that here.)

I am admittedly biased, but an experienced mortgage broker should be able to provide you the best options for you to evaluate and assist you in making the best and most educated decisions.

-Adam
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-Adam
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#4
If you have 10% down, look for a Bank that will do an 80% first mortgage and piggyback a 10% HELOC. Not a lot of Bank's out there still do this, but some of them do. If you are on the east coast, TD will do it so long as the credit is good.

Drawback is that the HELOC is usually priced higher than a fixed rate 30 yr mortgage, and that the rate is floating based on prime. A lot of Banks do offer 1-year promotional rates.
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#5
While it used to be a very popular structure, there are currently a few negatives to the piggyback structure that must be measured:
One, as Vindadu13 mentions, is the fact the Second Mortgage will either be an adjustable HELOC or a Fixed 2nd with a higher rate.
Secondly, and something many do not realize, is that when structuring a conventional first mortgage with simultaneous subordinate financing triggers pricing adjustments to the first mortgage as well.

If you have credit scores of 760+ you will be pleasantly surprised as to the minimal adjustments keeping it as one loan with Lender Paid MI (in lieu of the price adjustments mentioned above).
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#6
Quote from tiedyed1 View Post :
Every borrowers scenario is truly unique and the options do change quite regularly with the introduction of new loan products, however, the more recent new loan products are conventional products directed towards making home ownership more possible to those who may not have qualified prior.

The reason you find little on Piggy backs (a 1st and 2nd) or Jumbo is due to those products being very specialized to the specific lender and falling outside of Conventional of HUD/FHA guidelines.

In respect to being a bit off the desired 20% down payment, depending on how far off, structuring the purchase with a seller's concession towards closing costs and preapaid expenses (i.e. escrows) may get you closer to achieving that 20% down payment; but if not, there are still options, especially for those with excellent credit scores.

When I have a client with credit 760+ , 99% of the time we close on a Conventional loan product.
In respect to down payments lower than 20% the two most common options are:
a) conventional loan with monthly Mortgage Insurance
b) conventional loan with Lender Paid Mortgage Insurance (LPMI)

You should weigh these two options against each other and see which works best for you.
Think of down payment in terms of 5% increments (5%, 10%, 15%, 20%, etc) as pricing adjustments for both rate and Mortgage Insurance premiums are based on Loan To Value (i.e. 80%, 85%, 90%, 95%) and credit score.

In addition, for those making this comparison of loans with less than 20% down, there are wholesale conduits that provide reduced conventional MI premiums for credit 740+ so a mortgage broker may be able to direct your loan to that conduit for additional savings. (FHA loan products are a whole other option for less than 20% down and possible credit issues, but I am not touching on that here.)

I am admittedly biased, but an experienced mortgage broker should be able to provide you the best options for you to evaluate and assist you in making the best and most educated decisions.

-Adam

Thanks for the initial info, I am doing some more reading into HELOC loans but I figured I should be a little more specific in hopes of getting a bit more direction. Before I start though, I am asking here because I want to read up as much as I can before contacting a broker or brokers. I do plan on reaching out but to get specific options but I am currently looking for a more general and detailed understanding instead of one specific to my situation (although I would like to understand how people in my situation fall within the general or non general options). We are also at least months out from purchasing so I have no desire to take a credit hit before we are ready (although I am sure some would be willing to give estimates without a pull).

Overall, you mention what you commonly do, I guess I am also looking for uncommon options specifically targeted to higher income/better credit. My wife and I are about 1 year out from grad school so we really haven't had much time for big savings (hence lack of 20%) but our debt to income ratio is around 28, fairly high annual income (especially for area), perfect credit histories, and currently scheduled to be debt free in under 5 years (student loans + 1 car loan, repaying at higher then necessary for each but not by much, could increase but currently prefer to save for downpayment/retirement).

I will say we really aren't interested in full ARM mortgage, I simply mentioned it as an example of what is easier to find information on. I do not trust myself to know the market well enough to trust ARMS, especially as mortgage rates appear to still be low. We are looking into purchasing for a number of reasons which include natural desire to be out of rentals, looking to settle in the town, improving housing market in region (aka prefer to get in now compared to next year), low rates, desire to build equity, and tax purposes (currently have 0 real deductions). I am sure there are a few other reasons but these are what come to mind. If you have any criticisms or thoughts on these reasons I will happily take them as well, anything that makes me think, I appreciate. Finally, I am approaching this entire house buying thing as me doing the sellers a favor. We are not going to rush into anything and we will not be pressured. We are currently not at any point requiring a house, I simply hate throwing money into rent without any equity being built. I know this may be a naive viewpoint but I also see it as a view which helps protect my wife and I. We may miss out on a good deal, but we wont get hit with a crappy one.

So back to the mortgage options. I am a numbers guy. I like being able to put in my information and look down the line 1 year, 5 years, 10 years etc and see with some estimation where I will be. To do this with mortgages I really need a better understanding of the options. A standard 20% loan is fairly easy, as is any loan which requires PMI up to 20% equity. For me, I need to understand the difference in the other options before I can start making the comparisons. I wonder what the difference in 5 years will be between putting 10% down, taking a 10% HELOC, and getting an 80% loan vs other options for example. Especially if we move in 5 years or 10 years I want to know what the break even points are and how much it effects us if we decide to simply keep the first home and buy a second instead of selling it (aka mortgage rate on second home). These are all situations I would love to run but can't currently. This makes for complex situations but I seem to like them.

I guess an easy way to get to these answers would be to simply ask, where do mortgage brokers learn their trade? There has to be some good written basis for it somewhere and while it may be dry I think it would be worth it for me.

thanks again,
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#7
My education of my trade started 24 years ago reading Underwriting manuals from my wholesale conduits and the fact is the guidelines are not what you are seeking as you know you are well qualified and what you are trying to evaluate in detail are the products, which outside of the standard conventional loan products are all specialized between lenders. We really learn our trade from the hundreds if not thousands of loans we have originated, processed, underwritten and closed; as the baskets of products do constantly change.

Realize that with your credentials (800 credit, low ratios) there are not a slew of options for you to choose from; as the more specialized products are designed for making homeownership more accessible to those with lower credit, incomes, etc.

HELOC's are portfolio products and vary between each lender, so while you can make some generalizations, there is no universal HELOC loan product.

I have had clients design their own spreadsheets or just referred to amortization tables; however, on a HELOC keep in mind that it is an interest only product for usually 10 years and it will adjust based on Prime Rate.

I am in no way looking to self promote myself on Slickdeals and focus my posts on providing general guidelines and point out or clarify where I can. I am just saying that based on your high credit scores and based on my experience and deep knowledge of wholesale lenders and loan products I do suggest you compare what is available to you with a reduced MI premium wholesale conduit or a Lender Paid MI pricing option in addition to the piggyback.
(As with your credit scores you may find that the pricing adjustment on a first mortgage with a piggy back may be very close to the same pricing for LPMI on a single fixed rate loan.)

-Adam
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#8
I chose to Piggyback mostly to avoid PMI. What is Lender paid MI (I understand it by name, but this must be a new product, right?).
I had no adjustment in rate on my first mortgage even though I piggybacked with the HELOC.
As I stated earlier, I knew the drawbacks going in with the floating prime based rate, but I am somewhat unhappy with my 5% rate that I am paying right now on the HELOC.
Not sure if there are any options for me right now aside from fixing the rate with my current bank and amortizing. Not sure if I can shop around on just the HELOC side as I am okay with my conventional 30-year first mortgage (not looking to incur closing costs for a half a percent savings in rate and then re-amortize).
It has been 4 years since i purchased the home... not totally sure if it has depreciated or appreciated as I am looking at it as a place to live rather than an investment.
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#9
The wrong mortgage can be hard to get out from under. It is important to work with a lender who can explain to you the very best options based on your particular circumstances - first time borrower, need a low down payment amount, etc.
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#10
also keep in mind that creative financing can disqualify you from certain programs. our loan (w/heloc to get us to 80% at purchase time in 2005) was not fannie or freddie, so we weren't able to take advantage of harp, hamp, or any of the "help for underwater homeowners who have continued to make their payments" refi stuff, even though we were horribly underwater.
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#11
Quote from Vindadu13 View Post :
I chose to Piggyback mostly to avoid PMI. What is Lender paid MI (I understand it by name, but this must be a new product, right?).
I had no adjustment in rate on my first mortgage even though I piggybacked with the HELOC.
As I stated earlier, I knew the drawbacks going in with the floating prime based rate, but I am somewhat unhappy with my 5% rate that I am paying right now on the HELOC.
Not sure if there are any options for me right now aside from fixing the rate with my current bank and amortizing. Not sure if I can shop around on just the HELOC side as I am okay with my conventional 30-year first mortgage (not looking to incur closing costs for a half a percent savings in rate and then re-amortize).
It has been 4 years since i purchased the home... not totally sure if it has depreciated or appreciated as I am looking at it as a place to live rather than an investment.
Lender Paid MI (LPMI) is a loan product where the lender will essentially self insure the MI where you will not be making a monthly MI payment but will have a slight increase to the interest rate.

This is not for everyone but can prove to be a very viable option for those with high credit scores.

For example, and this is hypothetical but will illustrate what i am describing:

A borrower with 760 credit is doing a 90% LTV purchase and the rate is 4.125% plus monthly MI.
They may have the option for LPMI at a rate of 4.25% with no monthly MI premium.

Again, I stress that i am generalizing as there are many factors that affect pricing.

--------------------------------------

Depending on your current rates, credit scores and equity position, if you still have less than 20% equity it may be worth investigating.

--------------------------------------

Keep in mind that when refinancing a first and second mortgage, as long as they were simultaneous purchase money mortgages the new loan will be written as a rate/term refinance.

However, for those that obtained the second after the acquisition, these are underwritten as cash out refinances and will follow those product LTV matrix, guidelines and pricing (even if you are not walking away from the table with cash).
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#12
Quote from tresh View Post :
also keep in mind that creative financing can disqualify you from certain programs. our loan (w/heloc to get us to 80% at purchase time in 2005) was not fannie or freddie, so we weren't able to take advantage of harp, hamp, or any of the "help for underwater homeowners who have continued to make their payments" refi stuff, even though we were horribly underwater.
This is an excellent point. Yes, while the loan may have followed conventional guidelines, those portfolio loans (loans not securitized by Fannie Mae and Freddie Mac) did/do not qualify for any of the HARP programs which caused tremendous issues for the homeowner who otherwise would have qualified for relief.
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#13
None creative lending also didnt help some. My friend had a 100% with pmi from an offshoot of fannie and got zero help yet another with a fancy 80/10/10 did.

Anyway, FHA can work if you do the numbers - the rates can often be lower than conventional but you have to add on pmi as a percentage. It still might be cheaper than a piggy back with a second high rate. As people say, its unique to your situation.
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#14
For those with high credit scores putting less than 20% down FHA is not the way to go in most cases as FHA as an Up Front MI Premium of 1.75% of the loan amount (which conventional financing has no UFMIP) and then a higher monthly MI premium compared to conventional financing. (Despite lower interest rates FHA is more expensive due to the MI Premiums.)

To illustrate what I have been mentioning about significantly reduced MI premiums for high credit scores here is a great example.

Purchase Price $695,000
Loan Amount $625,000 (90% financing)
Qualified Credit Score = 760

The Monthly MI = 156.38/mo (compared to the standard conventional premium of $307.54/mo, or $417/mo for FHA)

Then there is the option of Lender Paid MI. (LPMI)
In this case the rate would be .125% higher with no monthly MI premium being paid.

Again, every scenario is unique and must be analyzed on its individual criteria, but the bottom line is that CREDIT IS KEY TO OBTAINING THE BEST PRICING.
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#15
You cant state that - it depends on rates being offered which are often lower on FHA. Ive seen FHA + PMI total rate be the same as a conventional 30yr being offered. You also only need 5% down and regardless of credit rates you need deposit money.

You can also haggle better rates despite having a poor credit rating - gather those GFE's.
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