Home Loan Advice Needed

In My Humble Opinion
1

Mrs. Rancid and I are looking to buy our first home, and we are novices in every way. I would especially like help deciphering which type of loan I should look into securing.

Specifically, what are the advantages and disadvantages with the following loan types:

  1. Fixed Rate
  2. Arm
  3. Interest only
  4. A piggyback loan? I believe this is actually tacking one loan on top of the other.

Should I go with a local lender, or are services like Lending Tree reputable enough to trust?

Any additional home purchasing advice is more than welcome.

Thanks!

2

While I haven’t actually bought a house, we’ve been studying up for the hopefully near future when we do. How long are you planning to be in this house?

Considering the fact that interest rates are at historic lows, I think by far the safest and smartest bet is to get a fixed rate loan. The fixed interest rate might be a bit higher than the other options, but only until the interest rates go up which (IMO) they almost certainly will. So in the long run I think it’ll be a lot cheaper, plus you’re completely protected from interest rate hikes.

Interest-only is a terrible idea unless you’re only buying the house as a short-term investment (which at this point in most markets I also think is a terrible idea). If the only way you can afford the monthly payment is with an interest-only loan, rent. You’re a foreclosure waiting to happen.

3

There are a bewildering variety of loans out there. Definately speak with a couple local loan officers, and perhaps get some recomendations from your real estate agent (if you don’t have one yet, you certainly want a buyers agent).

Now, assuming you plan on staying in the house for more then 5 years or so, I’d definately go with a fixed rate loan. Mortgage rates are still really low right now, so there’s no reason not to get one if you’re going to be in the house for a while.

If you’re going to be in the house less then 5 years, do the math very, very carefully to figure out if it makes financial sense or not, because unless you luck out and the house appreciates a lot you may end up loosing money over renting.

If you don’t have enough money for a traditional 20% down payment, look at an 80-10-10, 80-15-5, or 80-20 loan. Basically, the “80” is a conventional mortgage on 80% of the value. The second number (15, 10, or 5) is the percentage of a second, additional mortgage, and the final number is your down payment. IMO, this is the best option if you don’t have a 20% down payment. You could also look at a single loan for more then 80% of the value, but then you’d have to get PMI, which, unlike interest on a second mortgage, isn’t tax deductible.

4

  1. It’s fixed. You know what you’re paying. You’ll be paying off principal and interest. It’s traditional, and classic and nothing it wrong with it.

  2. ARM should give you a lower interest rate than the fixed rate, but will will adjustable after a few years. With rates low right now, compared to traditional numbers, you could have higher payments when the ARM period runs out. We started out house with an ARM that was like 6% for 5 years, then adjustable. If we went fixed at the time, it would have been like 6.75% or something. It was my first job otu of college, so I knew that I’d probably be making more money in 5 years. We refi’ed when the fixed rates actually dropped well below the 6%.

  3. I don’t like them. Search this forum for a recent discussion we had. I just don’t like NOT paying off a loan on the “bet” that your house is going to appreciate.

  4. I don’t know what they are. Are they those 80-15-5 things?

Here’s the thing. . .all of those things besides a traditional mortgage seem constructed to get people who can’t afford it into a house. They’re cheaper short term, but I just don’t believe that they work out for people in the long run. There’s more risk built into them for you and the mortgage company.

5

Here are a couple of recent-ish threads dealing with interest-only loans:
http://boards.straightdope.com/sdmb/showthread.php?t=303198&highlight=interest-only
http://boards.straightdope.com/sdmb/showthread.php?t=295494&highlight=interest-onlyhttp://boards.straightdope.com/sdmb/showthread.php?t=273089&highlight=interest-only
http://boards.straightdope.com/sdmb/showthread.php?t=319889&highlight=interest-only

I’d be very leery of getting such a loan unless you’re nearly certain you’ll be moving on within a couple of years.

ARMs can be useful but again, mostly if you’re most likely to be moving on within a year or two of the adjustment period; it seems quite likely that rates will creep up enough that in a few years, an ARM will adjust to something like current fixed-only rates. Plus, IIRC, ARMs typically have a lower rate initially then automatically adjust up a little the first time, even if things like the Prime Rate are unchanged.

A piggyback-type loan can be a terrific idea. Basically you get a primary mortgage for 80% of the purchase price, at a standard rate (say, 6% as a WAG), then you get a secondary mortgage for some or all of the remaining cost of the house (basically, whatever you can’t come up with for a down payment). The rate would presumably be higher - say, 8%, and/or it might have a shorter term, and/or it might be a variable rate; I’ve never actually used one of these so I’m not sure. HOWEVER - it allows you to avoid Private Mortgage Insurance, which is a big money sink (and very tough to get rid of). You can pay it off over its full term, or you can throw whatever spare cash you come across into paying it off early, thereby reducing your mortgage payment. AND - its interest is tax-deductible which right there makes it a better deal than PMI.

Anyway - you need to think about your geographical area and local housing market, the likelihood of you wishing to move on in a few years, and comparative rates between ARMs and fixed-rate loans. Use Excel to run some numbers. Don’t forget to factor in tax savings when figuring out what you can afford; for example if your rent is 1000 a month and your mortgage (which is nearly all interest at first) would be 1500, and your income tax rate is 28%, you’d get a tax deduction worth 420 a month (28% of 1500) - i.e. your monthly cost doesn’t go up much at all.

6

:smack: Forgot to mention one other factor that might make an ARM a bit more attractive: They recalculate your payment each time the rate adjusts (e.g. on each one-year anniversary). If you’ve been paying a bit extra on the principal, then that recalculated payment could go down even if the rates have been unchanged.

Whereas with a fixed-rate loan, prepayments just slice off time from the end of the loan. An extra 50 dollars a month might shave a few months off the end of the loan, so ultimately there’s a significant cost savings, but there’s no short-term cash-flow benefit to prepaying.

7

I have an interest only loan for my second. I did an 80% (fixed) - 15% (interest only) - 5% (down). That got me into the house, and because my job is pretty stable with relatively predictable raises every year, and because my student loans would eventually go away, I’m comfortable with an interest only loan for my second. It gave me the flexibility to have a very low interest rate, and the ability to pay only interest if things were tight that month. But I generally pay what I consider to be the “principal” amount in addition to the interest each month. That eats away at it and, frankly, it’s down low enough that I could pay it off completely now. In general, I wouldn’t advise interest only loans, but in my situation, it’s a good deal.

That’s really the bottom line for you; you’re the only one who knows your particular situation. But in general, fixed good; interest-only bad. YMMV (mine does).

8

Standard disclaimer: I don’t do this for a living, just another guy buying a house. And I just went through all the paperwork for this last night, so things are a little fresh in my memory.

It depends on your current financial situation, how long you’re planning on keeping the house, and how much risk you want to assume.

Fixed Rate: The interest rate you get once the loan is “locked” is set for the entire duration of the loan. The rate will be higher some of the other options, but you won’t have to watch the market to see whether it’s going to change, either. Rates are very low right now, so any “adjustable rate” loan is likely to go up over the long term.

ARM and interest only are variable rate loan types. With interest only, the bill you get only covers the interest accrued over the last month (or whatever the payment period is). So you have a lower required payment, but you’re not reducing the pricipal any unless you overpay. Some people take these and pay only the minimum in the hope that the house value will appreciate over the period they’re going to own the house and make a net profit on the sale a few years down the line.

I’m not sure how ARM differs, that may include interest + principal on the bill.

There are a few different types of interest-only. When I spoke to my loan officer there were some options to “lock” the interest rate for a certain period of time, although the longer the lock the higher the rate. The ones he laid out for me varied between a 1 year lock to a 10 year lock (which was barely below the 30 year fixed rate). If you’re expecting to sell the house within that period, that may shave a bit off the interest and be a better choice.

There are also HELOC loans (Home Equity Line of Credit). Think of this as like a credit card with a credit limit equal to the initial loan amount. After you pay some of the principal off, you have so much available to draw from (although you still have to get to a zero balance by the end of the loan period) for things like home improvements, emergencies, new toys, etc. Unless you’re the kind of person who’s very careful with your money, you may want to avoid this, otherwise you could find yourself with a very large bill years down the line. I believe these are almost exclusively for second loans (see below).

The “piggy back” loan is a very good option, but may require a pretty good credit history to qualify for. Basically, if you get only a single standard 30 year loan, you have to pay mortgage insurance until you have paid off a certain percentage of the house (usually 20%). If you have the 20% to put down, you don’t need to worry about the second loan. Then again, that much cash usually isn’t available to anyone buying their first home. The second loan can be any type (ARM, HELOC, interest only, fixed rate) completely separate from whatever you got for the primary one.

I’m going that way. For me, the way that works for is like this:
I got a 30 year loan for the price of the house minus the cash I’m putting up (5%).
I got a second loan for 15% of the house price, used to pay off part of the first loan. The second loan is at a higher interest rate, and has a 360/180 setup. The monthly payment amount is calculated on a 360 month amortization, but it must be paid off in full after 180 months. The schedule had 179 payments of about $230 with payment #180 being 22,000. Obviously, you can (and should) ease that final bill by making overpayments.

The second loan payment is a little more than what mortgage insurance would cost, but part of that money does go into the equity of the house, and I’m pretty sure (but not 100%, I have to do some more research on it) that the interest on the second loan counts for tax deductions the same as the interest on the primary loan.

Both of my loans are fixed rate. I’m looking at a total bill of around $1250 per month (barring any rate adjustment between the initial paperwork and getting “locked in” to a rate), although I’m probably going to be actually paying around $1500-1600 (with most of the overpayment being into the second) since I don’t like debt. Between having a larger space, the ability to do what I want to it, the tax savings, and having my girlfriend move in with me and covering some costs, I consider it a net gain for me over renting.

9

Thanks to everyone for the replies. I believe we are going to end up going with either a 30 year fixed for 100% of the loan amount, or use the piggyback type, depending on the price range we end up going with.

Can I ask once again if anyone has used a service such as Lending Tree to secure a loan? If so, would you reccomend such a service?

Thanks.

10

I don’t know Lending Tree.

Lenders will try to get higher-than-market rates from you. This worked for me:

I used MyFICO.com to get my FICO score, and there’s a table to find what the current week’s interest rates are in your area for your FICO score. They charge you a few dollars. You want this for your negotiations, as in, “forget that deal, it’s ridiculous.”

I tried two or three of the big lenders (Ameriquest for one), and then at a friend’s advice I tried a credit union. The big lenders all tried to sign me up for much higher costs, ie Thousands of dollars more in points & fees, plus Hundreds of dollars more payment per month, for the same mortgage. I told them I knew my FICO and that the going rate was, and the salesperson just bypassed that, would not negotiate. All three almost identically matched offers with each other. :dubious:

I went with the credit union, which did match the going rate, and have no problems. It’s a known California CU with a history (Patelco), and again, the numbers were obviously better.

Without a 20% down payment, you may not be able to get the top deal, but you could re-finance later on if it will work for you.
A lot of mortgage decision depends on what will work for you. My brother paid his mortgage off as soon as he could. I’ve now re-fi’d for 30 years fixed at these low rates, and don’t intend to pre-pay, expecting to live here indefinitely. If you don’t pre-pay, you can put that money into other investments that are more liquid than a house, but YMMV. I had to fight my emotions in order not to pre-pay. This is a bet on inflation/economic growth over the years. Ie, my monthly payment will be less than my food bill toward the end.

But invest that money somehow, don’t fribble it away.

Another approach is: you buy with whatever the transaction costs you, and the mortgage. Suppose it’s a $200,000 house and you put down $40,000. If homes in your area appreciate, in five years you sell it for $250,000, and you pay off the balance of the mortgage and have your $40,000 back plus $50,000, so you’ve more than doubled your $40,000. Tax-free. Then buy a nicer house and do it again.

But also account for any repair/maintenance/upgrade costs, and the outflow is likely higher than renting during that period so that’s a cost, while the interest is a tax-break so the cost is reduced, so you want to be realistic in your accounting and thus it might not be a clear $50,000.

(deep breath) and you might find satisfaction in home-ownership that’s worth the expenses.

PS, real estate prices fluctuate like the stock market. We bought in '92 in a flat spot after the booming eighties, and a couple of years prices were down and wow, the equity was down to zero so all the life savings were gone and if we’d had to sell, the mortgage company would have had every penny from the sale.

Now on re-fi’ing, the appraisal was for about three times the original price. But that’s imaginary money till selling it, if I ever do.

11

I’d like to point out that “fixed rate” loan does not mean you’ll have fixed (unchanging) monthly payments. Traditionally, part of your monthly payment goes into an escrow account which is drawn from to pay taxes, insurance, and maybe a few other things I’ve forgotten. Every year the escrow company will make (hopefully) minor adjustments to ensure they have enough money when these bills are due. This can cause your monthly house payment to fluctuate (in our case) by as much as 300 bucks year-to-year. (max difference, high to low… it rarely changes more than 200 at a time).

(YMMV of course. We live in a no-income-tax state, which means the state gets its money via property taxes. These are part of our house payment, which accounts for some of the changes every year).
Good luck on your new house :slight_smile:

12

True enough - though to put it in perspective, you’d have the taxes and insurance regardless of the loan flavor (and ours have varied wildly; they’ve gone up 200 a month in 2 years). And if your mortgage company doesn’t require escrow, you’d have to put that money aside yourself.

Our escrow is just insurance and taxes, I don’t know if any other expenses are typically escrowed. It’s all a ripoff anyway, because the bank gets to sit on your escrowed funds but does not have to pay you a dime of interest on them. I don’t mind the concept of an escrow account, it keeps me from forgetting to save up the money, but I don’t think the bank should have free use of the money.