Buying a house, loan questions.

[swanysto]

Ok guys, I am very inexperienced when it comes to finances. Most of my decisions have been pretty straight forward. Well, I have a little bit more difficult decision coming up. I(my wife and I) just got pre-approved for a couple loans, FHA and Standard 20% down. I won't go into too much detail, but the monthly payment for the FHA(with roughly 12-15k down) is coming in around $1650 with payment, tax, insurance, and PMI. The conventional(with roughly 50k down) is around $1250 with everything but the PMI obviously.

Now here is my situation. We have two car payments for a total of $540 a month. So I am wondering if it would be more beneficial to take the FHA loan, and pay a higher monthly(and throw away $200 a month in PMI) and pay off the cars(owe a total of 17k) with the down payment money. That would save us $150/month total. Or would it be better to take the 20% down on the house and have instant equity and no PMI, but pay a higher monthly and have less money in the bank.

I am really leaning towards the conventional, cause it seems to me to be the better investment, but it would be nice to have the cars paid off and cut the interest payment from them(albeit not very much interest), and have a little bit of money sitting in the bank. Like I said before, I am not financially savvy, so opinions on this would be nice. Both of our parents bought houses many years ago, and those were different times.

TIA

P.S. There is a law being instated end of June that gets rid of the 5 year rule with PMI. It will now be required throughout the life of the loan. So I will not be able to drop that $200/month. And it would be next to impossible to close before then.

 

[rcpratt]

What rate are the vehicles financed at, and what rate are you being quoted on the mortgage?

What amount of cash could you realistically spend on a down payment and/or paying off cars right now? Keep in mind the costs that you will incur with a new home.


I'm not sure how your last paragraph affects the below, but this was true when I closed on my mortgage in February. So PMI is for the whole 30 or whatever years now? And even once you have 20% equity you can't get rid of it?

Due to the low interest rates nowadays, you can save a pretty decent amount by basically paying off the PMI up front - but rolling that amount into the loan. I would guess that may add closer to $50-75/mo to your payment rather than $200/mo. The drawback is that you pay that throughout the life of the loan, of course.

 

[JPerk]

Avoid the pmi and pay that extra $200 to the cars or use it to rebuild your savings.

 

[swanysto]

What rate are the vehicles financed at, and what rate are you being quoted on the mortgage?

Mine - 4%
Hers - 3%

FHA - 3.25
Conventional - 4

What amount of cash could you realistically spend on a down payment and/or paying off cars right now? Keep in mind the costs that you will incur with a new home.

Well, I could pay off the cars and still have 20k, but that wouldn't be enough to get rid of PMI.

I'm not sure how your last paragraph affects the below, but this was true when I closed on my mortgage in February. So PMI is for the whole 30 or whatever years now? And even once you have 20% equity you can't get rid of it?

That is correct, the new law will require PMI for 360 months on a 30 year, so essentially 80k wasted.

Due to the low interest rates nowadays, you can save a pretty decent amount by basically paying off the PMI up front - but rolling that amount into the loan. I would guess that may add closer to $50-75/mo to your payment rather than $200/mo. The drawback is that you pay that throughout the life of the loan, of course.

I was told that no longer applies.

 

[rcpratt]

PMI is going to cost you way more than interest on the cars then. Go conventional (although you should be able to get at least a quarter point lower if your credit is decent), assuming you are able to put that $50k down comfortably.

Really not a fan of the new FHA rules. That's really going to prevent a lot of young people with relatively high income/low cash from buying, when it shouldn't. I wouldn't have been able to buy my home with these new rules.

 

[HardcoreRobot]

last i checked, PMI on FHA loans automatically disappears after 78% LTV (based only on loan amortization, not house value). You must keep the PMI for at least 60 payments (5 years).

often the lower FHA rate compensates for some of the lost PMI.

best advice is to plug your numbers into a calculator (i like bankrate.com) and see for yourself. run a few different scenarios. calculate how long you will have to pay PMI based on your downpayment. See how much interest and PMI you end up paying over the life of the loan etc.

Also, if your house appreciates sufficiently, you can refi out of an FHA loan at any time.

 

[AustinInDallas]

i was under the impression that the pmi drops after you hit 20%, or at the very least you could refinance, but then I guess the interest rates might be high by then

 

[swanysto]

last i checked, PMI on FHA loans automatically disappears after 78% LTV (based only on loan amortization, not house value). You must keep the PMI for at least 60 payments (5 years).

That used to be the case, but I have been told by a couple loan officers, that as of the end of June, I believe the 21st is what they told me, that FHA will now require PMI throughout the life of the loan. You will no longer be able to get out of it after 5 years.

http://www.housingwire.com/news/2013/01/30/fha-raises-mortgage-insurance-life-loan

often the lower FHA rate compensates for some of the lost PMI.

best advice is to plug your numbers into a calculator (i like bankrate.com) and see for yourself. run a few different scenarios. calculate how long you will have to pay PMI based on your downpayment. See how much interest and PMI you end up paying over the life of the loan etc.

Also, if your house appreciates sufficiently, you can refi out of an FHA loan at any time.

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[jaedaliu]

With your car rates being so close to your mortgage rate, there's no real benefit (other than lack of headache) to paying off the cars first.

However, as rcpratt said, try finding a better rate on your conventional loan. I'm surprised there's a 3/4% difference between the two.

 

[swanysto]

Here is another link.

http://themortgagereports.com/12357/fha-today-new-fha-mortgage-insurance-premiums-mip-announced

 

[HardcoreRobot]

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thanks for info.

we were considering an FHA loan a while back. with 15% down, the PMI would come off right at 5 years, and the payment after 5 years would be significantly lower than the conventional.

over the life of the loans the total cost was within 10 or 20k I think. these changes make FHA a lot worse.

 

[RagingBITCH]

You can pay off mortgage insurance up-front. (We did that for the house we just closed on)

 

[Legios]

Never pay PMI, go conventional, our first house we did and 80/20, 2 loans but with the ability to pay down the smaller loan as fast as we wanted.

Even did an 80/10 on our second house until we sold the first to pay off the extra 10%. works out so much better for us not being locked into PMI payments.

We had the loan officer lay out the exact payments each type would be and choose based on that and what we felt comfortable being able to pay.

 

[sciencewhiz]

Do you have a good enough credit score to qualify for a conventional 5% down with PMI? If you do, I wouldn't even consider FHA anymore, due to the new rules. Have your lender run the 5% down numbers.

Were the FHA and conventional loan numbers run at the same time? Mortgage rates are up the last few weeks, which could explain some of the difference. 4% on a conventional seems high, unless you have poor credit.

 

[sciencewhiz]

You can pay off mortgage insurance up-front. (We did that for the house we just closed on)

Not with FHA.

 

[Mermaidman]

Can you pay off ONE of the cars and still put down 20% on the mortgage?

 

[rcpratt]

Not with FHA.

I guess my understanding of some of the details may be unclear - 5% down, rolling the PMI into the loan was what I did in February. It was initially labeled as FHA, but later I did hear something about conventional...

So can you still do 5% down conventional and either pay the PMI up front or roll it in?

 

[sciencewhiz]

With your car rates being so close to your mortgage rate, there's no real benefit (other than lack of headache) to paying off the cars first.

However, as rcpratt said, try finding a better rate on your conventional loan. I'm surprised there's a 3/4% difference between the two.

Because they are not financed over the same term, putting extra money into the longer term is worth much more over the long run. 10k at 4% for 5 years costs about 1k in interest. 10k at 4% for 30 years costs about 7k in interest.

 

[PingSpike]

If that change to PMI is true and its for the life of the loan, stay the fuck away from that I'd say.

 

[sciencewhiz]

So can you still do 5% down conventional and either pay the PMI up front or roll it in?

Yes, assuming you can qualify for 5% down conventional. It has a higher minimum credit score then FHA.

 

[JTsyo]

Looking at it, the .75 difference in interest rate isn't enough to offset the PMI. As long as you have a healthy savings after 20% down, I would say go with the standard. Just beware, the first year after buying a house, you'll run into a host of expenses from furnishing the house to small things to fix to yard care and what not. Be careful not to build up credit card debt to cover everything.

EDIT: oh also look into a 15yr. You might be able to get something you can pay and save a lot by going 15 year, keep your options open.

 

[HardcoreRobot]

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Never pay PMI, go conventional, our first house we did and 80/20, 2 loans but with the ability to pay down the smaller loan as fast as we wanted.

Even did an 80/10 on our second house until we sold the first to pay off the extra 10%. works out so much better for us not being locked into PMI payments.

We had the loan officer lay out the exact payments each type would be and choose based on that and what we felt comfortable being able to pay.

my info is now a couple months dated, but when we were loan shopping there were no choices aside from conventional w/ 20% down, or FHA.

though when we bought our current house, we did 80/15 with 5 down. and it worked very well for us