I have been talking about comparing FHA loans to Conventional loans and how to use your money wisely in my last 2 mortgage posts. The links are below and I suggest you reading them to find out what the fuss is all about. But in this post, I wanted to bring up 2 important points.
- some people argue that you should put more money down if you have it, so you don't become up-side-down in your property (I disagree with this statement)
- another point is that you could actually make a lesser down payment and take some of that extra money that you saved and use it to buy your interest rate down. It all comes down to your goals.
So, let's jump into this a little deeper...
So your fear is that you could be upset down on your property if you don't put 20% down or so? Let me pose a question to you. Why would it matter right now? Homes aren't suppose to be purchased like a car, to where you sell it or trade it within 2 to 5 years. Sure, unforeseen things can happen. But homes are suppose to be a place to live in, raise a family, possibly have your kids go to that school system, and for fond memories. And overall, it's a long term investment.
If you were to buy a home for $200,000 and put 20% down, you would have a mortgage of $160,000. What happens if in a year or so that value of your house drops to $165,000? Then you have nothing at that moment. And if you needed money as an emergency, you just can't walk up to your house and say, "house, please give me some of money back." Especially not in today's market, because of the fact that it's tougher to get mortgage financing.
I don't have a crystal ball, but home values should come back in the next 3 to 5 years. And in some areas they have come back now. But if they don't, why not take the money that you saved from not putting it all down as a down payment and invest it, to make more money. It can happen, think about it. And worst case, you have that extra money for emergencies.
Please read - Don't be cash poor - Cash is king
Onto the second part of this post, something else that you could do with your left over down payment. Buy your interest rate down, which allows you to get another bang for your buck. It's very simple math.
In my scenario below, you will be putting 10% down on a FHA loan as opposed to the required 3.5% down for all FHA loans. I will show you the difference in mortgage payments and what you could actually do with that extra money, even when it comes down to lowering your interest rate.
FHA Loans – Comparing 10% down to 3.5% down
Scenario # 1
My sole purpose in this comparison is to show that cash can be king and that you aren't hurt as much if you just put 3.5% down on FHA loans. On the 10% down, you will be better by $4,193.60 in 5 years. But by putting 3.5% down, you are keeping $14,787 in your pocket upfront and your total monthly mortgage payment is only a total of $41.61 extra. In my honest opinion, that is a very good trade off in order to have more cash left over for several things such as :
- monies left over to fix up the house
- future home repairs
- new furniture
- loss of future income
- family emergencies
- possibly put some money into investments to get a better return
Overall, just left over cash for security for unknown circumstances....
FHA Loans – Comparing 3.5% down w/buying down interest rate
Scenario #2
Lastly, this is a very simple comparison. You now have the extra cash from scenario #1 above to use to buy down your mortgage interest rate. Not only do you save $91.22 per month, but it only takes you approximately 3 years to recoup the money that you spent to buy down your interest rate. As I have stated in several posts, the average person stays in their home for over 6 years. Your end result then is that you will save more money by buying down your interest rate.
Disclaimer : The rates are examples in today's market, aren't any form of advertising, and aren't for solicitation of new business. It's merely to educate the consumer. And the spread shown in these examples are real as in the profit margins for both sides, in order to compare apples to apples.
For more FHA loans vs conventional loans comparisons :
- FHA loans vs Conventional loans - A true numbers comparison with 5% down - 12-20-08 -Using a 710 credit score
- FHA loans vs Conventional loans - A real comparison with 5% down - 11-15-08 - Using a 659 credit score
- FHA Loans vs Conventional Loans - 20% down - A Rude Reality Check - 04-03-09 - Would you believe that FHA loans could be cheaper even with 20% down? Come see why and how.
- FHA Loans vs Conventional Loans - 5% - 4 comparisons that you need to know - 05-02-09 -Comparing a FHA loan against 3 types of conventional loans with different types of monthly mortgage insurance. Guess who won while still using a 679 credit score.....
- FHA loans vs Conventional loans - Knowing the true comparisons - 07-10-09 - A great comparison with a 679 credit score and 5% down. This example will still show that even with a better than average credit score, that FHA loans are still better in many cases.
- FHA loans vs Conventional loans - Things you need to know with 10% down, especially in regards to Condos - 09-19-09 -
Donw Payment Series - A Must Read -
- FHA loans vs Conventional loans - A real comparison with 20% down - Part 1 of 3 - 01-28-10 - Not much of a difference, unless you stay in the house for more than 5 years. Hence why a loan officer should be talking about your goals. So very important, yet many dont ask.
- FHA loans vs Conventional loans - Don't be cash poor!! - Part 2 of 3 - 01-29-10 I want to show even a bigger difference if you put less down. And even if you decided to put less than 10% down, because cash is king now. You can't predict even next week. And keeping in mind of some misleading rumors, that you need more than 10% down to buy a house.
- FHA loans vs Conventional loans - Get a bang for your buck - Large down payments aren't always the best way - Part 3 of 3 - 02-01-10 - Some great examples of having cash left over and not really affecting your monthly mortgage payment. And that you will have cash left over for emergencies. Keeping in mind that cash is king.
- Make sure you know about the NEW FHA loan changes : FHA loan changes for 2010 & why they changed. Reasons for these FHA changes and when they go into effect.
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Experience & Knowledge at its BEST !!!
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For more information on FHA loans, please go to this link. The FHA Expert
For more information about the 2009 Tax Credit for First Time Homebuyers : 2009 Tax Credit
For important mortgage insight to watch for, please read : Consumers need to be aware of these Red Flags!
Copyright © 2010 by Jeff Belonger of Infinity Home Mortgage Company, Inc
_____________________________________________________________________________________________________________________________
FOLLOW ME ON FACEBOOK
- FHA Loans - USDA Loans - VA Loans -
- Energy Efficient Mortgages -
- Conventional Loans - 203 k loans -
- FHA Home Loans - Mortgages -
Experience & Knowledge at its BEST !!!
Follow me on:
______________________________________________________________________________________________________________
For more information on FHA loans, please go to this link. The FHA Expert
For important mortgage insight to watch for, please read : Consumers need to be aware of these Red Flags!
For information about FHA myths & FHA rumors, please read : FHA Myths & Rumors
Copyright © 2011 by Jeff Belonger of Infinity Home Mortgage Company, Inc
Please read this series on FHA Loans on how to save money & use your money wisely.
Hi Jeff! You are just a wealth of information! I used to be such an advocate of putting down at least 20%--encouraging first time home buyers to save until they have the amount they need to put down 20%. Now, I'm with you--I don't want them being cash poor and with the home values dropping so dramatically, they surely can't say, as you so eloquently put it, "House, please give me some of my money back!"
Great articles too--I've got a bit more reading to do!
Have a wonderful Wednesday...
Jeff,
I love redundancy so let me quote you.
"So your fear is that you could be upset down on your property if you don't put 20% down or so? Let me pose a question to you. Why would it matter right now? Homes aren't suppose to be purchased like a car, to where you sell it or trade it within 2 to 5 years. Sure, unforeseen things can happen. But homes are suppose to be a place to live in, raise a family, possibly have your kids go to that school system, and for fond memories. And overall, it's a long term investment."
It's well worth repeating!
Let me ask a further question. If the buyer could afford the higher down payment and the house goes upside down and they let it go, who's better off? The guy with no equity that loses his home, but still has 16.5% in the bank or the guy with no equity and nothing in the bank?
Bill
Jeff,
You are right on here. There is a myth that is circulated (there are too many in our industry) that if you a put a large down payment into your house its better than putting a small one. People dont tend to realize that if you put money "in to your house" its not a like a bank. Equity is not guaranteed, as you pointed out it can go away and you cannot get it back. Also equity is dead money, meaning once its in your house, its gone, you want it back you either have to sell your home or refinance and make payments. And most people dont take into account the lost opportunity of investing the money elsewhere to help off set a higher loan amount. The same principle comes into play with people who never harvest the equity out of their home. Equity can really create a false sense of security with homeowners. There is a whole book on this topic called Missed Fortune 101. Its a pretty good read.
Great Post
JP
DEBE.... . I think many were always an advocate of putting more money down, even when those years were good. I think too many of us got caught up in such slogans... "pay your house off early", etc, etc.. and I still see and read about it. But in my opinion, what is missed are the many things that I pointed out. Overall, thank you very much for your compliments, much appreciative.
WILLIAM... . thanks for repeating that... ;o) And in regards to what you brought up in the end, that is kind of what I had stated, but not as directly as you had stated it... I would hope that many reading this would get the gist of this and the meaning behind it. But thanks for pointing this out, as usual. Thanks again..
JP aka Preferred Financial Funding... . As I mentioned to Debe above, that I feel too many lose sight of this, that the fear should not be whether you are upside down or not, but do you still have money in reserves, for those emergencies and such. Overall, in my opinion, I think you hit the nail in the head.. you stated.. "Equity can really create a false sense of security with homeowners." thanks for your input and for the compliment.
Jeff: Thanks again for the series it was very thought provoking. Its another thing we can bring to a borrowers attention which adds value to our industry. In our business "one size fits all" does not apply. Everyone has different cash outlays (large and small) depending on their age group. In my opinion ready cash is extremely attractive. These folks may be able to purchase a rental as well which will be an excellent investment with the potential of cash flow and equity enhancement over the long term. ~Doug
Jeff, great information again. Thank you for the suggestion to my previous question on 2 of 3 . On a side note what are the costs involwed with 203K? When you have a moment let me know. Thank you.
Jeff...very well written post. Understanding your client's goals is key to providing good counsel. I had a referral call last month who has been out of work for 10 months, has a mortgage for 25% or the homes value, and wondered why the servicer would not work to modify the loan. With 75% equity, what motivation did the bank have to work with them, none in my opinion.
CARI & DOUG... . what;s been sad is that one size had never fitted all. I have always felt that ready cash was always attractive, especially more now than ever before. Yet, you still have many loan officers and those selling those programs to pay off your mortgage, that push this and push it hard. In any case, don't get me started... lol Thanks for your input on a subject that I feel is lacking big time. So many just look at what borrowers want and don't work the numbers.
ENDRE.... . my pleasure and thanks for the polite compliment. I will be honest, I need to go back and see what question that was... lol In regards to 203k loans... the rate is usually a tad higher and you definitely have the HUD consultant fee. Other than that, about another $500 in fees. It also depends on if you are doing a streamline k or a regular 203-k. I will say this, be careful, because half of those that say they can do K's, aren't good at them. You need a good team that understands these, from the loan officer, the processor, to the underwriter. And even someone that knows how to disburse the funds properly and in a timely manner. If you ever need someone for California or for your clients, I have a good person for this. I am not licensed in CA as of yet, but we are working on it. thanks
MICHAEL... . I have always felt that understanding your clients goals was huge in any mortgage process. What has always scared me was when I would talk to a borrower, who actually talked a loan officer prior to me, who would never ask them about their goals... and or tell them how an arm works... or for the fact that if you wanted to refinance when you had 20% equity,that on a FHA mortgage, you would still have monthly mortgage insurance. I just ran into all of this in one situation about 2 months ago. It kind of ticks me off, because an 1/8% lower in rate still doesn't always mean that borrower has the best deal, depending on their goals.
In regards to your call, you sometimes have to wonder what people think. I had a borrower called about modifying their loan, who was having no troubles what so ever in paying their mortgage. Yet they wanted help to lower their payment, because those that were in trouble were getting help. yea, okay.. no problem.. lol In any case, thank you very much for the kind compliment.
Jeff,
As always, this is a very well written post and helps debunk some of the myths out there on down payment requirements. You know me well enough to know that I also favor smaller down payment for most of the reasons you state.
I had a client about 1 and half years ago decide to go FHA putting 3% down at that time vs. 20% conventional. Six months into the loan, he got layed off his job. The client called me sharing how he was so happy that I explained how cash is king. He weathered through is unemployment situation and is now working again and never missed a payment. I wonder if the same outcome would of been true if we would of put down that full 20%.
GARY... thanks for those kind words about a topic that so many assume that you should put more down, yet they don't think about today's economy when they should. And you bring up a good real life example of someone that listened to your advice and how you laid things out for him. Good job... thanks for your feedback.
Jeff you continue to educate us on the financial aspect of the real estate transaction and it is really appreciated.