100% Mortgages 80/20 vs. 10% down. Which mortgage is best in Texas ?

January 9, 2008

Texas 100% Mortgage financing vs. 10% down  http://www.mylendingplace.com

When I started Mylendingplace.com over 3 years ago, I decided I wanted to do “good loans”.  Or Home loans that really helped move people forward toward their overall financial goals.   Remember, a mortgage is either a 15-30 year debt instrument or a financial planning tool.  It can be a 30 year debt loan or a tool to bigger, better things like getting out of  debt, saving for college, retirement. 

Any licensed mortgage person can do a home loan, it’s how the mortgage is constructed or designed that’s important.   

Let’s compare the following:   80/20 loans (100% financing) or 10% down home loans.    

Most people put 5-10% down on a mortgage do so to lower their monthly payment and/or to get a better mortgage rate.    Since mortgage rates are tied to the overall risk of the loan, the more you put down, the lower the risk of default, the lower the rate.  More down, Lower risk, better rates, better payment.

 This is why subprime home loans have much higher rates than “A paper.” Rate is tied to risk.

80/20 loans vs. 10%  Which is better?

Borrower profile:   Let’s say Britney Spears wants me to do her mortgage.  She has a 800 credit score, a decent job as a Rehab counselor and now she wants to buy a $200,000 for her and her hubby , Kevin Federline.  Oh yeah, she wants an awesome rate, so she’s prepared to put 10% down.

$200,000 sales price

10% down =$20K

In addition to this mortgage Britney is the typical American borrower with some consumer debt.   She has:

$350/month on a car payment.   Owes $8700.00

$100/month Visa Credit Card.  Owes $4500

$85/month MasterCard Credit Card.  Owes $2900

$75/month Department Credit Card.  Owes $1800, zero percent interest for 1 year.

Total:  $610.00/month servicing  $17,900 in consumer debt.

One good thing about Brit is she has a budget.  And she does not want her mortgage payment any higher than $1250/month so she’s putting 10% down.

Let’s say today’s mortgage rate on a 90% loan is 6.00%, and includes PMI.  Mortgages with PMI have better rates because PMI is an insurance policy you pay (that’s why it’s commonly called mortgage insurance) that protects the bank–not you–should you default on the loan.   Since a bank will feel more comfortable about an insured loan, they offer better rates on loans with PMI. 

As a general rule, If your mortgage is over 80% loan to value,  you’ll have PMI (private mortgage insurance) but I like to avoid it if possible since it benefits the bank, not my clients.  However, this “credit crunch” is making it harder to avoid PMI than a year ago.   (By the way, if your 3-6 months out from buying please email me at jon@mylendingplace.com so we can make sure you’re in a position to avoid PMI when you do buy.)

Loan#1:   Britney’s 90% loan, putting 10% down:   $180, 000 loan amount, 6% rate.  Payment is $1079+ PMI of $145 = $1224.69.   (For this example and to make things simple I’m not including taxes or insurance.)

However, as her mortgage consultant, I’m looking at her overall expenses as I’m showing her options.   In reviewing her credit report, I notice she’s servicing almost 18K in consumer debt totalling $610/month.  And this $610 is pretty typical.  She’s carried a balance on these credit cards for the last 2-5 years.  But since she pays them like clock-work, she has really good credit.

But in my eyes, if she gets a 10% down mortgage on top of the consumer debt she’s really paying $1834 towards bills each month.  Her 10% down mortgage is $1224 and her consumer debt is $610 = $1834

 To avoid PMI, Ill break the loan up into two loans.  An eighty percent loan. and a second loan for 20%.   Together we get 80+20=100%.  This way, there’s no single loan over 80%, therefore PMI is not required.  (PLUS your closing costs for an 80/20 are much lower.)  

Loan #2:  80/20, 100% percent loan.  As seen below, her payment is $1346.35.   And since the rate is tied to risk of her loan, and 100% loans are higher risk loans, her rate went from a 6.00% to a 6.75%.  

The 100% loan is $121.31/month higher than the 10% down!   Why would I even show this loan to someone, especially Brit who has awesome credit?  

Because anytime one gets a mortgage they should weigh the mortgage in light of one’s overall financial situation.  In Britney’s case she’s paying over $600 towards high-interest credit cards and car payment (that aren’t tax deductible).  

So while the 100% loan is $121 higher it’s actually lower when you look at her overall budget and spending habits.   I might suggest the “best” loan for her might be the 100% loan since it allows her to pay off her consumer debt and lower her overall expenses.

 I’d probably say: “Put your 10% towards your consumer debt and retire it.  Gone.  Osta la-vesta baby.   Now your not paying $610 out each month and in doing so you’re lowering your monthly expenses by $610.

I would then show her how the 100% loan would actually save her $489.00 per month.   While the 100% loan has a higher rate, it actually has a lower payment in her overall budget of $489.00 since she putting 10% down towards her consumer debt, not the mortgage.   In this case, 100% lending was used as a financial planning tool to get Brit out of debt and lower her overall expenses.  

With the 100% or (80/20) she pays off her car and credit cards and this leaves her with only a house payment as fixed expenses:   As her mortgage person, I would suggest Brit to have a mortgage that cost her $1346/month and not $1834.

 This is what I mean when I suggest one look at their overall financial picture when getting a home loan.   While the rates are important, they aren’t the only thing to consider when getting a home loan.   Together you and your mortgage consultant should look at the available home loans in light of your real-life spending habits and choose one that will help move you forward financially.  

 100% loan are often the beginning of getting out of debt for most people.   Now the challenge is changing your spending habits so you don’t get back into debt.  This is why I recommend financial planners and CPAs to my clients.   Usually, I tell people to just take 2-3 months off and have fun with the extra money.  Take a trip, buy an Ipod or something, but come month #4 I suggest they meet with a financial planner and find a “home” for at least half of the $489 savings that the 100% loan brought you.

Or consider taking the other half and let’s applying it towards your mortgage so your 30 year mortgage gets paid off in 10-13 years, saving a ton in overall interest.

Mylendingplace is a licensed mortgage company in Austin, Texas.   But we help clients all over Texas.  If you have a Texas Zip Code we can help you with your 80%, 90%, or 80/20 loan.   Our phone is 512-577-2958 and our email is jon@mylendingplace.com.

Please call us today.   Oh yeah, we also do home equity loans for those who want to pull cash out of their homes.

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