First-Time Buyer
You can buy with no money down, but the incremental cost of interest on that last 5% borrowed is over 16%. That is why I encourage buyers to continue renting and wait until they can make a down payment of at least 5%. With 5% down you would qualify for an 80% first loan and a 15% second loan, and you would avoid having to waste your money on mortgage insurance. For example, on a $200,000 purchase you would need savings or a gift of $10,000. You would then borrow $160,000 on your first (30 years at 6%), and $30,000 on your second (30 years at 7.5%). Your monthly payment would be about $1,400. In the Dallas area property tax would be about $350 a month and hazard insurance about $150 a month. Your total payments would be about $1,900 a month. Interest expense and property taxes are deductible for income tax. This would make your after tax payment equivalent to about $1,450 a month. If you can make a 10% down payment, your monthly P&I payment would be about $1,330. With property tax and hazard insurance that is equivalent to a lease payment of about $1,390. Unless you are earning more than 20% on your investments, or are just desperate to own a home, continue renting until you have that 5% down.
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Jumbo Buyer
If you are paying $450,000 or more for your home you will probably want a “Jumbo” loan. Interest rates on 30-year and 15-year fixed rate loans are usually about 0.25% higher than interest rates for conforming loans. However there are great ARMs available for Jumbo’s at interest rates that are 1 to 1.5% lower than the rates on fixed loans. For example, an ARM that is fixed for five years at 5.25% is available, and you could pay only for the interest. No payment to principal is required. On a $400,000 loan the monthly payment would be $1,750. Since every dollar paid is deductible for income taxes, this is equivalent to about $1,100 a month. And why are ARMs so advantageous when it comes to Jumbo loans? It is because a 1% or 1.5% difference in the interest rate can make a big difference in interest cost. A 1.5% difference on a $400,000 loan adds up to a $30,000 savings in interest expense over five years, and the interest-only feature would reduce your cash flow by an additional $50,640 during this period. These savings will pay the cost of refinancing many times over! Of course you will need a 20% down payment and great credit scores to qualify for this loan. But what greater investment can you make than buying the home you dream about and reaping the benefits of appreciation. Just don’t forget to add in property taxes!
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