Anyone here in finance? Loan advice needed.

[onewhippedpuppy]

My wife and I are trying to decide if we can afford to purchase a house, because renting, quite frankly, sucks, and I'm tired of throwing out $710 a month. Yes California people, that sounds like a bargain, but when you can pick up a decent quality brand new house for $120k, it doesn't make sense. Anyway, the scenerio is my wife is an accountant, works full time, same company four years. I am a full time student, so I don't work. Great credit, previously owned a house and never missed a payment, same with our one car payment.

Basically we want to find a loan option that will allow us to make a low monthly payment, without totally losing our ass in the deal. Realistically, I'll be out of school in 2-3 years, so within five we'll probably be selling to get something nicer. I'd be happy with something we could just break even with, or even to lose a little, it's still better than renting a townhouse. The houses we are looking at all have unfinished basements, so I see that as one option for building a little equity, and our real estate market is pretty strong in Wichita.

Any ideas?

[Tishabet]

get a 3 or 5 year ARM.... or if you're looking to get your equity out of the basement and really want o minimize payments, I would suggest looking into an interest only.

[jrdavid68]

Seems to me that at $120K for a new house, even with a no money down loan, you would be ahead. The monthly payment would be about the same as your current rent (30 year fixed / conforming), and the additional property taxes and insurance expense would be offset by the tax breaks.

If you can come up with the 10-20% down - even better.

[Steve Carlton]

You'd need to have your wife either do a "full doc" loan, or go "stated" (if necessary) to qualify. And you can go on the loan as well as a co-borrower (unless your FICO score causes problems).

I'm a believer in having the rate fixed for a period of time to cover how long you'll need the loan, in your case I'd suggest a 5/1 ARM, which is available with an interest-only option. Otherwise, "Option ARMs" have payments based on a minimum payment based on a 1% rate, fully amortized.

What percentage were you going to put down, and what percentage is "seasoned" in your name >60 days?

[onewhippedpuppy]

Grant, what's an ARM? My last loan was a fixed rate 20yr simple interest loan, so all this other stuff is new to me.

Also, if anyone has had a good experience with certain institutions, either online or physical, I'd be happy to hear it. Our last loan was with a small bank that knew my wife's family and us, so we were able to get a very fair loan.

[Moses]

Originally posted by onewhippedpuppy
...decent quality brand new house for $120k

What would the payments be? $32.50? Buy three of them.

[onewhippedpuppy]

Too slow, I missed the other replies. We had hoped to do a 0 down loan, we have some in mutual funds and bonds, but had hoped to leave it alone. As you can see, we're trying to approach this as a temporary solution.

Steve, could you elaborate a little more? Our first loan was set up as you listed, with myself as the co-borrower as my wife had more credit than I did. I didn't even have a credit card until I met her. What do you mean by seasoned?

[onewhippedpuppy]

Originally posted by Moses
What would the payments be? $32.50? Buy three of them.

Welcome to Kansas, that's one of the few perks. $120k will get +/- 1500 sq. ft living space, 2-3 car garage, , 2-3 bedrooms, typically 2 full baths. Nothing too fancy, but decent oak trim, brick front for curb appeal, etc. Basements are typically framed and roughed in for a bath, I did remodeling for years before returning to school, so finishing it off is easy.

You guys in Cali get raped, a friend of mine is moving to Orange Co in July, he just offered $450k on a 1200 sq. ft. townhome. That's what I currently live in for $700/mo.

[Steve Carlton]

Okay, if you need to finance 100%, you'd probably want to do an "80/20." That's an 80% 1st ($96K) and a 20% 2nd ($24K) on a $120K house. Financing 100% will limit your choices. Can you borrow 5% ($6K). Also, can you come up with the closing costs? The non-recurring closing costs (NRCCs) can be paid by the seller, sometimes you can make this acceptable by goosing the sales price a little, so the seller's not losing anything. (As long as an appraisal will support the goosed price).

ARM = adjustable rate mortage. They're available where the rate is floating right away, or with a "fixed period," say 3, 5, 7, or 10 years.

"Seasoned" means time has passed by, in this case down payment money shows in the last 60 days bank statements without any large, unexplainable deposits.

One issue is your wife's income- will it qualify to cover the debt load. If so, a "full doc" loan will have better terms. If not, going "stated" will limit your options and affect the rates.

Do you know what your wife's FICO scores are?

[onewhippedpuppy]

On our previous loan, we borrowed $125k and had a lower household income than we do now. I don't know either of our scores offhand, I need to check, but they were good enough two years ago, and after two years of house and car payments, all on time, I expect they've gotten better. Closing costs won't be a problem, and if we were to wait a while we could save up for a down payment.

What are the pros/cons of an ARM?

[Steve Carlton]

Pros- lower rate.
Cons- when rate goes up and exceeds what your fixed rate would have been.

[Steve Carlton]

You won't really know your or your wife's FICO scores until a lender runs your credit reports. You can get scores from the bureaus themselves (for an extra fee), but I find those scores fairly unreliable. I've seen big differences!

You can get a free copy of all three bureaus once a year. I would do that, make sure there's no negative information on your reports (especially your wife's). A consumer-obtained credit report will not cause you to lose any points as a lender-obtained report would. Also, make sure (your wife especially) doesn't have high revolving balances vs. credit limits. That will hurt a score dramatically. You can obtain these reports here:

www.annualcreditreport.com

[RANDY P]

Down payment you have available?

Anticipate it going up in value?

Is this a keeper or you think you may move away in a few years?

Thinking if the credit is good enough you can always to an interest only 1st and HELOC 2nd

(Naysayers hear me out 1st!!)

rjp

[turbo6bar]

$120k house mortgaged at 100% Loan to Value and 5.86% 30 yr fixed (bankrate.com) is $708. Add taxes and insurance and the cost to own exceeds your rent payment.

$120k via 5/1 ARM, 5.31% is $666 + Taxes & Insurance.

If you definitely plan to sell in 5 years, the 5/1 ARM is great, but if you may stay, the 5/1 ARM would be an awful choice.

Is your housing market appreciating well? If not, there is little chance you will make any money. After all, in 5 years, you will have paid down very little principle. When you do sell, realtor commission and closing costs will eat up 6-10% of the sale price.

Based on the numbers, I believe buying as an investment (building equity) doesn't look promising. However, you must put a price on intangibles: pride of ownership, enjoying a larger or nicer home, Honey-Do list, etcetera. Perhaps someone can present numbers that will change my opinion: Interest Only???

Jurgen

[vash]

i got nothing to add matt. just wanted to wish you the best home shopping luck.

just walk into your bank and ask. it wont cost a dime. maybe, you can have a credit report run, and find out how much of a loan you can qualify for.

[SpeedracerIndy]

I'm in the same boat as you. I know NOTHING about this stuff, and I'm looking for a house in the same price range in the next 13 months. I pay $1000 in rent now per month, it amazes me I can own a house cheaper than I can rent! Good luck!

[onewhippedpuppy]

Any feedback on the online companies such as Ditech.com or Countrywide Home Loans? They seem to have more competitive rates than what I've seen locally, and more options for interest and payments.

Overall the housing market in Wichita is strong, especially in the area that we are considering purchasing a house in. The joys of urban sprawl. My personal feeling is that even if we break even, or lose a little, we'll still be better off than paying $710 a month down the drain. Plus, this way we get a decent house with a yard, and some space for our son to play.

Steve, thanks for the links. I don't anticipate a problem, wife's credit is perfect, I have one collection from a phone bill I never recieved back in 2001 that I took care of as soon as I found out about it.

What's the overall opinon of a 30yr/ 5 fixed ARM? Will the rate go up drastically after that five years?

[Steve Carlton]

I believe Ditech is owned by GMAC, so it should be fine. Other onlines can be flaky. When you're buying a house, you don't want to lose the financing late in the deal or have them change the deal on you. If it's a refi, there's less at stake. Countrywide is huge and has a large choice of programs; I like them a lot.

Even if you lose a little on the house, you will have had deductible interest and real estate taxes. Considering the relatively small amount of money at stake, maybe do a 30 year deal. You'll get owner-occupied rates going in, then if/when you move you can keep the house and rent it out instead and have a stable, minimal interest rate. It sure looks like you wouldn't have much of a negative cash flow, since you'd get to deduct depreciation. Could be a heck of a nestegg in the long run...

Sounds like the credit is excellent and probably a non-issue. A 4-year old paid collection should have minimal impact.

I think rates are still heading up. I believe in a healthy economy, they might stabilize around 1% higher than they currently are. A lot of the hazards in the ARMs are in what index they're based on. Countrywide's fixed period ARMs are based on the LIBOR index, which is the most volatile and therefore the worst when rates go up. Countrywide does have 30-year fixed loans with the first 10 & 15 years interest-only. After the I/O period the loan becomes fully amortized and the payment is even higher than a non-I/O payment would have been because there's only 15-20 years left to pay off all the original principal. But that might work you you guys if you really need the I/O payment to start, as your income will come on line before the payment increases, or you can make a fully amortized payment as soon as you can afford to. Countrywide also has a 7/1 and 10/1 ARM (the /1 means the rate is adjusted annually after the fixed period). Generally, the longer the fixed term, the closer the rate gets to the 30 year rate.

If you can come up with 5% down + the closing costs, and meet the reserve requirements, you can get the best rates on 30 year conforming loans (under $359,650). After you close, you can get a 100% CLTV (combined loan to value), and get your 5% (or more) back. Citibank has some 20-year fixed 2nds to 100% CLTV with great rates and zero closing costs, as well as HELOCs (home equity lines of credit) with lower margins than most, including Countrywide. Otherwise, it looks like Countrywide will do an 80/20 on a fixed period ARM.

I would also think that you should probably do two loans, an 80% 1st and a 15-20% 2nd. That way you'll avoid mortgage insurance (which is a rip) on the 1st. Or a higher rate, that is basically MI built-in (but at least deductible).

[turbo6bar]

Originally posted by onewhippedpuppy
What's the overall opinon of a 30yr/ 5 fixed ARM? Will the rate go up drastically after that five years?

30 yr - long term
5/1 ARM - don't plan to own for more than 5-6 years

The spread between the 5/1 ARM and 30 yr fixed is small now, so the savings are minor compared to the risk of a rate increase at year 5. Whether the rate goes up drastically depends on the mortgage. I've heard the cap can be huge (3-4%) in some cases.

There are certainly other products out there you might consider, like the Interest Only, but I would only do this if you can exercise strict discipline.

You should pull your own credit score, as suggested earlier, and then talk to a few lenders (try your local bank or credit union). Get referrals from friends/family.
good luck, jurgen

[onewhippedpuppy]

So is taking out the loan in two parts pretty standard practice? We escaped the mortgage insurance last time, it is a pretty big rip off.

We need to shop around locally as well, what I've heard so far isn't very impressive though.