4-20-18: Why do you want me to put 21.2% down?
Question of the week: Why do you want me to put 21.2% down?
Answer: This question came from a new client last week who had been speaking with a representative of a major national lender about loan options for purchasing a new home and called me on the advice of her tax preparer.
She is a first-time buyer who was getting ready to write an offer on a condominium unit and began the call the way many do, “I was given your name by my tax person when I told her I was buying a condo. I’m writing an offer tonight, have spoken to my bank already and will be putting 20% down.”
After getting the necessary information for income, credit, funds for closing I asked about the property she wanted to purchase, price, if she was sure it was a condominium (a great question for next week) and the homeowners’ association fees.
After getting all the information I said, “Everything looks great, you definitely qualify, however instead of putting 20% down I think you should put a bit more down, $6,900 more to be precise, which is 21.2% down.”
This prompted our question of the week.
Because we look at the big picture and have over 30 years’ experience that allows us to quickly sort through options my suggestion was an automatic response.
The offer my client was going to make was for $575,000. If she put 20% down, $115,000, her loan amount would be $460,000. Following my advice putting down 21.2%, which would be $121,900, her loan amount will be $453,100.
Why is that important? Look at the rates for today below. The conforming rate today is 4.375%, the high-balance rate is 4.625%, one-quarter of one percent higher (0.25%). Usually, the difference between the two is one-eighth of one percent (0.125%), however the high-balance rate is always higher by 0.125% or higher.
What is the difference between a conforming loan and a high-balance loan? One dollar.
The maximum conforming loan amount is $453,100. This amount happens to be 78.8% of the $575,000 offer my client wanted to write. The payment on today’s conforming rate for $453,100 is $2262.26 per month. If the client put down 20% the loan amount would be $460,000, which would have a payment of $2365.04 per month. By putting down the extra $6900 she is saving $102.78 per month ($1233 per year).
Having inherited money from her recently deceased father she has the funds to put down the extra 1.2% without any financial harm, and with her income situation the extra $102.78 per month makes her a little more comfortable with the monthly housing payment.
To be fair most lenders would bring up this option to a client in a situation like this, however we find time and again options with small changes to the what the client may pay in closing or monthly payment or manipulating credit or other factors that can provide another option that may be more beneficial in the long run.
Several decades experience enables us to look at a transaction and present several different options to consider so our clients can determine which they feel is the best for them and their family. Experience matters!
(The client’s offer on the condo was not accepted, but she is probably writing another offer this weekend, keep your fingers crossed for her!)
Have a question? Ask me!
The most significant economic news this week was the retail sales report for March, which was very strong. American consumers spent 0.6% more in March than February with auto sales leading the charge. The news was a bit of surprise and put a bit of upward pressure on rates.
Rates for Friday April 20, 2018: With a lack of economic news this week the increase in mortgage rates was a bit unexpected. Some of the increase can be attributed to investors pricing in a rate hike from the Fed in June, and some speculation of perhaps two more increases in the second half of the year instead of the anticipated one. With a lot of government debt hitting the markets this week, and two major foreign buyers of our debt (China and Japan) not real thrilled with the Trump tariffs, plus the Fed putting bonds and mortgages from its portfolio into the market rising rates should not be a surprise. With a lot of supply coming to market prices are going to drop, when prices drop interest rates go up. The conforming rate increases for the first time in eleven weeks and we see the high-balance rate hit its highest level since January 2014.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:
30 year conforming 4.125% Up 0.125%
30 year high-balance conforming 4.625% Up 0.25%
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.
I love the cool Spring weather we have been having and hope it lasts for a few more weeks. My weather sweet spot is low to mid-70’s with breezes, exactly what we have been having!
Have a great week,
Dennis
