New home build - Mortgage options and advice

[Jspafford]

Hello Everyone,

My wife and I are currently building a home. It is scheduled to be completed in April. I have two lending options. They are about the best I can find, unless of course you all know something better.



1. In house financing, through hallmark mortgage. Loan is an FHA 30/yr fixed APR unknown until closer to closing. I assume between 4-4.25%. If we go with the inhouse financing the builder will pay on our behalf up to 2.75% of the loan amount for our closing costs, and we are also able to do a 'work equity' program to work off our 3.5% down payment (FHA).



However, this loan is a 30 year fixed, and we would be paying PMI on the loan for the full 30 years now, per the new mortgage laws. On our loan the PMI is $184 monthly. So we would be paying an extra $184 a month for the life of the loan, over and above the Principal, Interest, Taxes and Insurance. Putting our payment at close to or over $1200 a month.



2. There is a local credit union that is offering a 3.2% interest rate on a 5/1 ARM. They will allow me to put down 5% and then buyout the PMI. This would get my house payment to $700 + taxes, insurance which they DO NOT escrow. This is a lot more in my comfort zone, but it requires $15,000 to pay the 5% down, the closing costs, and the PMI Buyout. The builder will NOT still allow us the 2.75% for use, because we are not using their 'preferred' lender.



I am not sure which was is better. We have some savings, around $25,000. If I go with the in house lender I would not have to use any savings, the builder would essentially be paying 3.5% of my loan off the top for me, and if I needed help with the $1200 a month payment, I could take $400 or so a month from savings to help.



If I go with the credit union, I would be taking $15,000 from savings, only leaving me with $10,000 as a buffer, but, I would not be paying PMI at all, and my monthly payment is down at almost 1/2 before taxes and insurance.



However, I do know a ARM will adjust in 5 years. I was thinking I could refi before that happens, and hopefully have enough equity in the home to qualify for a traditional 30/yr fixed mortgage.



Am I missing anything? What option is best for my situation.



Thanks!!!!

[disneysteve]

I think you've gotten yourself into a really bad situation. Neither of the options you list are good. You shouldn't buy a home without 20% down and a 6-month emergency fund in place. You are debating between 5% down and 3.5% down. I vote "neither" between those choices. And I absolutely wouldn't take an ARM particularly in an environment of rising interest rates. That's a disaster waiting to happen. You definitely shouldn't count on the home's value rising enough to let you get out of that loan.

Without more info, it sounds like you can't really afford this house. Is there any option to get out of it at this point or are you stuck? If you're stuck, have you looked into getting a fixed rate 30 year loan anywhere other than from the builder?

[Jspafford]

Disneysteve,

Thanks for the words of advice. We are not too late to get out of the new build, however we are too late anyhow because we've already sold our previous home and are now temporarily living in an apartment while the new house is being built.

I do not like the idea of an ARM either, but according to the credit union they do not usually adjust the rates like corporate backed banks do. They say since the member's money is what keeps them in business, they try not to send people into default by jacking up the rates.

Our 6 month emergency fund is currently the 25K in savings. That is more than enough to cover 6 months.

I've looked into other banks for a 30 yr FHA loan, and they all have around the same rates, the only difference is, with them, we are not able to use the 2.75% builders credit for closing costs, so it would cost us more to use another lender.

My wife is currently looking for a teaching position, and once she finds something, we plan on paying more each month to get the equity built up in the house. This current financial situation is temporary, but our family had outgrown our previous home and we needed more space.

[disneysteve]

I wouldn't spend your EF to get the house, so I guess that leaves you with the FHA option. You'd have to pay the PMI but if you can make extra payments and build equity, in a few years you might be able to refinance to a loan that wouldn't have PMI (as long as rates haven't climbed too much by that time).

Good luck.

[Jspafford]

I wouldn't spend your EF to get the house, so I guess that leaves you with the FHA option. You'd have to pay the PMI but if you can make extra payments and build equity, in a few years you might be able to refinance to a loan that wouldn't have PMI (as long as rates haven't climbed too much by that time).

Good luck.

Thank you for the honesty. My wife agrees. I just saw the lower monthly payment and thought it was the better option.

Would it be a good idea for me to 'buy down' my interest rate or just save that money as well?

Thanks!!

[MonkeyMama]

I agree with Steve. All around.

We actually bought a new home in 2001. From what I recall, the builder tried to really sell their mortgage lender with up front discounts, but the interest rates were not that impressive. Just to say, shop around. If those are your only options, then I guess #1 sounds better? Shop around and work your butt off to refinance into better terms as soon as possible.

We actually just went with the home builder because I think it ended up being kind of breakeven in the end. I just remember not being that impressed with their sales pitch.

**Edited because I misread last posts.**

[disneysteve]

Would it be a good idea for me to 'buy down' my interest rate

Do you have any money? I mean other than your EF because that isn't for a home purchase, it is for emergencies.

If you have savings, how much do you have because that could change the answer.

[Petunia 100]

Disneysteve,

Thanks for the words of advice. We are not too late to get out of the new build, however we are too late anyhow because we've already sold our previous home and are now temporarily living in an apartment while the new house is being built.

I do not like the idea of an ARM either, but according to the credit union they do not usually adjust the rates like corporate backed banks do. They say since the member's money is what keeps them in business, they try not to send people into default by jacking up the rates.

Our 6 month emergency fund is currently the 25K in savings. That is more than enough to cover 6 months.

I've looked into other banks for a 30 yr FHA loan, and they all have around the same rates, the only difference is, with them, we are not able to use the 2.75% builders credit for closing costs, so it would cost us more to use another lender.

My wife is currently looking for a teaching position, and once she finds something, we plan on paying more each month to get the equity built up in the house. This current financial situation is temporary, but our family had outgrown our previous home and we needed more space.

But you could keep renting for as long as you like, right?

What other loans does the preferred lender offer?

Why can you not qualify for a fixed rate loan from the credit union? Do they not offer fixed rate without a larger down payment? Which index is the adjustable rate loan based on? You seem to be saying they implied they have descretion to raise rates on ARMs or not.

[TBH]

It makes me nervous that you don't know what the interest rate will be with the builder's preferred lender. You think it will be "between 4 and 4.25" but that's pretty darn low for a fixed 30-year loan right now. I wouldn't be surprised if it's higher.

Seems like either way you will want to refi as soon as you can.

[disneysteve]

we are too late anyhow because we've already sold our previous home and are now temporarily living in an apartment while the new house is being built.

our family had outgrown our previous home and we needed more space.

But you could keep renting for as long as you like, right?

I was thinking that too, Petunia.

OP, you outgrew your previous home but you are now living in an apartment. Is the apartment bigger than your former house? Probably not I'm guessing.

It is nice to have more space but it is certainly not a need. I've known people with 6 kids who lived in a fairly small 3-bedroom townhouse. You managed in the old house. You are presumably managing now in the apartment.

My advice would be to seriously reconsider this house purchase. Wait until you have a 20% down payment on top of your 6 month EF. And make sure your house payment (with taxes and insurance) doesn't exceed 28% of your monthly income. I'm curious, if you do take option 1 and have a $1,200 payment, what % of your income will that represent?

[MonkeyMama]

P.S. My experience was that it was super easy to walk away from a new home build. It is something to consider. (We had paid a $3,000 deposit, but they would have never kept it. We had once negotiated out of the deal due to a change that we did not agree with. VERY late in the build process. OF course you sign all the paperwork that *they* can do whatever the heck they want, but when it comes down to it, as long as there are other buyers, they don't really care. In an appreciating market they can just sell it to someone else at a higher price).

I honestly would not buy the house in your shoes.

[Dsquared513]

There are a lot of lenders that are offering 3.5-5% down on conventional 30 year loans, Wells Fargo was one name I remember reading but I'm sure you can google it. I would just be weary of refinancing as part of your plan, since first of all interest rates have nowhere to go but up, but also even at 10% down it takes 6 years to reach 20% equity due to amortization, not to mention having to pay closing costs again. Whatever loan you do find make sure that in the worst case scenario you can live with those loan terms for the life of the loan. I agree that you shouldn't exceed 28% of your monthly income for rent, but I disagree that you must absolutely have 20% down in order to buy, there tons of financing options available today, and if the real estate market continues its slow climb then you are making money as your home appreciates, although that is purely speculation when crunching the numbers. It's not as if you have no other savings at all in case the unexpected happens, and you're just buying a house because you can. Yes, ideally you should have 20% down, but you also need 3-5% for closing costs, so how long would it take you to save 25% of the purchase price? By that time interest rates may have doubled for all we know. Just don't make the all too common mistake of falling in love with the house you found. The home you buy should fit your finances, not the other way around.

[Like2Plan]

All good advice offered so far.
I'm not sure this will have any impact in your decision, but are you sure your builder won't chip in the money towards closing costs for not-preferred lenders as well? My DS ran into a similar situation with his new home purchase (builder was offering money towards closing with preferred lender). DS found a (non-preferred) lender who had the terms he was looking for--and the builder agreed to do the same deal.

[snafu]

I've yet to understand the basics. What are the figures you're working with? What is the negotiated price of house being built? How much is 20% down payment? How much are closing costs? Can they be negotiated? How does the PIT + PMI relate to 28% of your income? What is your FICO score? It plays a part in determining your mortgage interest. Does your $25,000. savings represent savings or is some part a result from the sale of a previous house? When will wife return to work? Have you negotiated possible rates with the spectrum of lenders?

[Jspafford]

Sorry for the delay in responding. I work a FT and a PT job, so I have little time to do much in the evenings.

The credit union does offer fixed rate loans, but they require 20% down.

The home purchase price is 170K. We just sold our current house for $111K. We only netted a couple thousand, which was put directly into savings.

We only have the one "savings" account, which honestly, until recently we never had any savings. I am impressed we've managed to save so much. We've gotten a couple good breaks and have been able to pack away some money.

Between my wife and I's monthly income, we bring in just above $5000 a month gross

We currently do not have a house payment, but she has student loans, and we have a car payment, so our monthly expenses add up to around $1000 a month. Not including, utilities, gas, food, etc. I am talking about things that show up on the CR as debt.

As I said, i would much rather have the $900 a month payment than the $1200 a month payment, but I also don't think I want to spend any of the savings!

So, I found out yesterday, finally, that if I locked my rate today with the in house lender, the rate would be 4.25% for a 30 year fixed FHA, with a payment of around $1215.00 a month.

I think I am going to go with them. It is nice knowing the builder is paying down the first 3.5% of my loan, so within a year or two I should be below 95% LTV, and if needed could probably refinance to a conventional 30 year, and drop the $185 a month MIP insurance.

FICO are 730+ for both of us.