TWO Mortgages for ONE House?

Question

I'm in the market to buy my first home (30 year fixed),  and today I talked with my first potential lender.  It made me realize that I need to get ALOT more educated.  LOL.

They approved me for up to $200,000 at 6.25% with $10,000 down.

But for some reason this "deal" involves two seperate loans.  They called it an "8015" I believe.

Has anyone heard of this type of mortgage?  Does this sound like a good deal?  My credit score is 746 and they said my payment on a $185,000 loan would be about $1087 per/month.  The lender was Chase, BTW.

Thanks in advance for any help.

N/A N/A · Answer

Welcome to the learning curve!

The lender suggested an 80/15 or 80/15/5 which is a two transaction. You are borrowing $160,000 on the first loan so that the amount you borrow stays at 80% of the sales price. By doing this, you do not have to pay a private mortgage insurance policy (PMI). However, you do end up financing the remaining $30,000 in a second mortgage note which will be at a higher interest rate.

I would ask the loan officer to show you figures on doing one loan to 95% of the sales price vs. doing 2 loans 80 + 15 to get to the same point. The 2 loan transaction may still be best, but you should see the comparison.

Another reason for doing this even if the monthly payments are the same between the two options is that private mortgage insurance is only tax deductible up to $114,000 annual household income. If you make more than that, it isn't deductible whereas the higher rate on the second mortgage still creates a "deductible" interest expense. So for tax purposes there could still possilby be a reason for doing 2 loans instead of one even if the payments were the same.

Based on the payment and other information, it looks like your first mortgage is at 6.25% and your second mortgage was quoted at 7.25% If you are paying no origination and no discount points these seem fair quotes to me.

good luck

Scott Miller · Answer

Mortgage insurance is not something that can be approximated.  PMI differs depending on the perceived risk (max. LTV, etc.) and particulars unique to the transaction (like loan size and loan program selected).

An 80/15/5 equates to 100% financing and as configured, PMI would not be required.

It is apparent to me that if you are required to invest 10K into a 100 LTV loan, some or a majority of this could be allocated into buying the rate down (by way of discount points).

What you haven't told us but I am certain is the case, is that you have been quoted a 2nd mortgage with a variable interest rate.  My point is, your blended rate today will not be your blended rate tomorrow.

If a high LTV loan is what you are after, there are better alternatives then a 80/15/5 loan.

The FHA 203b program allows for up approx. 97% on the 1st lien with allowances for gift funds, down payment assistance grants and gifts of equity to be used to bring it to 100%.  It's based upon a one loan configuration (no need to concern yourself with a blended rate) with repayment terms as long as 30 years.

From the rates posted, I am going to assume that your scores are in the high 6s/low 7s (or higher) and if this the case, you could secure 100% financing with rates in the 6s.

FHA allows for high LTV financing but with the security of a fixed interest rate and no adjusting payments (as will be the case with the 2nd mortgage you are evaluating).

Regards,

Scott Miller

N/A N/A · Answer

Yeah, well he put his score of 746 in his original post too.

I'm also going to disagree that you need an FHA loan. The advanatage of an FHA loan is "typically" found in qualifying home buyers who do not have funds for a down-payment and/or they have credit challenges. With a 746 score, your credit is great and you obviously have money for a down-payment.

An FHA loan can actually finance up to 97.75% of the $200,000 sales price you are considering. You would need to contribute 3% or $6,000 towards the purchase of the home.

A conventional loan could also go up to 97% but you were trying to understand the difference between doing one loan at 95% of the sales price vs. 2 loans for 95%.

To answer your earlier question, PMI can be pretty accurately estimated given the information we know about your transaction.

Assuming a loan for 95% of the $200,000 sales price, your monthly private mortgage insurance would be approx. $124 per month. So...

If you finance one loan for $190,000 at 6.25% you would pay $1,170 for principal and interest PLUS $124 for private mortgage insurance (PMI). total = $1,294.

If you finance two loans, $160,000 at 6.25% you would pay $985 on the first lien and $30,000 at 7.25% would be $205 so your total payments would be $1,190.

Now I'm not 100% sure on that 7.25% rate. I took it from the numbers on your original post and calculated it. But using this math I think you can see why the loan officer at Chase was suggesting 2 loans instead of one with private mortgage insurance.

SECONDLY

Here's why I wouldn't suggest an FHA loan for you. I love FHA loans, but I don't think you are best suited for one.

For the sake of argument, let's just say you put down 5% on the FHA loan so either way, for comparison sake, the loan amount would be $190,000.

You already know the payments for an 80/15 scenario so here's the FHA scenario.

The FHA loan has 2 pieces of mortgage insurance. First is the monthly mortgage insurance premium which on this loan would be $79 per month. 
The second part is the Up Front Mortgage Insurance Premium which is a lump-sum you can pay as a closing cost or add to the amount you borrow. Let's assume you add it to the loan amount of $190,000. The UFMIP is $2,850 so your total loan amount is $192,850 at 6.25% is a principal and interest payment of $1,187.

So your monthly payment would be the same on an 80/15 as it would on an FHA (assuming you get the same interest rate on a FHA loan). However, you would be borrowing MORE money because of the financed UFMIP.

There's nothing wrong with an FHA loan...it just isn't for you in my opinion. I think Chase has given you a pretty good deal.

good luck.

N/A N/A · Answer

What's LTV?  What are points?

I'm not sure what you mean by required.  They just asked me how much I planned on putting down and I said "10."

Why are you certain? Is that always the case with 80/15/5 loans?  They didn't say anything to me about the 2nd mortgage being variable.

I'm thoroughly confused.

What's FHA? What do you mean by 97%? Wha'ts a lien? What are allowances? What are gift funds?  Where do the down payment assistance grants come from, and how are the dollar amounts figured?  What's a gift of equity? Bring what to 100%?

Is this type of loan avaliable through every lender?

Good guess.  My "middle" score is 746.

N/A N/A · Answer

ANOTHER $150 per month on top of homeowner's insurence, tax, and my loan payment? Ouch.

What do you mean by 95?  I don't understand this whole 95% / 100% thing.  95 percent of what?

Scott Miller · Answer

With a 85/10/5, you would not need PMI.

The other poster is referring to loan to value or LTV.  LTV can be calculated by:

Loan Amount / Appraised Value = LTV

Does that answer your question?

Regards,

Scott Miller

Scott Miller · Answer

What's LTV?  What are points?

Loan to Value; I explained how to calculate this below.

Why are you certain? Is that always the case with 80/15/5 loans?  They didn't say anything to me about the 2nd mortgage being variable.

Check with them, but I am quite certain that this is the case (the rate is too low on the second to be anything but).

I'm thoroughly confused.

What's FHA? 
Federal Housing Adminstration; government sponsored loan program.

What do you mean by 97%? 
97% of the purchase price; if you were to purchase property for 100K, you would get a 97K loan...hence the 97 LTV or 97% financing.

Wha'ts a lien? 
Lien is another word for a deed or mortgage.

What are gift funds?  
Funds that are gifted (given without need for repayment) by a employer or relative.

Where do the down payment assistance grants come from, and how are the dollar amounts figured?  
DPA grants are offered by various non-profit organizations and the grant is funded by the seller by way of concessions.

What's a gift of equity? 
A gift of equity is when the property owner gives the buyer a concession in the form of a equity in the property being purchased.

Bring what to 100%?
Your financing; my point was that there are many ways you can structure a FHA loan that would allow for 100% financing (no down payment).

Is this type of loan avaliable through every lender? 
No, only those that are licensed can provide FHA loans.

Good guess.  My "middle" score is 746.
Wasn't really a guess; the rates you posted was the indicator.

Regards,

Scott Miller

Minna Reid · Answer

PMI varies, but I've always been quoted at the $150/month range for 200k.
There are lenders who offer 95 or even 100% single fixed rate loans without PMI. Rates are slightly higher, but still less than paying PMI. From my experience anyway.

N/A N/A · Answer

Thanks for the reply.

Now that you mention it, I realize it is an 80/15/5

How much does the PMI usually end up costing?  Is it a flat fee? or a monthly expense?

I make less then $114K, so unless the PMI is of great expense, I don't really see much of an advantage of an 80/15/5