Real Estate and Home Mortgages - Question about 80/15/5 loans

Hi, I am a first time home buyer and I have a quick question about 80/15/5 loans. My mortgage broker set up my 15% loan ($45000) as interest only for a 5 year term with a $43,000 balloon payment at the end. She told me that it would be easy to refinance before the 5 years is up and be able to get a lower interest rate then the 8.3% (fixed) that is currently on the 15% loan since I had build up equity in the house. My question is, is this true, or should I go for a longer term 15% loan and not have to worry about refinancing in 5 years?

Thanks for all your help, this forum has been very educational for me!

Matt

There's not nearly enough information to give you a good answer, except this one: You are crazy to buy a house under those conditions, expecially as a first-time buyer. You need to either save more money first, or buy a cheaper house where you have a full 20% down payment without getting "creative."

Unless you've been living on Mars, you surely must know about the "foreclosure crisis" going on right now in real estate. You situation is a good example of what caused it.

I do realize that there is a foreclosure crisis going on, but I don't think that I absolutely need to have 20% down before buying a house. I am graduating in May and my yearly income will be 170k a year. A 350k house is only 2x my yearly income which is well below average. Simply put I will not have any problem making my house payments, and paying back the 2nd mortgage quickly. If you need more information in order to help me out, I would be more then happy to provide it. However, do not assume that I am going to contribute to the housing crisis, without knowing my situation.

Matt

OK, point taken. But if your income is going to be that high and you expect to pay back the 2nd mortgage quickly, why even ask about refinancing in 5 years?

There must be more to this story. With that kind of income, you should be able to pay off BOTH mortgages in less than 5 years.

You're right I could pay off both mortgages, but I'd rather put the money in investments that on average will return more then the 6.25% I am paying in interest on the 80% mortgage. Basically I want to known if I accept the terms given, what are the chances of the following:

1) Having to make a balloon payment
2) Being able to refinance at a lower rate during the 5 year time period

If the chances are of 1) happening are high, then it seems I should just get a 95% mortgage and accept the PMI. Especially since my income this year will be less then 100k (in school until June) and therefore (from what I've read) I can deduct my PMI for at least this year.

Thanks for your help.

In the years I've been in mortgage lending, I've seen only 2 first time buyers with 20% down--and both of those were gifts from parents. You certainly do not have to save that up. The more you can put down the better, but some goals are simply unrealistic and too far fetched to consider. I do support buying with a down payment though--that you seem to have. Your NEXT house you'll put more down on, and then more still on the 3rd etc. People put down larger downpayments, usually, from proceeds of selling the previous house, not from straightforward cash savings.

Your situation:
"She told me that it would be easy to refinance before the 5 years is up"
Famous last words. When someone tells you this,you need to seriously rethink your situation. Don't plan on things like this. This is your first home, make this a secure transaction. What is the motivation for going with an interest only option? To save $50 a month? That makes no sense. If your income in a month will be $175k, then wait until you have your job going and then buy. Use your income to qualify and your improved budget to get a loan that makes SENSE. This does not.

In May, after you've started your job, or at least have a confirmed letter of employment showing salary and start date, shop around for another 80/15 loan. Fixed rates, both loans. Typically, the 15% loan is either a 15 year loan, or a 15 year balloon with a 30 year payment (called at 30/15). If your budget supports this, go ahead with the 15 year straightforward loan.
Rates you should find, if there are no other factors, will be in the low 6% range for the first and around 8% on the second---not interest only, not an ARM, not a HELOC.

People are just now wising up to the folly of misusing interest only loans. There's no reason for you to use that, especially on $43,000. It's a waste of your time and there's no reason to accept it if you're just going to have to refi later on, costing you a couple thousand dollars. You can avoid that expense by doing this right the first time.

You ARE correct that if you can pay off that 2nd fast you'll save money. Clearly, with the higher rate you pay additional on that loan before you pay down the first loan.

You're asking the right questions, keep it up. I think you smelled a rat and already knew what to do though. (And get a new broker). ;)

Bill,

Thanks for your response! It helped clarify several points for me. I thought the refinancing option was a little sketchy. I already have my employment letter with my salary, so no worries there. I do wonder if you think the 80/15/5 is better then a 95% loan given my situation. When I use the online calculators, it seems that the payments work out almost the same either way. Thanks again for your help.

$300,000 house

95% loan
$285,000 loan
$1700 principle/interest payment
$185.25 PMI
----------
$1885.25 total (before taxes & ins)


80/15
80% loan, $240,000....15% loan $45,000
$1470.07 principle/interest payment
$328 principle/interest on a 30/15 fixed rate
----------
$1798.07 total (before taxes & ins)


Is $87 worth it? Probably so to me. ;)

Bill,

Thanks for your help again, and $87 a month is certainly worth it to me as well!
I have one last random question. Which is better having a large down payment (15-20%), and large student loans (65k), or a small down payment (5%) and almost no student loans (5-10k). A friend of mine is going to be looking to buy a house soon and doesn't know which way he should go.

That's a personal decision as much as financial.

With most student loans, you'll be paying your interest no matter when you pay it off: right after school, or over 10 years, you could be out the same amount of money (check with the holder of the student loan to know for sure--very important to have the facts). So, you would probably save more money using that for the downpayment on the house, especially if the rate on the student loan is nice and low like it has been (last I checked).

However, let me tell you, student loans just plain suck. LOL
There's a whole other side to debt beyond dollars and cents. Having that thing gone will surley feel good, and then still put 5% down. On top of that, your overall pay out each month, budget-wise, might be lower if you pay a higher house note instead of a house note as well as the student loan. That's where this is a personal decision.

If it were ME, I'd pay off the student loan and then put my 5% down on the house. Debt is simply a horrible thing and I'd rather limit my liabilities as much as possible. To me, peace of mind for being debt free other than the house is worth a lot--beyond putting a dollar figure on it. Many people never get in the position to know what that's like.

To me, peace of mind for being debt free other than the house is worth a lot--beyond putting a dollar figure on it. Many people never get in the position to know what that's like.

I couldn't agree more. Recent circumstances have made it possible for me and the wife to be totally debt free for the first time in over 20 years. It's an unbelievable feeling. I'm planning to retire in a year or so, but it's a heady brew to know I could pull the plug tomorrow if I wanted.

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