First time home buyer!

[CasuallyWreckless]

I'm in pa and am currently living with my parents and have a good enough job to be able to afford my own home. I know there's first time home buyer programs but from what I read they turn out to be scams mostly. I'm just looking for some insight on what to watch for when dealing with mortgage companies. Thank you guys in advance for any insight you could lend me

[Das Pike]

I'd probably start off by going to your own bank and asking them for any information or consultation they have to offer. There's a reason you chose them for your personal banking options so if you're comfortable with them then that would be a solid place to start.

Shop around, there's tons of companies with tons of information that willing to offer you tons of money for competitive rates. We felt more comfortable actually walking into a bank instead of applying for one through an online institution. The face time helps and if you find an agent that knows or is familiar with the mortgage officer it makes the whole process that much easier. Consider a credit union if you can, that's what we did.

Couple things to keep in mind:

- Try to come up with a 20% down payment. It will save you PMI and the escrow option.
- Ask your lawyer if they're willing to cover the title insurance, sometimes they do
- Take your time. It's a long process with a LOT of white paper but if you do your research and are patient everything will work out just fine.

Good luck!

[jnm2.0t]

I'm just looking for some insight on what to watch for when dealing with mortgage companies.

Mostly watch out for mortgage companies.

What % down?

[nobbyv]

I would also look into credit unions before a "mortgage company". My credit union offered a first-time homebuyer program (granted, this was 6+ years ago) that was a 3/1 ARM w/ a 40-year term, only 3% down required w/ NO PMI. It was a fantastic deal, and something that banks/mortgage companies (as opposed to credit unions) would have trouble offering.

I lucked out a bit on the ARM; because of the state of the housing/lending market the rate has dropped every year and is now at 2.825%, but even if the rate had stayed at the 5.125% I started at I'd still be happy with it (mostly for the lack of PMI).

EDIT: These guys anywhere near you?
http://www.eriefcu.org/mortgage/

[jnm2.0t]

I would also look into credit unions before a "mortgage company". My credit union offered a first-time homebuyer program (granted, this was 6+ years ago) that was a 3/1 ARM w/ a 40-year term, only 3% down required w/ NO PMI. It was a fantastic deal, and something that banks/mortgage companies (as opposed to credit unions) would have trouble offering.

I dont know if I would ever call a 40 year amortization a good deal (unless you're a bank). I didn't know anyone took those outside of CA anyhow.

[ValveCoverGasket]

I know there's first time home buyer programs but from what I read they turn out to be scams mostly.

say wha?

[nobbyv]

I dont know if I would ever call a 40 year amortization a good deal (unless you're a bank). I didn't know anyone took those outside of CA anyhow.

Took 40 year with plan to live in current house 5-10 years. W/ deductable mortgage interest, well worth it.

[jnm2.0t]

Took 40 year with plan to live in current house 5-10 years. W/ deductable mortgage interest, well worth it.

Would be interested to see the figures between the 30 and 40 year and how it is better to pay a higher percent to interest versus paying down the principal particularly given a 5-10 year horizon.

[GeoffD]

Would be interested to see the figures between the 30 and 40 year and how it is better to pay a higher percent to interest versus paying down the principal particularly given a 5-10 year horizon.

Assuming 4%, for every $100K you borrow, you pay an extra $60 in mortgage payment on a 30 vs a 40.

Personally, I think that if you have to go 40 years to qualify for a mortgage, you're beyond your limit of affordability.

[jnm2.0t]

Assuming 4%, for every $100K you borrow, you pay an extra $60 in mortgage payment on a 30 vs a 40.

Personally, I think that if you have to go 40 years to qualify for a mortgage, you're beyond your limit of affordability.

Well the rates are usually higher on a 40 so I bet they're even closer in payment just more to interest. I was going to do a marginal IRR between the two options if he posts up the stats.

[AZGolf]

Took 40 year with plan to live in current house 5-10 years. W/ deductable mortgage interest, well worth it.

I'm not a believer in long mortgage terms, but I decided to run through the numbers to see what they look like. I realize that for many, a longer amortization typically means the difference between being able to afford their house or not but I guess I'm of the mind that buying a house shouldn't be all about stretching to the very last dollar just to be able to afford your house payment. Here's some sample scenarios. I'll pick $300,000 financed since a 40-year amortization is likely to be for a more expensive than average home and we'll say you're high enough income to make the 25% marginal income bracket filing jointly. I choose this one because again, the implication of the 40-year amortization is that you don't have a high enough income to afford a shorter term, but that it's high enough income to still qualify for a large mortgage. For those of us in the 15% bracket and below the mortgage interest deduction means less of course.

I wanted to give sample numbers and only go through it one time so I picked 7 years of home ownership. I've read that is a typical number for pre-retirees and it falls within your 5-10 year window.

40-year mortgage, 3.85% APR.
After 7 years of $1225.97/mo P&I payments:
P&I: $102,981.48
Interest: $76,744.88
Interest deduction: $19,186.22
Payment cost (P&I - Deduction): $83,795.26
Outstanding balance of home: $274,989.00
Total financial settlement (Balance + Payment cost): $358,784.26

30-year mortgage, 3.75% APR.
After 7 years of $1389.35/mo P&I payments:
P&I: $116,705.4
Interest: $72,575.32
Interest deduction: $18,143.83
Payment cost (P&I - Deduction): $98,561.57
Outstanding balance of home: $257,259.54
Total financial settlement (Balance + Payment cost): $355,821.11

It was actually quite surprising to me but it appears you can go either way and have roughly the same total cost. Yes, the 40-year will end up costing more because you get worse rates the higher the term. For my wife and I, we went with a 15-year mortgage when we moved to a new home this summer for two reasons. First, we got a significantly lower rate. I think it was 0.75% better. Second, at least for us, saving money is hard when you're raising a family on a single income. If you have a 15-year mortgage it's forcing you to sock away more cash into home equity than you might otherwise save on your own if you had a lower rate and possibly just spent the money on random stuff. We too would like to move in about 7 years or so when our son is out of school and potentially moved out so the 15-year means we will have more equity and thus be able to afford our next home more easily. That's our personal choice though. In the case of a 30 versus 40 year, based on my numbers above (and the guesswork for income bracket and APRs) the 7-year cost between those loans is actually very similar.

[GeoffD]

I'm not a believer in long mortgage terms

All the mortgages I've had in my life were 15 year mortgages. I've done accelerated payments on every mortgage I've ever had. My goal is always to get to "zero debt" as quickly as possible.

[jnm2.0t]

40-year mortgage, 3.85% APR.
After 7 years of $1225.97/mo P&I payments:
P&I: $102,981.48
Interest: $76,744.88
Interest deduction: $19,186.22
Payment cost (P&I - Deduction): $83,795.26
Outstanding balance of home: $274,989.00
Total financial settlement (Balance + Payment cost): $358,784.26

30-year mortgage, 3.75% APR.
After 7 years of $1389.35/mo P&I payments:
P&I: $116,705.4
Interest: $72,575.32
Interest deduction: $18,143.83
Payment cost (P&I - Deduction): $98,561.57
Outstanding balance of home: $257,259.54
Total financial settlement (Balance + Payment cost): $355,821.11

Here's the way I look at it. The difference in monthly payment is $163.37 but at the end you own $12,202.80 more (over 60 months). The IRR of this stream of payments is 9.14%. This is a real cost. If you cannot do better than 9.14% investing your $163.37 you should have taken the 30 year instead. This is with a slight difference of only 10 bps on a really low rate. If that 10 bps gap widens to say 20bps the rate becomes 14.77%. Also, unless this mortgage was taken today you are likely to have had much higher rates, say you use 5.00% and 5.10% the marginal IRR goes to 11.03% or 17.51% if the gap is 20 bps. These figures do start to get smaller as time goes on but you are still looking at rather high rates.

Secondarily the issue of deductability of interest wouldn't do anything for a married couple in this scenario. You're looking at a bit over $11k in interest the first 12 month period in either scenario however you already get a standard deduction of $11,900. The only amount of interest that really is of any benefit is the portion that eclipses this $11,900 and in neither case doe that happen. Mortgage brokers love to show you the 'true cost' of the mortgage by applying your tax rate to your interest but thats a scumbag move since in this case you have no actual benefit.

[AZGolf]

Secondarily the issue of deductability of interest wouldn't do anything for a married couple in this scenario. You're looking at a bit over $11k in interest the first 12 month period in either scenario however you already get a standard deduction of $11,900. The only amount of interest that really is of any benefit is the portion that eclipses this $11,900 and in neither case doe that happen. Mortgage brokers love to show you the 'true cost' of the mortgage by applying your tax rate to your interest but thats a scumbag move since in this case you have no actual benefit.

I guess so - but then again my 2011 return had me in the 15% tax bracket (married/jointly) and we had $15,096 of itemized deductions without counting mortgage interest. If my family on my lowly 15% bracket income can go way over the standard deduction not counting mortgage interest I don't doubt there's plenty more families who are looking at the same financial picture as me. Your point is valid though; mortgage interest deductions are more complex than the straight 25% I was counting.

[jnm2.0t]

Yeah and you can certainly bring the mortgage interest deduction into the marginal IRR calculations to reflect your real world scenario but it isn't going to impact it that much. The bigger point though is that unless you have parity between 30 & 40 year rates you are paying a hefty premium on the 40 year over the 30 year.

[CasuallyWreckless]

A lot of good stuff in here I've decided to hold off on it until I pay my touareg off in a year or so and do a bit more research my limit would be about 280$ I think with a 20% dp

[ValveCoverGasket]

no harm in waiting longer and continuing to build up cash

[nobbyv]

Personally, I think that if you have to go 40 years to qualify for a mortgage, you're beyond your limit of affordability.

The 40-year term was the only one offered as part of this program. Again, well worth it to me considering my intention to stay 5-10 years and not being required to pay PMI with less than a 20% DP. Allowed me to put some of the cash I had intended for a DP into rennovations (kitchen).

Yeah and you can certainly bring the mortgage interest deduction into the marginal IRR calculations to reflect your real world scenario but it isn't going to impact it that much. The bigger point though is that unless you have parity between 30 & 40 year rates you are paying a hefty premium on the 40 year over the 30 year.

At the time, the rate for the 40-year term on the First Time Homebuyers program was also over a full point LOWER than the average country-wide for a 30-year FRM (February 2006, average rate ~6.5%).

Historical mortgage rates here: http://mortgage-x.com/x/ratesweekly.asp

As I recall, local rates were actually a bit better in southern NH/northern MA; I believe my credit union was offering 5.75% on a 30-year FRM at the time.

[Oliver@triplezoom]

All the mortgages I've had in my life were 15 year mortgages. I've done accelerated payments on every mortgage I've ever had. My goal is always to get to "zero debt" as quickly as possible.

Is that for psychological reasons or because it makes the most sense financially?

I know things are a bit different in Canada vs the U.S. but I wouldn't put an extra cent towards my mortgage unless I was maxing out my RRSP contributions (which are tax deductible) as well as maxing out a tax free savings account. That would definitely put me further ahead financially than paying down my mortgage faster would.

I hate debt but I don't mind having a mortgage at all.

[AZGolf]

Is that for psychological reasons or because it makes the most sense financially?

I know things are a bit different in Canada vs the U.S. but I wouldn't put an extra cent towards my mortgage unless I was maxing out my RRSP contributions (which are tax deductible) as well as maxing out a tax free savings account. That would definitely put me further ahead financially than paying down my mortgage faster would.

I hate debt but I don't mind having a mortgage at all.

I'm sure GeoffD will have his own reasons. For me, there's a few reasons. My first home had a 30-year because that's what I had to do in order to afford payments. Granted, this was back when I had a lot less income and my rate of 8.5% was considered a fantastic rate for only having 20% down and not paying any points up front. I don't konw what RRSP is, but there's two tax-free methods of saving that I know of in the US: 401(k), which is an employer provided retirement program and two forms of IRA, one of which has income limits that are easy to exceed and the other which has future tax benefits promised but no short-term tax benefits. I max out my 401k contributions but don't do any IRA contributions because I'm not eligible for traditional IRA contributions and I honestly have little faith they aren't going to just change the rules for Roth IRAs between now and the decades from now when I hope to be able to draw from that account. So you and I are on the same page that the top priority is socking away money in a tax sheltered account of some kind.

As for the house, Phoenix is one of the cheapest housing markets in the country so if we ever want to be able to afford to live somewhere else then we're going to need a very healthy down payment. By working on getting houses paid down / paid off, you are building up savings in an investment vehicle that has tax benefits while paying it off and capital gains protections when it appreciates in value. So in a sense, even a house is a tax-advantaged savings account. As an example, let's say I started in a lame area of town with a $100K house. If you work to get it paid off in 10 years or whatever, now you've got, say, $92k to put toward your next home after sales costs, so you can buy a $200k home and still only have that same $100k mortgage. If you pay that one off in another 10 years, the next home can be $300k and still only need a $100k mortgage. Sales costs play a role, but I also ignored appreciation and whatever. It's a simplified description, yes, but I hope that makes sense.