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buying a home - combo loans

mightyjongyomightyjongyo Registered User regular
I'm trying to buy a house and so started talking to a loan broker. Right now he's trying to sell me on getting a combo loan - I put 10% down, and get 80% 30-year loan plus a home equity loan for the remaining 10%. His reasoning is (I guess) that having two loans is better than paying morgage insurance premiums. Either way I only have the 10% to put down.

It sounds like a bad idea to me (why would I want to get two loans?), but on the off chance that I'm wrong, is this a bad idea?

Posts

  • JasconiusJasconius sword criminal mad onlineRegistered User regular
    My opinion, essentially yes its a bad idea.

    Parse the phrase "home equity loan"

    first you need equity to have a home equity loan

    The reason why this approach isn't mainstream and the reason you don't see it advertised is because when a major bank packages that 80% loan, they aren't really that thrilled when they find out that another bank also have a lien on the house from Day 1. That complicates an already complicated legal and financial matter.

    I would ask your broker who he (they) end up selling these loans to after they package them. If he doesn't have a good answer, it's probably shady.

    PMI is annoying... but its not THAT annoying, and you can write off the full amount on your taxes.

  • ASimPersonASimPerson And they will tremble again at the sound of our silence.Registered User regular
    Where are you looking?

  • mightyjongyomightyjongyo Registered User regular
    @ASimPerson‌ looking in Santa clara/San Jose in California. 600k is not easy but should be doable.

    @Jasconius‌ thanks for the advice. Makes sense when you put it that way. I'll ask the broker on Monday. What constitutes a "bad" answer? He was initially talking about Freddie Mac and Frannie Mae, not sure if that would be the final holder of the loans.

  • ThegreatcowThegreatcow Lord of All Bacons Washington State - It's Wet up here innit? Registered User regular
    @ASimPerson‌ looking in Santa clara/San Jose in California. 600k is not easy but should be doable.

    @Jasconius‌ thanks for the advice. Makes sense when you put it that way. I'll ask the broker on Monday. What constitutes a "bad" answer? He was initially talking about Freddie Mac and Frannie Mae, not sure if that would be the final holder of the loans.

    Ultimately, the majority of loans are "sold" to Freddie Mac or Fannie Mae by banks as a method of transferring the loan off the books of the bank. You'll still send payments to the bank, but ultimately, the loan will be owned by one of those two giants. Supposedly this frees up the bank to be more flexible with the cash/debt ratios, but even I don't know the specifics of it. Basically yes, you're loan, probably within the first 3 months of closing, will be sold off to one of those two companies.

    And 2n'ding the whole combo thing is a bad Idea. You want to focus as much as possible on putting a bigger down payment and getting out of PMI as quickly as possible. Yes you do get a tax deduction every year for it, but that's money that could be building equity that's essentially be sucked out of the equation. Besides, home prices are going up pretty quickly here in california. My Condo in azusa went in 4 years from 120k when I bought it in 2010, to about 180-200k depending on listing now.

  • ASimPersonASimPerson And they will tremble again at the sound of our silence.Registered User regular
    @ASimPerson‌ looking in Santa clara/San Jose in California. 600k is not easy but should be doable.

    I bought a condo in San Jose last year, so I have some experience with this, though I did not need a combo loan or PMI.

    If you really want to avoid PMI, there are some things you can do, like offer more for the down payment.

    If you're not happy with your current broker, I can PM you the guy I used when I bought my place. Him and his assistant were pretty great in a bad situation with my HOA and the bank. He can supply an agent as well but he worked great with mine. Dude even showed up to closing, which my agent said rarely happens.

  • mightyjongyomightyjongyo Registered User regular
    Cool, that would be helpful. Can't hurt to have more options, at any rate. I don't necessarily want to avoid pmi, the broker just brought it up (I may have mentioned it in the past, I can't remember). Just want to make sure I'm not getting screwed (or less screwed) one way or the other.

  • ThunderSaidThunderSaid Registered User regular
    @ASimPerson‌ looking in Santa clara/San Jose in California. 600k is not easy but should be doable. .

    Then $600k is not the right price. You say you can swing a 10% down payment, so I guess you have $60k sitting somewhere. A smart move would be to put 10% down on a $500k house and still have $10k set aside for when the air conditioner breaks. Then take the difference in mortgage payments and save that up as well.

    On the subject of the loan type, I'd say get the more traditional loan even with the PMI. Doing weird crap on mortgage loans was how so many people lost their houses when the bubble burst.

    bowenschussDaenriszagdrobDarkewolfe
  • bowenbowen How you doin'? Registered User regular
    edited June 2014
    Yeah get a conventional loan, the PMI will disappear with the proper equity. Then get out a HELOC once you've built some equity. There's also FHA 203k loans. But they require 20% downThey require 3.5% down, but you can roll into repair costs if you want the extra money like you're trying to do.

    Edit: If you don't need repairs and are just trying to avoid PMI, you're better off getting a conventional loan package with a 10% down payment and eating the PMI until you've built up the proper equity, in which you can petition to get it removed.

    bowen on
    not a doctor, not a lawyer, examples I use may not be fully researched so don't take out of context plz, don't @ me
    schussThegreatcow
  • schussschuss Registered User regular
    A lot of brokers like doing combo loans as loan producers are now limited to 1% commission or so, so if they do multiple loans they get more flat commissions as well as the normal. PMI sucks, but it can be an indication you're going after too much house if the PMI is what makes it unaffordable.

    bowen
  • bowenbowen How you doin'? Registered User regular
    Some say too much house, bowen says house market is artificially high compared to wage stagnation.

    If you've got 10% down and play to stay somewhere for more than 10 years, I'd say you're good. Some states even have down payment assistance loans where if you stay in a home for 10+ years you never have to repay it, so long as you can put X amount down.

    In NY, you have to get a certain type of loan with a higher interest rate and down payment though, so, you may not want to.

    not a doctor, not a lawyer, examples I use may not be fully researched so don't take out of context plz, don't @ me
  • schussschuss Registered User regular
    Oh, I agree that 5 or 10% down isn't a huge concern. It's more about monthly payment with PMI being ok vs. not.

    bowen
  • 1ddqd1ddqd Registered User regular
    edited June 2014
    FYI conventional loan means 20% down payment EDIT: (in most cases)

    1ddqd on
  • mightyjongyomightyjongyo Registered User regular
    Just to clarify - I've gone through my expenses, I can afford the PMI or the second loan but obviously want to avoid paying more than I need to, and don't want to get screwed by the broker as a result of my lack of knowledge.

    There are a lot of other factors like schools (since we may be here long enough to have kids) and area which brought me to the 600k price point. I'll be trying to go lower, of course, and will compromise as I need to but the average price of homes (as opposed to condos or town homes) where I live is around that price. I do have more than the 10% but that is so that I have extra funds for when things break, as was pointed out.

    From what I remember of the housing crisis I thought it was getting two loans, but both of them had adjustable rates or something?

    At any rate it seems like PMI should generally be better than the second loan then. Anything else I should keep in mind while going through this?

    Geth
  • schussschuss Registered User regular
    2 loans can work, but it's additional complexity and paperwork hell. None of the good mortgage guys I know really use them that often, as it's easier to just put your extra money towards paying up to 20% vs. taking the hit of the 2nd mortgage stuff (as there's a fixed base cost for the prep and closing of that loan etc.). It may make sense at 600k, but it may not.
    I will also take this opportunity to say that the bay area housing market is insane.

    bowen
  • bowenbowen How you doin'? Registered User regular
    Yeah PMI may be an extra few thousand over the course of the loan over the 2nd loan, but the closing costs on the 2nd loan is going to need to be up front. You'd have to sit down and crunch all the numbers based on what they're giving you (and how much the PMI is).

    not a doctor, not a lawyer, examples I use may not be fully researched so don't take out of context plz, don't @ me
  • mtsmts Dr. Robot King Registered User regular
    conventional loan is 5%

    camo_sig.png
    schuss
  • mightyjongyomightyjongyo Registered User regular
    Okay, trying to read up on this HELOC thing (which I think is what the broker sent me) - so you're opening a line of credit, which is subtracted from the mortgage amount, but you are supposed to pay interest only?

    It sounds to me like maxing out a credit card, but only making the minimum payment, which you then assume you will be able to pay back when you sell the house, but on top of that the interest rate can change on a month-to-month basis.

  • bowenbowen How you doin'? Registered User regular
    edited June 2014
    HELOCs are lines of credit liened against your home. They're secured debt in that they give you a low interest rate since they're tied to equity in your home's value.

    Sounds like they were going to take the HELOC out to pay the rest of your down payment. You'd want to pay the full monthly payment on your HELOC though. They work a lot like credit cards, you're right.

    bowen on
    not a doctor, not a lawyer, examples I use may not be fully researched so don't take out of context plz, don't @ me
  • PedroAsaniPedroAsani Brotherhood of the Squirrel [Prime]Registered User regular
    PMI is what will get you on the housing ladder. I am in the final stages of getting an FHA 3.5% down, 4.5% APR loan. After six months I will be able to switch it to a regular loan with no PMI, saving me about $500 a month. Don't worry so much about PMI, just have a plan to get off it so you can bring the payments down.

    bowenschuss
  • ASimPersonASimPerson And they will tremble again at the sound of our silence.Registered User regular
    edited June 2014
    Just to clarify - I've gone through my expenses, I can afford the PMI or the second loan but obviously want to avoid paying more than I need to, and don't want to get screwed by the broker as a result of my lack of knowledge.

    Just a quick note: brokers in California actually have a fiduciary duty to you, which means that they are legally obligated to get you the best possible deal.

    In other states, it's kind of "eh" if you should use a broker or go to a bank yourself, but in California brokers are definitely the way to go.

    ASimPerson on
  • Dr. FrenchensteinDr. Frenchenstein Registered User regular
    PedroAsani wrote: »
    PMI is what will get you on the housing ladder. I am in the final stages of getting an FHA 3.5% down, 4.5% APR loan. After six months I will be able to switch it to a regular loan with no PMI, saving me about $500 a month. Don't worry so much about PMI, just have a plan to get off it so you can bring the payments down.

    I don't think that's a very common possibility for people, and FHA loans with PMI have PMI for the life of the loan now. so buyer beware and all.

    schuss
  • AspectVoidAspectVoid Registered User regular
    PedroAsani wrote: »
    PMI is what will get you on the housing ladder. I am in the final stages of getting an FHA 3.5% down, 4.5% APR loan. After six months I will be able to switch it to a regular loan with no PMI, saving me about $500 a month. Don't worry so much about PMI, just have a plan to get off it so you can bring the payments down.

    I don't think that's a very common possibility for people, and FHA loans with PMI have PMI for the life of the loan now. so buyer beware and all.

    Depends on the PMI you get. FHA now allows two different forms of PMI. One form you can pay in full at the time of the closing. This version is applied to the loan for the life of the Mortgage. The other PMI is a month to month PMI. It used to be for life, but in 2001 it was redone so that you can drop the PMI when you have the loan down to 78% of the sale price.

    PSN|AspectVoid
  • bowenbowen How you doin'? Registered User regular
    I think they redid that PMI rule in 2013. FHA doens't care if you refi into a conventional loan though, but you end up paying closing costs on the new loan too.

    not a doctor, not a lawyer, examples I use may not be fully researched so don't take out of context plz, don't @ me
    schuss
  • ThegreatcowThegreatcow Lord of All Bacons Washington State - It's Wet up here innit? Registered User regular
    edited July 2014
    Just to clarify - I've gone through my expenses, I can afford the PMI or the second loan but obviously want to avoid paying more than I need to, and don't want to get screwed by the broker as a result of my lack of knowledge.

    There are a lot of other factors like schools (since we may be here long enough to have kids) and area which brought me to the 600k price point. I'll be trying to go lower, of course, and will compromise as I need to but the average price of homes (as opposed to condos or town homes) where I live is around that price. I do have more than the 10% but that is so that I have extra funds for when things break, as was pointed out.

    From what I remember of the housing crisis I thought it was getting two loans, but both of them had adjustable rates or something?

    At any rate it seems like PMI should generally be better than the second loan then. Anything else I should keep in mind while going through this?

    Lot of folks below me have commented on the heloc and and whatnot, but I can chime in on the actual process since I so recently went through it.

    Be prepared to bring a lot of documentation. Like.... A LOT. Lately due to stricter underwriting standards, the bank originating the mortgage is going to ask for some if not all of the following:

    -Tax Filings for the last 2 years minimum
    -At least 2+ Paystubs from your most recent job
    -Bank statements going back at least 2 months.
    -Copy of your most recent credit report (they may pull another one on their own, but you should pull it yourself just to be sure so you see that your credit profile is where it's supposed to be. You're legally allowed to get one copy for free at www.annualcreditreport.com
    -Documentation of all of your liquid assets (official statements of say investments/retirement accounts/etc)
    -Verification of current employment (This can be a pain in the ass to get sometimes depending on where you work, my job at the time had a whole department dedicated to shit like this, so they got it quickly, but your job may or may not have that handy, they will most likely ask for a detailed employment verification letter (detailed usually entails detailed salary info how long you've been working there etc).
    -Copies of Official IDs (Driver's License/Passport/Social Security Card/Etc)
    -List of all previous places you've lived for the last several years


    -Be next to a fax machine and be ready either to fax any and all of this information over or be close to a Fedex/UPS store and be prepared to mail this stuff out. The bank and the escrow company are going to want copies of everything.
    - Be prepared to pay a whole bunch of fees throughout the whole process. Especially if you're buying into a condo or a foreclosure. There's a whole bunch of fees tacked on through the process that even though they're supposed to document, some still manage to come up, particularly when dealing with a Homeowners association (verification of the HOA accounts etc). Be also prepared to pay for an inspection fee depending on the originator, though it makes good sense to have the house fully inspected before you sign any documents.

    - Patience. The process will take a while. Most escrow and underwriting process can take as long as 30-60 days not counting other issues, but hang in there and keep track of your costs and documents. Don't be surprised if the escrow company or the underwriter asks for the same documents multiple times. So many people are involved with this process that they invariably lose their copy and will need a replacement copy RIGHT NOW, usually at some critical juncture that requires you to scramble to a fax machine or overnight mail it (did I mention you'll want to have a ups/fedex store location handy? Yeah I'm a bit bitter about this crap)

    Also you may want to consider signing up for an escrow account. There's a lot of back and forth about the merits of one, but I find having an escrow account is worth it. It allows you to lump in the Property Taxes and Homeowner's insurance payments as part of your monthly mortgage payment and allows you to make sure you'll be ready for the payment when the time comes. If you do decide to go with one, make sure to specifically request it early on. Some lenders by default don't offer it unless you bring it up so make sure you let them know about early on in the underwriting process so they can get it set up with the bank.

    Those are just a few of the things off the top of my head. Hopefully your process will go smoothly! My two times sure didn't.

    Thegreatcow on
    zagdrobbowenmightyjongyo
  • zagdrobzagdrob Registered User regular
    Lots of very true stuff

    This is the absolute truth; back in 2008 when we bought our house things were (relatively) easy.

    When we refinanced two years ago, we went through a similar set of circumstances and it took four months to close on our mortgage. Not four months sitting and waiting, four months hammering on everyone we could talk to just to get the mortgage done.

    We had the benefit of being high value customers / clients with the bank we did the refi with, so threatening to walk had some real bearing...but expect to provide every document two or three times.

    I'd recommend scanning everything above to .pdf and putting it in a secure place you can get to it anytime (encrypted on a flash drive, cloud storage, etc). You'll invariably get a call three hours before the notary is due to sign off that you need X, Y, and Z or you'll need to reschedule and having the scans on hand will be a lifesaver.

    Get the name, phone number, and ID of everyone you talk to and keep it handy. Start badgering if it seems like anyone is dragging their feet.

    On the plus side, after that whole nightmare they dropped our interest rate .25% at no cost to us because of the hassle. But still, that was four months of back and forth.

  • Dr. FrenchensteinDr. Frenchenstein Registered User regular
    is not having an escrow account even an option? i don't remember exactly but i thought it was just a standard thing, that your mortgage servicer fills your escrow account from your mortgage payments, and makes insurance and tax payments on your behalf from it.

  • AspectVoidAspectVoid Registered User regular
    Escrows depend on were you get your mortgage from. My credit union doesn't do escrows, but the county I am buying my house in does, so I'll be able to set one up with them free of charge after the closing.

    PSN|AspectVoid
  • WhacktoseWhacktose Registered User regular
    Escrow is used in the sale/transfer of ownership, but is not required for the actual mortgage and other payments. We pay our mortgage separate from our taxes etc. by choice, because I consider escrows just another point of failure (for example, my parents' escrow failed to pay their property taxes recently). AFAIK escrows are never required, but frequently encouraged.

    Back to the original topic: It depends on the rate you're being offered on the HELO/HELOC. If the interest costs are lower than PMI, then I would go for it. It will be more paperwork, but it will save you money in the long run. And who doesn't love money? If you're going to be dropping a little extra into principal, you likely will want to put it into the 2nd loan, as most HELOCs are variable rates, and rates will rise in the next few years. The main downside issue to consider in my mind is this: If for some reason you need to sell your house for LESS than you owe on your loans, that 2nd loan can be problematic, especially if it's with a different bank than your original loan. You would then have to receive approval for the short sale from 2 entities, and since the 2nd loan likely won't be made whole (since their claim is in line behind the 1st loan and CA is a non-recourse state), they have little to no incentive to approve, as it's just more work for them.

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