Finance mini-Wizard request.
azith28
Registered User regular
Registered User regular
I'm looking into buying a home, and I was reading about some of the programs available for first time home buyers. The Only one that stands out as something I may want to consider is a down payment assist program, but its sounding like a bit of a trap, so i wanted to try and confirm that.
The offer is to pay 5% of your down payment
Down Payment Assistance Program Ohio offers first-time homebuyers a second mortgage of either 2.5 percent or 5 percent of the purchase price in the form of a 0 percent loan with no payments that is forgiven after seven years. If the home is sold, refinanced or transferred the amount received must be paid back. Borrowers must have a minimum 640 FICO score. Borrowers who select 2.5 percent in assistance will incur an interest rate on their first mortgage that is 0.5 percent above loans with no assistance; borrowers selecting 5 percent help receive an interest rate that is 1 percent above loans with no assistance.
It's the 1 percent more interest that I'm looking at funny. Lets assume 3 situations, a 170k house (8500 assistance), a 220k house (11,000), and a 250k house(12,500), each with a 30 year fixed apr loan, at say 3.5% . What would be the total amount owed back at that 3.5% vs the 4.5% if i got the 5% down payment assistance? I am assuming that these kinds of programs are more for a much lower purchase price than what i am looking at, and so the higher amounts I'm considering is actually going to be a lot worse because of the higher interest rate. Please confirm my theory.
The offer is to pay 5% of your down payment
Down Payment Assistance Program Ohio offers first-time homebuyers a second mortgage of either 2.5 percent or 5 percent of the purchase price in the form of a 0 percent loan with no payments that is forgiven after seven years. If the home is sold, refinanced or transferred the amount received must be paid back. Borrowers must have a minimum 640 FICO score. Borrowers who select 2.5 percent in assistance will incur an interest rate on their first mortgage that is 0.5 percent above loans with no assistance; borrowers selecting 5 percent help receive an interest rate that is 1 percent above loans with no assistance.
It's the 1 percent more interest that I'm looking at funny. Lets assume 3 situations, a 170k house (8500 assistance), a 220k house (11,000), and a 250k house(12,500), each with a 30 year fixed apr loan, at say 3.5% . What would be the total amount owed back at that 3.5% vs the 4.5% if i got the 5% down payment assistance? I am assuming that these kinds of programs are more for a much lower purchase price than what i am looking at, and so the higher amounts I'm considering is actually going to be a lot worse because of the higher interest rate. Please confirm my theory.
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You'll have thousands of dollars of repairs and upkeep each year (averaged out over time), being able to meet a high down-payment usually means you can afford those costs moving forward.
The main reason im looking into this now is that my income is about to go over the amount that i would be able to get any kind of first time buyer assistance, so if im ever going to want to use that advantage, I have to look into it now.
I'd find a reputable lender to get their perspective.
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And thats the entire reason for this post. I figure that there is a certain amount of purchase price where you start losing money. I'm trying to determine where it is.
edit: which I guess makes it somewhere around 11% interest loan, if you were to consider it that way
edit: I punched in the numbers for a $15,000 house and it cost you $2500 over the life of the loan to reduce the down payment by $750. So there appears to be no purchase price where you don't lose money
Edit: At least from that snippet, adding 0.5 or 1% to your first mortgage just seems like a really bad idea that will end up costing way more on the house in the long term unless you plan on paying it off way earlier than the original term.
But a house that isn't under warranty is going to require fixes and repairs, even a house that is in good condition. Assume first year you are going to spend $1.15 per square foot in repairs year one, and 80 cents per square foot in repairs each year after. If your house is over 25 years, add 15 cents a square foot.
Not that it matters in this case, but money upfront is different than money over time. Inflation, the possibility of asset appreciation, investing, ect..., all mean that it's possible to convert some money now into more money later. So it's possible that taking the assistance upfront would be a net positive even if you pay more over time than the single amount upfront. That being said I didn't crunch any numbers and 11% interest is likely much higher than any return you would get from appreciation, inflation, ect...
Take $100,000 house, which you get 5% down payment for. $95,000 mortgage, with a $5,000 downpayment.
You would pay an additional 1% on that $95,000 for seven years = $950 extra per year. $950x7 = $6,650 extra paid over the 7 years.
If you discount the $5,000 value forgiven, you get $1,650 extra paid over the seven years. If you amortize that over 7 years, it's ~$236 extra per year, when divided by $5000 is equivalent to 4.7% annual interest on that $5,000. To be honest, most personal loans for something like this is about on par if you have excellent credit. If your credit is only fair or bad, this is only about half to a quarter interest you'd be paying on a personal loan.
tldr; I could see it making sense for people with only bad to fair credit who don't have access to some sort of loan to obtain a down-payment, and they were able to refinance on at least equal terms in seven years. Otherwise if you have good to excellent credit, there's easier alternatives for you. This deal gets even better if you account for principle reduction over the seven years, but I wanted to stay simple with the math.
I'm skeptical this it ever makes sense to do this if putting 20% down is a viable option. If you're going to be paying the same PMI either way, it might make sense given a confluence of unlikely but plausible circumstances.
Edit: I don't think this is that bad of a program to be honest. If you can refinance as soon as the balance is forgiven, it's essentially a personal loan of up to 5% of the purchase price for down payment with an annual APY of 4.7% which bypasses all credit and debt to income ratio checks that it would take to get a personal loan. If it gets people to buy a home and the other benefits (all else being equal) such as the first time home buyers credits, mortgage interest deduction, which they wouldn't be able to get otherwise, I think it's a much much better deal.
I wouldn't expect to deduct any mortgage interest on a mortgage of the size being discussed
The purchase price doesn't matter. The length of the loan does. It increases interest rates by 1%, in return for decreasing the amount needed by 5%.
Length of mortgage: extra amount you'll be paying over the life of the loan as a percent of the base price of the house
30 year: 10%
20 year: 5%
10 year: 0% (just slightly below 0)
This means that if you can manage a 10 year loan, this might make sense. (Assuming I did the math right.)
However:
* Even at 10 years, it's basically a wash, and is probably still not worth it if you end up with any extra fees.
* If you qualify for this you probably can't handle a 10 year mortgage.
* It keeps you from moving for 7 years, and you never know what the future holds. A regular mortgage is bad enough at this.