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September 2, 2008
Mortgage Help!
We need help choosing a mortgage option. We were working with a particular bank and just last week they told us they can no longer do 90% financing. Considering that we already put down a 50K down-payment and signed a contract we don’t have the option to back out so we have started courting other banks. We have about 2 months to get everything together and get a mortgage, but we were hoping to close by the end of this month. It’s been really hard for us to choose and see what option is best for us. We don’t know We are hoping that someone in the brownstoner family can provide some good advice. PS- we are going through this process without a realtor but we do have an attorney
New construction condo, purchase price- $500K
Option 1- The major bank that denied us 90% financing has offered to finance at 85% for 6.375%. This option requires us to put down an additional $23K plus pay $25K in closing costs.
Option 2- A second major bank is offering 90% financing at 6.75%. The closing costs would be 5% of purchase price.
Option 3- A credit union is offering 90% financing at 6.875%. The closing costs would be 3-4% of purchase price.
Option 4- The major bank in option 1 has also offered us the possibility of a FHA loan at 6.5%. This is because the home is in Crown Heights and is considered a low/moderate income area. This also gives us a potential $1500 closing cost credit. This seems like the best option but I am unsure. I’m a little peeved that they didn’t offer this at first, why are they only offering this now??
Is it better to pay the additional $23K now in order to get the lower rate? Ideally we don’t want to put any more money down and also have low monthly payments. Because it is new construction we are looking at very high closing cost.
How do we know what Option is the best for us financially? Is it better to pay the money up front even though it would take a huge chunk of our savings? Opinions please!
Comments
Did you look at your contract to confirm that you don't actually have a finaning condition that would let you out of this? I say back out if you can, keep renting, and buy this place for $450k in a couple of years.
Posted by: lechacal at September 2, 2008 3:13 PM
W could back out and lose our deposit--not an option we want to take. we had an appraisal contingency and not a financing contingency. Since the condo appraised for more than the purchase price- we don't have "a way out".
Posted by: Dappledo at September 2, 2008 3:24 PM
A lot of this depends on how long you plan to stay in the apartment. Based on your time frame you should crunch the numbers on each option to see if the lower interest rate is worth a higher closing cost or earnings lost on the additional funds you may need to put down.
Posted by: fawn at September 2, 2008 4:05 PM
we only PLAN to stay around for 7-10 years
Posted by: Dappledo at September 2, 2008 4:38 PM
Are you able to get a conforming mortgage ? From what you write you must be right on the borderline. Think its 417k. If you do have a conforming mortgage that should help you obtain the best rate.
If you're only staying there for 7 years or so then you should consider a 7 year arm and see if that lowers your rate. That's a trade off though in terms of peace of mind vs lowest interest rate. I haven't looked lately but there may not be much difference between 30 year fixed and 7 year arm. Something to think about.
Posted by: 10thStreetReno at September 2, 2008 5:00 PM
You need to sit down and crunch the numbers. Throw together an Excel spreadsheet (what I always do in these situations). Get a friend who knows Excel to help you if need be. There is no magic to it. Just punch in what each option will cost you (up front costs and monthly after-tax cost) and then run comparisons for different assumptions about how long you hold the place. (If I hold 3 years, option A will cost $x, option y will cost $y, option z will cost $z, and so on).
And consider very carefully how valuable cash-on-hand is to you. Every person puts a different value on it. If you have a government job or a trust fund that spits out a little money a month, maybe a rainy day fund isn't too critical. If you are in the finance industry (low job security) and you have a couple of mouths to feed, then every dollar of savings is very valuable. Depending on the value to you of a rainy day fund, you might want to go with more expensive financing that involves less money down.
And be on the lookout for excuses to back out of the sale. If you can chat with a lawyer for free or on the cheap, get a sense as to what will entitle you to walk away *with* your deposit.
Posted by: lechacal at September 2, 2008 6:00 PM
Most standard contracts state that the sale is persuant on getting a mortgage.
If your lawyer didnt add that line then he/she's an idiot.
Posted by: CobbleHilller at September 3, 2008 11:00 AM
The standard NY form contract has options for including a financing contingency or not including it, so it's obviously something that is on the table for negotiation. In NYC before the credit meltdown, it was standard for the seller to ask the buyer to waive the financing contingency, and if buyer didn't waive it, the next person would. Since this is new construction, it's entirely likely that the OP signed the contract when banks were handing out mortgages to children on street corners, so there was no need to be concerned about a financing contingency so long as the appraisal came in (which the appraisal contingency covers). Not to say it was ever a good idea to agree to waive the financing contingency, but it was done all the time, and you often could not get seller to sign a contract with that contingency included.
All that said, I agree with a prior poster: crunch the numbers and see what the differnce in costs are based on several different time periods.
Good luck.
Posted by: Grendel at September 3, 2008 12:21 PM
When you say "closing costs," do you mean "points?" on the mortgage, or are you including taxes, etc. You need to separate these. $25K in closing costs for a $500K condo is crazy high. Do NOT pay that.
You need to compare mortgages with no closing costs with the ones you're being offered. Then you can use an online calculator to determine whether it's worth "buying down" your rate. The only other variable is how long you think you're going to go before selling or refinancing. Historically (and unfortunately, these are unprecedented times), you'll have the opportunity to refinance within 3 years and save money. Regardless of how long you intend to stay in your apartment, I would get a 5-year ARM or 7-year at the most. You're very likely to be able to refinance at a lower rate within a couple of years, after the credit markets loosen up.
Posted by: FatLenny at September 3, 2008 3:41 PM
FatLenny -- Whoah!! Very dangerous advice you just gave. Rates are still incredibly low by historical standards, and the Fed has its finger on the tightening trigger to fight inflation. SPREADS (i.e., the difference between risk-free treasuries and mortgage rates) might go down, but I think the yield on treasuries could go up much more (with the net result that mortgage rates would go up).
Perhaps I will be proven wrong, but I think planning on being able to refinance at a lower rate in a few years is a dangerous gamble, particularly for someone who might not be able to absorb the shock of a higher rate.
Posted by: lechacal at September 3, 2008 3:57 PM
lechacal, we just can't seem to see eye-to-eye, can we. Given that Dappledo only plans to be there 7-10 years, which is a very long time to stay in one place these days, it would be insane to get anything beyond a 10-year ARM unless the rate is the same as a fixed-rate mortgage.
Rates are historically low right now but they're also historically cyclical. Over the past 30 years, borrowers have typically been able to refinance at a lower rate within a few years. I would say 5 years is safe, 7 years safer, and 10 years bullet proof given the likelihood of moving before then. Anything more is just throwing money away. The average first-time home buyer stays in his home for 5 years.
Having said that, it doesn't look like the spreads between a 10/1 ARM and 30-year fixed are very wide. But even if it's 1/8 of a point, that's $600/year. You'll be better served putting that into one of your guaranteed 7% investment vehicles than handing it over to the bank.
My personal opinion is that the Fed will do everything possible to keep lending rates low given the nature (credit) and magnitude of the current crisis, but inflation could pose a problem.
Posted by: FatLenny at September 4, 2008 12:15 PM
If all other options fail, try M&T Bank - they were great.
Posted by: Ama at September 4, 2008 3:07 PM
Sorry for not including this in my previous post - the M&T Bank contact we used was Peter Sestito [845-416-8888]. He is great and will provide you with honest answers to your questions and will do his utmost to help you.
Posted by: Ama at September 4, 2008 3:11 PM
We used Bank of New York and got a really great rate in Crown Heights. It was below market because CH is considered a low income area.
$25k in closing costs for 500k condo is not really that outrageous... maybe a little high...
Our closing costs came in under the estimates...
Good luck
Posted by: CrownGardener at September 5, 2008 7:55 AM
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