Hello everyone! I am soon to become a homeowner! I am purchasing a condo and will be closing on August 17th. I am putting 5% down on a $96,000 unit. Of course, that means I have to pay PMI unless I take an 80/20 loan, which means the smaller loan will be a balloon at the atrocious rate of 10.5%. My cousin had a great suggestion after I discussed some things with him. I have a BofA Visa with a $65,000 line and have an offer for 3.99% for a year. They will put money right in my checking account. He suggested that I have them put the other 15% of the down payment in my checking account and that will give me the 20% down, thus avoiding PMI insurance. He recently got a HELOC from a local credit union at a 6.75% fixed rate with $100 in closing costs; no other fees. After closing on the mortgage, I would take out a HELOC to finance the remaining 15% by paying off the BofA card. The PMI insurance will run me almost $60 a month, so the savings would be substantial. What do you think? My scores are pretty strong, ranging from 715-724, so I don't think I'll have to worry about getting approved for the HELOC, since his were around 700 when he obtained this from the local credit union. Advice?
Using the BOA card is a good idea. I have heard a few ads on the radio where the lender is using 'no PMI' as a selling point. Maybe you should shop around a little more.
A couple of things to look at, and consider: 1) Using the BoA card for $15K-is there the standard 3% fee? That would be $450 to start (7.5 months of PMI). 2) Does the 3.99% rate apply for cash advances? Often times it does not. Be sure to read the fine print of the offer. 3) Following your plan, A HELOC loan for $15K will run you about $105-$125 per month in interest. (It will vary with the number of days in the month). This is interest only, no principal reduction. 4) Not to be discouraging here, but it is highly unlikey you could get the HELOC; you will only have the 5% equity in the property, and most HELOC amounts are based upon a formula of 80% of equity in the property. You most likely will find yourself stuck with the BoA balance. 5) What are the average property value apprectiation rates in your area? i.e. how long before the value increase to create a 20% equity position. 6) Can you "play with the offer terms", i.e. can you say the "price is $120K, seller contibutes $20K, etc. 7) What is your abiilty to repay the $15K to "yourself" under any scenario? I know you are trying to avoid an expense that seems to be a waste of money, but it is never a good idea to take unsecured debt like the CC balance to avoid it. Based on your information, the $60/month is financially the best right now. The only other option I can recommend is to take a 401K loan (if you can), or if this is your first home, a withdrawal under certain circumstances. If you take out a 401K loan, you will have to pay about a 10% interest rate, but you will be paying to "yourself".
Thanks for your advice, I may look into using my 401K as well. But please, set me straight if anything looks fishy here. I want to make sure I'm doing the things right.
Ok guys and gals. First off, thanks for all of your suggestions! I thought things over tonight while I was at work and figured, why not just get the conventional 30 year mortgage with the 95% LTV. Then, use the BofA card to have the money put in my account, call the mortgage company and have the PMI removed. Then, I could take out the HELOC with the local credit union? Does that make more sense?
The main danger here is your ability to get a "HEL/HELOC", and the risk of being stuck with a credit card rate of interest on the $15,000.00 advance. Remember, most HELOCs and HELs limits are calculated based upon a limit of up to 80% of "available equity". For example, you have a home valued at $96,000, you put down $19,800 ($96K X .05 = $4,800, + $15K BoA advance). Assuming an average of 3% appreciation in the home, in 12 months you will have equity roughly equal to: $23,000 (96,000 X 1.03 = $98,880 home value, less $19,800 intial payment, less $300 (+/-)mortgage principal reduction ( about $25/month principal portion of mortgage) =$22,980. So, $22,980 X .80 =$18,384 available equity. So, your projected HELOC limit = $3,204.00 Home Value (in 1 year): $98,880.00 ($96,000 X 1.03) Home Value X .80: $79,104.00 Less mortgage balance : $75,900.00 ($96,000.00-$19,800 down-$300 pymnts) "Available Home Equity": $3,204.00 So, you will have to find a lender that will loan up to 100% of home equity, not the traditional 80%. Down sides: Do not count on an interest rate at 6.75% for a HELOC, by the time you get the mortgage, it very well could change. Do not count on "low, or no" closing costs. You could find yourself having to pay appraisal fees and other closing costs. Be aware that even at 3.99%, you will be paying $50/month in interest, but this interest will not be tax deductible (as would a mortgage or HEL/HELOC). Also, ensure you pay this, you do not want any items kicking you into the "default" rates of 24.9%-29.99%. That would hurt! What will be the interest rate on the BoA card AFTER the 12 months, and when do the 12 months expire? The HELOC/HEL will run $100/month in interest (+/-), but yes this should be a near wash with your mortgage difference. Other points: What is the appraisal amount? What is the highest possible appraisal you can find? This will be key. How long do you plan to stay in this condo? The key financial decision here is moving beyond the "breakpoint" where the interest spread between your convential mortgage (say 6.5%-7.0%) and the rate on your borrowed $15K down payment cross the $60/month figure. The other key factor is the hosuing appreciation rate in your area. In short, you would have to do a spreadsheet with all the interest rates known, and the average appreciation rate for your area. The advantages of doing this scenario are(if you can get a HELOC): "Forced principal paydown": if you can suport the HELOC payment with the mortgage (comfortably and with discipline) then you will be "accelerating" your mortgage due to a normal maximum of 10 years on HELs/HELOCs. If the interest rate spread is minimal, you will be building equity faster (than the 30 year mortgage). HELOC interest is tax deductible (as are any points paid). HELOCs (with good available credit amounts) are a great financial tool. They are a wonderful "emergency" tool for unexpected events (loss of job, expensive home/auto repairs, etc.) It is your decision, but investigate your probability of getting a HELOC now, and review all the costs. Calculate your ability to repay the $15K at the "standard" interest rate on the BoA credit card. Lastly, inquire if you can qualify for, and afford, a 15 year mortgage instead of a 30 year one. Your principal paydown is much more rapid, and you may be out of the 80/20 amount quickly. Again, look at the total costs for a 401K/IRA loan also. Good Luck, there is a lot to consider here.
