Does it make sense or not?

My partner, Marie, has a client that “Will not use FHA financing to purchase a home”. However, she has to wait until December of 2016, to qualify for a conventional loan, due to a short sale event expiring. Mortgage insurance for an FHA loan is for the life of the loan.  For a conventional loan, this insurance can be removed once the loan to value of the home has reached 80%. So this is understandable, or is it?

Let’s crunch the numbers. For our study we will use the following numbers:

Purchase Price: $200,000

Loan Type: FHA

Loan Term: 30 Years

Loan Amount w/MIP: $196,378

Down Payment Amount: $7,000  

Interest Rate: 3.5%

Monthly MIP: $139.10

Upfront MIP: $3378

Monthly P&I Payment: $882

Loan Balance at year end: $192,608

Now, we will run the numbers for the projected values and interest rates for 1 year from now, using the same information that I wrote in my “What we sow now, we will reap later” blog. Please read this blog to understand our projections.

Projected Purchase Price: $210,800

Loan Type: Conventional

Loan Term: 30 Years

FICO Score: 720

Loan Amount: $200,260

Down Payment Amount: $10,540 

Projected Interest Rate: 4.8%

Monthly MIP: $103.47

Monthly P&I Payment: $1,051

Years to Remove MIP 8.5 Years

The FHA payment, including principle, interest, and mortgage insurance is $1021 per month. For the conventional loan, with the projected principle, projected interest, and mortgage insurance, would be $1,051 per month. A difference between the two of $30 per month.

The mortgage balance at the end of the year on the FHA loan, including the upfront mortgage insurance, would be, $192,608, whereas the balance of the conventional loan would be $200,260.

The math on this scenario gets even more complicated as we add in the cost of renting for the year, appreciation, depreciation, and refinancing to get rid of the MIP, etc. The bottom line is… Are you better off purchasing a home now with an FHA loan, or waiting to get a conventional loan next year?

Although it is understandable that you do not want to pay mortgage insurance for the life of the loan, it does not make sense that you would want to pay more in a different scenario, to do so.

Also if you purchase a home now with an FHA loan, you can always refinance out of it. But, only if the payment will be lower than what you are currently paying, and, only if it makes sense.

In nearly every case, or scenario, waiting to purchase a home… simply does not make sense. 

What you sow now, you will reap later!

I am currently working with a prospective buyer to purchase a single family home, and he was shocked at how prices have gone up recently. I explained to him that prices really haven't gone up, they have just leveled out to where they should be while our market has adjusted accordingly. His next statement is what prompted me to write this blog. He said "I'm just going to renew my lease for one more year and try to purchase again next year."

Sounding like a tenacious salesperson, I said "BAD MOVE! Just get a rope, and hang yourself!" Without actual numbers to back me up, I said "Climbing interest rates, and housing prices will skyrocket your monthly payment obligation by this time next year... affording you something less than you can purchase now. And, that's just the beginning! Your accountant, will build you gallows, and your financial advisor will lay the noose over your head."

Now I had to crunch some numbers to help my client avoid the lynching. In doing so, I used my clients maximum purchase price of $285,000, with him securing a conventional loan in the amount of $270,750, and putting 5% down for the study.

First I mentioned interest rates climbing. In Freddie Mac's December 2015 Economic and Housing Market Outlook, the current 1st Quarter interest rate is 4.1%, and the projected interest rate for the 1st Quarter of 2017 is 4.8%. Currently, if my client purchased a home today his principle and interest payment on a 30 year mortgage would be, $1,308 per month with an interest rate of 4.1%.

And for the projected housing prices, I sought out CoreLogic to help me. CoreLogic is the leading provider of financial, property and consumer information, analytics and business intelligence. In their November 2015, US Home Price Insights Report their forecasted year over year percentage change in Nevada is 5.4%. Translated, this means a home priced now at $285,000 is forecasted to be valued at $300,390 by the 1st month of 2017.

Now let's calculate the payment for the forecasted value of $300,390. The projected principle and interest payment on a 30 year mortgage would be, $1,576 per month with a projected interest rate of 4.8%. A difference of $268 per month, or $3,216 for the year.

The subtotal my client will reap for sowing now is a whopping $18,606. I say subtotal, as the sum total can’t be tallied without his accountant, or financial advisor.

With just this discovery, and a little fear of the gallows, my client has decided to reap financial blessings, by sowing financially now!