Posts Tagged ‘conventional loans’

Conforming Loan Limits going up!

December 5, 2017

For the first time since 2006, there is a significant increase in the conventional loan limit. The new maximum loan amount for conventional loans will be $453,100. Technically there was an increase from 2016 to 2017 (from $417,000 to $424,100, which is less than a 2% increase). This time the maximum limit gets a more significant increase.

What does this mean?

Buyers can purchase a $477,000 home with only a 5% down payment. If using a 3% down conventional loan, then the buyer can purchase a home as high as $467,000 in value. Prior to the increase, if a buyer wanted to purchase a home at $500,000 and avoid a Jumbo loan, then the down payment needed to be 15% to get the loan down to $424,100. Now a $500,000 home can be purchased with less than a 10% down payment.

This increases the purchase power for home buyers, and these new conventional loan limits can be used now! The start date for the conforming loan limit increase is January 2018, but the loan process can start today and close after the start of the new year!

Looking to buy a home in the state of Georgia? Wanting to use a conventional loan to purchase $500,000 or so home using a small down payment? Now you can! Contact me today and we’ll get going on your new home!

 

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Should I consider a 15 Year Mortgage?

August 27, 2015

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Someone recently asked me, “Do you recommend a 15 year mortgage now since interest rates are so low?”  To quote a CPA friend of mine when asked if a business expense is deductible, “It depends.”  The question I will ask in response is, “How much can you afford to pay every month?”  The answer to the question depends totally on the borrower’s budget.

While getting a lower interest rate is a very good thing, amortizing a loan over 15 years instead of 30 means that you pay significantly more principal with each payment.

So let’s play with the numbers to put the question in perspective:

Your friend Sally is looking to get a $250,000 mortgage on a single family home.  She has excellent credit and will make a 10% down payment.  Let’s assume that Sally would have received a 4.0% interest rate on a 30 year mortgage and her monthly principal and interest (“P&I”) payment would have been about $1,194.  For a 15 year mortgage, let’s assume that Sally would have received a lower 3.25% interest rate, but her monthly P&I payment would have been much higher at $1,757.

Over the life of the 30 year mortgage, Sally would spend $179,674 in total interest payments.  Over the life of the 15 year mortgage, Sally would spend $66,201 in total interest payments.  Ultimately, Sally would save about $113,500 in total interest payments by selecting the 15 year loan.

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Saving that amount of money over the life of the loan is fantastic.  But, on the flip side, Sally would have to pay an extra $560 per month to “earn” the lower rate.  Only Sally can decide if that fits in her budget.  (And of course, Sally would have to earn an income high enough to support the larger payment based on our debt to income guidelines.)

So if your friend Sally, or anyone else you know, wants to buy a new home and thinks a 15 year mortgage is the way to go, have her contact me and I will run the numbers for her.  I’ll take the time to explain the details, and then let Sally make the decision that is best for her family.  There are other ways to reduce your total interest expense, even if you select the 30 year mortgage.  Curious?  Call my mobile phone or send me an email to start the conversation now.

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MI comparison for FHA and Conventional Loans

August 7, 2012

I received an email Monday afternoon inquiring about differences between mortgage insurance on FHA and Conventional loans. After replying to the email, I thought about it and couldn’t remember the last time I posted anything on this topic. There have been many changes to mortgage insurance for both conventional (premiums gone down if above average credit) and FHA (premiums gone up across the board) loans. Let’s take a look at mortgage insurance rates as they are today.

FHA Loan with a minimum down payment of 3.5% on a loan amount of $250,000:

  • there is an upfront one time mortgage insurance premium of 1.75% of the loan amount. In this case, $4,375 is added to the loan
  • the monthly mortgage insurance is based on a factor of 1.25% of the loan amount divided by 12 (months of the year)
  • in this example, the monthly mortgage insurance is $264
  • these insurance rates hold for credit scores down to 620

Conventional Loan with a minimum payment of 5% on a loan amount of $250,000:

  • there is no upfront one time mortgage insurance premium
  • the monthly mortgage insurance is based on a sliding scale. The higher the credit score, the lower the premium. Assuming the credit score is 760+, the monthly factor is 0.59%. That is less than half of the FHA equivalent! At a credit score of 660+, the monthly factor is 1.20%. That is still less than FHA’s.
  • in this example, the monthly mortgage insurance is $122 if excellent credit and $250 a month as long as the credit is at least 660.

As you can see from this 30 year fixed comparison, even with the minimum down payment, the numbers show a conventional loan can result in a lower monthly payment for the borrower based on:

  • no upfront mortgage insurance premium rolled into the loan
  • lower monthly rates on the mortgage insurance. The monthly payment is greatly reduced as one’s credit score increases
  • the numbers improve as the down payment increases on the loan

You might be thinking, “this is for a 30 year loan, what about a 15 year loan?” An excellent question! In the past when putting down 10% or more on an 15 year fixed FHA loan, there was no monthly mortgage insurance. This is no longer the case.

Today a 15 year fixed FHA loan still requires the upfront mortgage insurance premium and comes with a monthly premium of 0.60% of the loan amount if a 5% down payment and 0.35% if a 5-21% down payment. Assuming excellent credit, conventional loan mortgage insurance rates are either the same or slightly better than FHA on 15 year loans. As one’s credit score decreases, the rates on a 15 year fixed mortgage begin to look more attractive.

The moral of the story – generally speaking, the numbers show conventional loans result in a lower monthly payment in terms of monthly mortgage insurance costs. This becomes even more apparent as one’s credit score increases.

When should one consider using FHA? Again, generally speaking, if 3.5% is the only amount you can make for a down payment and/or one has less than average credit. That is where FHA loans may be more attractive, and in some cases, the only option.

How does one decide to go FHA or conventional? You should always talk with a mortgage professional who will ask you questions and give you a pro/con analysis of both loan programs. Be careful of working with someone who gives generalizations like “you are a first time home buyer, then an FHA loan is right for you” and then not provide any more details as to why the loan is right for you. If you are looking to buy or refinance a home in the state of Georgia, I’d be happy to help you put together a pro/con list when deciding between FHA and Conventional loans.

FHA vs Conventional loans, yes another post!

October 5, 2010

For those of you who followed my posts in a previous life (in other words, my previous blog), you know I spent numerous posts detailing differences between conventional and FHA loans. For example, you can read here, here, here, here, here and here to get you started.

Like the typical never-ending-sequel-horror-movie that comes out every October, here we are again to address the differences between these two!

seriously, we need a 7th Saw film?!?

With the recent changes to FHA mortgage insurance going into effect on October 4, 2010, I know the questions on whether or not to use an FHA versus a conventional loan will pick up again. Consumers will want to know how the new guidelines impact the total monthly payments on conventional and/or FHA loans.

Whether or not to get an FHA or conventional loan should be up to a borrower’s unique situation. In order to accomplish this, borrowers should always speak to a mortgage consultant who take the time to ask probing questions about their situation and goals instead of quoting rates for the same loan program to everyone that comes their way.

That being said, let me try to shed some light on the latest change by using the example of a borrower looking to buy a home for $200,000 with a credit score of 720+ using a 30 year fixed loan.

We will look at principal and interest payments and mortgage insurance payments only. Property taxes and home owners insurance will be ignored as they will be the same regardless of the loan program used under this scenario:

  • FHA: a 3.5% minimum down payment is required and the 1% up front mortgage insurance fee is rolled into the loan. This gives us a total loan amount of $194,930. At a rate of 4.500%, the monthly principal and interest payment is $988 and the monthly mortgage insurance payment is $146. That totals up to $1,134 per month.
  • Conventional: a 5% minimum down payment is required and there is no up front mortgage insurance fee. The loan amount is $190,000. At a rate of 4.500%, the monthly principal and interest payment is $963. This payment is lower than FHA option because the loan amount is almost $5,000 less for the conventional loan. The monthly mortgage insurance is $149 (higher than FHA per month), and the total is $1,112.
  • Under this scenario, an FHA loan is $1134 per month versus $1,112 per month for the conventional loan. A difference of $22, or 2% higher for the FHA loan.

I guess that settles it… it is always better to use a conventional loan… right? Well, maybe or maybe not. This scenario assumes the borrower has at least a 5% down payment and a credit score of 720+. It also assumes the borrower has the credit trade lines necessary to qualify for an FHA loan. That leads us to some great questions:

  • What options are there for a borrower with only 3.5% to put down?
  • What if one borrower has four lines of credit on their credit report, but the co-borrower only has one?
  • What if a family member wishes to gift the entire down payment?
  • What if the borrower needs a non-occupant-co-borrower to qualify?
  • What happens if one’s credit score falls below 720? What about 680?

Those are excellent questions and further proof as to why one should always speak to a mortgage consultant who asks lots of questions and gets all the details pertaining to each individual’s situation. We can talk about pros/cons for FHA and conventional loans, but answers to all of these questions (and more) need to be known before one truly knows which is the better loan program for them to use – FHA or conventional.