The Right Financing Can Save Your Hundreds of Dollars Per Month
By Eric Fernwood
Suppose you wanted to buy a $375,000 home but you just can’t afford the monthly payment. If you only need to reduce the payments by a few hundred a month for a few years, the right loan program can make a huge difference.
Let’s start with basic financing on a $375,000 home with zero down. What would be the payments? The following is the calculation for a 30 year standard loan. Note that in stead of a single loan for the full amount, the loan is actually broken into two loans: one that is 80% of the total and the other is 20% of the total. This is pretty typical and avoids PMI. Also note that I am not including taxes, insurance and other fees that would be included in your monthly payment in order to make the examples less complex.
| Price of Home |
$375,000 |
| 80% |
$300,000 |
| 20% |
$75,000 |
| |
|
| Interest in 1st |
6.80% |
| Payment |
$1,956 |
| |
|
| Interest on 2nd |
10.50% |
| Payment |
$686 |
| |
|
| Total Monthly Payment |
$2,642 |
What are some options to a straight 30 year fixed rate loan?
Interest only loan
With this type you pay only the interest. Most convert to a straight amortized loan at some point in the future. Where this type of loan makes sense is if you expect to be making more in a few years and what to get by with the minimum monthly payments. You need to understand the full implications of an interest only loan but it does have its place.
| Price of Home |
$375,000 |
| 80% |
$300,000 |
| 20% |
$75,000 |
| |
|
| Interest in 1st |
6.80% |
| Payment |
$1,956 |
| |
|
| Interest on 2nd |
10.50% |
| Payment |
$686 |
| |
|
| Total Monthly Payment |
$2,642 |
Not a huge difference but better saves about $300 a month.
Builder Contribution
Suppose you decided to purchase a new home priced the same and I negotiated $40,000 in builder incentives (See Great Deals on New Homes for examples). We could just use it to lower the total amount financed. Here is what that calculation would look like.
| Price of Home |
$375,000 |
| Builder Incentive |
$40,000 |
| Net price of Home |
$335,000 |
| 80% |
$268,000 |
| 20% |
$67,000 |
| |
|
| Interest in 1st |
6.80% |
| Payment |
$1,519 |
| |
|
| Interest on 2nd |
10.50% |
| Payment |
$586 |
| |
|
| Total Monthly Payment |
$2,105 |
Obviously, the builder contributing money is a good thing. But we can still do better if we use the builders contribution to buy down the interest rate as opposed to reducing the purchase price of the home. I will not go into the details but a rule of thumb is that for every 1% of the total loan amount you apply towards prepaid interest, you reduce the over all interest rate by 1/4%. So, here is what this approach looks like if we applied all of the money to buy down the 1st mortgage rate.
| Price of Home |
$375,000 |
| Builder Incentive |
$40,000 |
| 80% |
$300,000 |
| 20% |
$75,000 |
| |
|
| Interest on 1st |
4.13% |
| Payment |
$1,033 |
| |
|
| Interest on 2nd |
10.50% |
| Payment |
$656 |
| |
|
| Total Monthly Payment |
$1,690 |
We have now reduced the monthly P&I by $415 using the builder incentives to buy down the rate as opposed to reducing the purchase price! However, buying down the interest rate like this does not make sense in most cases. Ask me to explain why; its too much for here.
The moral to all this is that the right loan program is almost as important as finding the right home. I have contacts with lenders that can match the right mortgage to your needs. Just give me a call.
If an agent is not saving you money, time and risk, what value are they providing? Call me today to discuss your real estate needs. You will be glad you did.
Eric Fernwood
702-358-8884
EricFernwood@Gmail.com
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