3.75 vs 4.00

[Sean19]

Hello,

I was offered 2 loans at 4.00% interest rate with 5% down and closing costs + misc funds coming in at around $15,000.

I was then offered a loan at 3.75% interest rate with 3% down but closing cost and other total close to $15,000 as well.

The loan value would be ~$200,000. I can put down $10,000 no problem. I feel like this loan company is asking me to put down only $6,000 (3%) and then taking that other percent in origination fees or closing cost that is about $4,000. I feel like it would be better for me to put that towards the principal so I can get rid of mortgage insurance quicker. Any advantage to the loan at %3.75 that I am not seeing.

[gzz]

Lower rate but more PMI/costs is no deal.

Your goal should be to minimize all non-principal/tax costs the first three years. So add them all up and take what’s better.

Don’t eat out, don’t get new furniture, do everything you can to pay in enough to stop paying PMI. You also should not assume “I hit 20% equity, no more PMI!”

In fact it is a pain to get PMI taken off of a loan, and it is easier to refi to a new loan when you hit 20% equity.

Then, once you have your house, push hard to make extra payments to hit that 20% asap. The refi has a double benefit (1) no PMI payments (2) the rate spread over the 10 Year Treasury itself goes down because a 20% down loan is more attractive than a 5% down loan.

This is what I did, and when I finally did my refi, my monthly payment went from 2450 to 1950. That’s $6000 a year less in housing costs going forward for decades. The refi itself was no-cost, they even did the appraisal for no charge.

[HLS]

Sean,
If you want to contact me and provide your EXACT details of each I will be happy to explain them for you.
I’m a Realtor & Mortgage Broker and have helped dozens of Piggington readers.

Some of your closing costs are not going to change regardless of which loan you get.
It’s easy to get confused by the numbers.
$15,000 needed for a 3% down $200K loan doesn’t sound right.

Is the 3.75% an FHA loan ?
Is the 4.00% not FHA ?

with an FHA loan you may have mortgage insurance for 30 years. DO NOT assume that you will be able to refi to a lower rate and have it removed in the future as rates could be much higher and it may not make sense.

Without more info I do not know what you qualify for but 4.00% is not a great rate today if your mid credit score is above 740, even with 5% down.

Without EXACT information, NOBODY can answer your question and many suggestions offered here will attempt to be helpful but in reality be bad advice.

[HLS]

[quote=gzz]Lower rate but more PMI/costs is no deal.

This is what I did, and when I finally did my refi, my monthly payment went from 2450 to 1950. That’s $6000 a year less in housing costs going forward for decades. [/quote]

It’s nice ‘that’s what you did’ and it worked out for you but’ it’s poor advice. What if rates go up ?

OP didn’t mention more PMI.

If you only compare your monthly payment amounts when you refi you don’t understand the benefit of a refi and your savings may not be as much as you think.

A true NO COST loan includes the appraisal cost, did that surprise you ?

Nobody should ever have a drop of 20% in their payment.
unless your rate dropped 1%-2% which would mean that you should have refinanced multiple times all the way down.

Your $6000 a year savings doesn’t sound right.

[Anonymous]

[quote=HLS]A true NO COST loan includes the appraisal cost, did that surprise you ?[/quote]

“No cost” mortgages simply do not exist.

It is a misleading term, at best.

[HLS]

When a loan has NO COST to the borrower what would you call it ?
There’s nothing misleading about it.

[no_such_reality]

No cash out of pocket.

Whether it’s YSP or buried into the new principal, there’s money being sucked somewhere.

[HLS]

I’m not here to argue with you.
Balance added to the principal is not a no cost loan.

You apparently don’t understand what you’re talking about.
I know your intentions are good and that you think you know what you’re talking about, but you don’t.

If you have advised anybody not to get a NO COST loan which would lower their rate .25% or more,
your ignorant, foolish advice could cost them $10,000-$30,000 or more over the life of their loan if they listened to you. (Depending on their balance and interest savings)

If you’d like to explain it to me, I’ll be happy to listen. Feel free to contact me if you’d like.
(I can also offer a clear, honest explanation but I doubt you want one)

The epitomy of ignorance & foolishness is someone who can qualify to refi with a no cost loan that is at least .25% below their current rate but decides not to because they are bothered that someone is making money.
It’s that simple.
There is no recovery period to figure out.

**There is no reason not to refi to a lower rate at no cost if one can qualify**
I’ve heard more than 50 different objections from some very intelligent people. They were all wrong.
After an explanation they saw the light.

Stubborness is costing many people a lot of money.

[poorgradstudent]

[quote=gzz]
In fact it is a pain to get PMI taken off of a loan, and it is easier to refi to a new loan when you hit 20% equity.
[/quote]

This is so true. I actually thought our loan originator would be more willing to work with us when we hit 20% equity, but their response was they don’t even consider it until the loan has existed for 2 years. So we refinanced at a 0.25% lower rate instead. More work on our end to gather and sign the documents again, but getting rid of PMI is saving us thousands of dollars a year.

[HLS]

It is still a bit complicated to get PMI removed.
Loan originator has nothing to do with it.
The PMI is a 3rd party insurer.

Refinancing to save .25% was worth it and better for you.
If you can afford it, keep making your original loan payment on your previous loan and you could shave several years off of your mortgage term. More money will go to principal each month, less to interest.
The guaranteed compounded savings is huge.

For FNMA/FREDDIE
A 20% reduction of your original loan balance you usually need to jump through hoops and pay for an appraisal.

At 22% reduction of your original loan amount it is supposed to be removed automatically (regardless of property value) but some insurers have a minimum time period, (i.e. 2 years)

Because there was a time that “real estate never went down”
the guidelines stated that removing PMI was based on the reduction of your original loan balance; so it was possible with property value declines to be upside down on the value of your property but still get PMI removed.

Recent FHA loans may never have MIP removed, it will stick with the loan until paid off up to 30 years.

[NotCranky]

Break even point does matter if you are going to stay in the home for a long time. The lower interest rate of a loan with “costs” could be a thing of value over the “no cost” loan.

Paying extra principal on the original loan ,the “no cost” refi, or a standard fees lower interest rate refinance is going to save money in all three cases. Nothing special about the “no cost” loan there.

We shouldn’t act like no cost means free.

[HLS]

[quote=Blogstar]Break even point does matter if you are going to stay in the home for a long time. The lower interest rate of a loan with “costs” could be a thing of value over the “no cost” loan.

Paying extra principal on the original loan ,the “no cost” refi, or a standard fees lower interest rate refinance is going to save money in all three cases. Nothing special about the “no cost” loan there.

We shouldn’t act like no cost means free.[/quote]

******No cost DOES mean free.

The comment made was that there is no such thing as a no cost loan.
THERE ARE LOANS AVAILABLE WITH NO COST.
I’ve done hundreds of them for borrowers and explained them clearly. Didn’t cost them one penny.
No addition to principal balance, no hidden fees or costs.
There is no break even point or recovery period with a no cost loan. You benefit from day 1 with a lower rate.

If you want an even lower rate loan with costs you can get one too.
A loan with costs could save more in the long run,but many people consider neither a refi with costs or without because they are confused.

30yr loans that have a cost usually have a TRUE break even period of at least 4-5 years but very few people know how to figure the true savings properly.
(You don’t just divide the loan cost by the monthly savings)
Payments are a combination of principal & interest
and there is the time value of money.

Anybody who paid any costs for a loan over the last 8 years or so probably wasted their money.

Intelligent, savvy borrowers refinanced multiple times all the way down the past few years and some pocketed thousands of dollars in the process and they are still on track to pay their loan off at the same time as their original loan was scheduled to be paid off.

There are many people who are confused, stubborn or foolish who will end up paying tens of thousands of dollars in extra interest because they just don’t get it.

BTW,
you are wrong that a lower rate refi is going to save money in all 3 cases. That’s not always true.

[NotCranky]

[quote=HLS][quote=Blogstar]Break even point does matter if you are going to stay in the home for a long time. The lower interest rate of a loan with “costs” could be a thing of value over the “no cost” loan.

Paying extra principal on the original loan ,the “no cost” refi, or a standard fees lower interest rate refinance is going to save money in all three cases. Nothing special about the “no cost” loan there.

We shouldn’t act like no cost means free.[/quote]

******No cost DOES mean free.

The comment made was that there is no such thing as a no cost loan.
THERE ARE LOANS AVAILABLE WITH NO COST.
I’ve done hundreds of them for borrowers and explained them clearly. Didn’t cost them one penny.
No addition to principal balance, no hidden fees or costs.
There is no break even point or recovery period with a no cost loan. You benefit from day 1 with a lower rate.

If you want an even lower rate loan with costs you can get one too.
A loan with costs could save more in the long run,but many people consider neither a refi with costs or without because they are confused.

30yr loans that have a cost usually have a TRUE break even period of at least 4-5 years but very few people know how to figure the true savings properly.
(You don’t just divide the loan cost by the monthly savings)
Payments are a combination of principal & interest
and there is the time value of money.

Anybody who paid any costs for a loan over the last 8 years or so probably wasted their money.

Intelligent, savvy borrowers refinanced multiple times all the way down the past few years and some pocketed thousands of dollars in the process and they are still on track to pay their loan off at the same time as their original loan was scheduled to be paid off.

There are many people who are confused, stubborn or foolish who will end up paying tens of thousands of dollars in extra interest because they just don’t get it.

BTW,
you are wrong that a lower rate refi is going to save money in all 3 cases. That’s not always true.[/quote]

I didn’t say a lower rate was going to save money in all three cases I said paying principal does. It is not free if you pay a higher rate for the “no cost”.

[HLS]

Idiotic semantics..

When you are offered something FREE, at NO COST, zero, zilch, nada, rien, niente, gratis….

Keep telling yourself (and insisting) that it’s not free because if you paid something you could get even more.

You’re right. You win. Pass the word. Tell everybody that you know……

[bewildering]

[quote=HLS]Idiotic semantics..

When you are offered something FREE, at NO COST, zero, zilch, nada, rien, niente, gratis….

Keep telling yourself (and insisting) that it’s not free because if you paid something you could get even more.

You’re right. You win. Pass the word. Tell everybody that you know……[/quote]

Yep. I had 2 no cost refi’s In fact, I was given money to move to a lower rate.

The 1st was 4.625% to 4%. The appraisal came in too low to remove my PMI, but the new PMI payment was much reduced.

The 2nd refi was from 4% to 3.625%. PMI was completely removed and I got my supplemental property tax paid, and received a nice amount.

Both refis happened within 15 months of buying with 10% down.

In CA there is no disadvantage to this strategy as your property tax bill does not change with a refi.

[Author]

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