IHCDA (Indiana Housing and Community Development Authority) introduced
a new mortgage option called ‘My Home’ last June. While I am typically a big fan of IHCDA’s
products, I must admit that I’ve been lukewarm on this one. Frankly,
I wasn’t seeing the benefit.
Today I decided to put some math behind my first impression
to see if this program really is beneficial to the homebuyer, and I thought I’d
share what I found with you. So...here
you go!
The Advantages of My Home
My Home is a
conventional loan option offered to both first and repeat home buyers that lets
them buy with a reduced down payment (3%) at an attractive, at-market interest
rate. Typically, if a conventional mortgage
has a down payment lower than 5%, the interest rate is higher in order to make
up for the additional risk, so this at-market interest rate is a strong
advantage. Also, the My Home buyer gets a reduced private
mortgage insurance (PMI) rate making the monthly PMI cost less than it
would be with other 3% down options.
The
3% down payment can come as a gift from a family member, which is also rare for conventional loans. With the ability to get a conventional
mortgage at a good interest rate with 3% down, reasonable PMI and an option to use
gift funds for the purchase, many buyers would be attracted to the My Home
program.
The Disadvantages of My Home
The biggest drawback to
this program are the fees. Like IHCDA’s
Next Home product, the My Home loan typically has 2 points charged as a closing
cost. A point is a cost equal to 1% of
the loan amount. The seller can
contribute towards these points but a conventional mortgage will only allow a
seller to give a total of 3% of the
sales price towards the buyer’s costs so the seller’s contributions typically
will not cover the 2 points, plus the additional closing costs/prepaid items
related to the purchase. This means the buyers will need to cover
some of those costs themselves, along with their 3% down payment.
Additionally,
the PMI is still slightly higher than it would be on a 5% down mortgage. Yes, it
is lower than many other 3% down loans out there, but putting 5% down puts a
buyer into a lower PMI bracket. Because
of this, the cost of PMI for a regular 5% down mortgage is typically lower than
the reduced 3% down PMI.
So Which Option Is Best?
Seeing that a buyer
needs 3% down for My Home and then has to pay 2 points on top of that, my
initial feeling was that they might as well just do a regular 5% down mortgage
and get the lower PMI that goes with it.
They’re paying 5% either way, right?
And the PMI is cheaper? So going
with a regular 5% down loan is best, isn’t it?
For some buyers, it definitely is. For some buyers, though, it isn’t. Why is that, you ask? It’s because
of the credit score impact.
Let me explain. The My
Home program has just one interest rate for all buyers. Today it is 4.5% for the 30-year fixed loan (this
is the current rate and subject to change at any time). A regular conventional loan’s interest rates will
move slightly based on your credit score, though. If you were buying a $125,000 home right now
with 5% down and had a 720 or higher credit score, your interest rate would also
be 4.5%. If your credit score was 680-719 though, it would slide up to
4.625%.
The PMI is also impacted by your credit score. If you were buying a home with a 760 credit
score right now with 3% down, the PMI would cost 0.57% per year. If you were buying with 5% down, it would
cost you 0.54% per year, which supports my original idea that 5% down is
cheaper because the PMI costs less.
If your credit score was only 680 though, the benefit goes the opposite way. A 5% down
option would have PMI at 0.89% per year while the 3% down option would actually
be less at 0.80% per year.
So What Does This Tell Us?
Based on this math, My Home very well might be a good option
for some conventional buyers. Buyers who want to use gift funds for their
down payment and closing costs, or buyers who have a credit score under 720,
should consider this.
But how do YOU know
if it’s right for YOU? Simple.
You talk to me. Together, we look at your specific situation
and the exact numbers for you. Based on that,
you make the decision for which type of mortgage suits you best.
If you are considering a home purchase in Indiana or
Michigan and have questions about the IHCDA My Home program or any other
mortgage program, just give me a call!
I’d be happy to help you take your next step towards your new home.
Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office. One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University. You can connect with Lori Hiscock or apply online here. NMLS#404320.
Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:
Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.
Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.
