“So we should put 20% down, right? And probably do a 15 year loan to pay it off
faster?” they asked nonchalantly.
“No….no, that’s not what I would recommend for you. I’d only put 10% down in your case and
consider the 30 year term.”
Needless to say, Andrew and Amanda were surprised. Anyone who has worked with me before would
likely be shocked as well. Why? Because
it’s well known that I’m very anti-debt.
Even though I help people get loans for a living, my goal is for my
buyers to owe as little as possible for as short of a period as possible.
So why would I
encourage these buyers to borrow more and stretch it out over a longer time?
Considering The Whole Picture
Truly, there was a method to my madness. When making my recommendation, I was just looking
at a bigger financial picture than the previous lenders had considered.
Most mortgage lenders tend to look at the new mortgage as an
isolated loan when making their recommendations. It’s not though. This new loan is going to be a part of the
buyer’s total financial picture. As
such, the full financial picture should be looked at when deciding on which
mortgage options are the most beneficial.
Yes, Andrew and Amanda
had the savings to put the 20% down.
They also had extensive student loans, though, most of which were at
6%-7% interest rates. Andrew and Amanda
had larger incomes which was great in that it allowed them to save money
quickly but bad in that it excluded them from getting any income tax benefits
on the interest paid on those student loans.
The interest rate on their new mortgage would be 2-3% lower
than the student loan interest and it likely would be deductible when
determining their taxable income. Seeing it would be a cheaper source of
money on multiple fronts, financially it made sense to pay more on the student
loans and less on the mortgage.
But….what about PMI?
When I explained my recommendation, Andrew and Amanda
immediately grasped the logic of using their extra savings to pay down the
student loans instead. The risk of
Private Mortgage Insurance (PMI) concerned them though.
“Don’t we have to put 20% down?” they asked. “Won’t we have to pay PMI if we don’t?”
“Not in your case.
For you, I would recommend a no PMI conventional loan.”
Ways To Slay The PMI Beast
No PMI? Is there really a no PMI conventional loan with
less than 20% down? Well, technically...no. If you don’t have a 20% down
payment, someone is going to have to pay for insurance to protect the lender if
the buyer defaults. Normally that
insurance is paid for in monthly installments by adding a premium to the buyer’s
mortgage payment.
That is not the ONLY
way it can be paid though. If the
buyer chooses, they can pay a lump sum upfront and have no PMI for the life of
the loan. If that lump sum needed is
under 3% of the price, they can also ask for the seller to pay for it in seller
concessions.
These weren’t the options I proposed for Andrew and Amanda
though. Instead, I recommended lender
paid PMI.
Getting Smart with LPMI
Lender Paid Mortgage Insurance (LPMI) can sometimes be the
best option for PMI avoidance. In Andrew and Amanda’s case, I could increase
their mortgage interest rate by 0.125% and, with the excess lender income from
that, pay the lump sum PMI in full for them.
This was a win on both fronts in that it removed a higher monthly PMI
cost (not tax deductible) and replaced it with a lower increase in interest
cost (wonderfully tax deductible).
And how did this work
out for them in dollars and cents? Very
nicely, actually. The monthly PMI
option would have added $108.23 to their monthly mortgage payment. The 0.125% higher interest rate? It only added $25.59 to the payment.
Knowing the Downside
While this was a good
option for Andrew and Amanda, this structure isn’t one I would propose for
everyone because there is a downside.
The buyers going this route have to actually follow the plan we’ve made. That means the extra that was going to go
toward the down payment needs to actually go to the student loans, NOT to new
furniture for the home or other optional items.
And the extra money they’ll have each month by taking a 30 year term
instead of a 15 year term also needs to go to the those student loans. If it doesn’t, they’ve taken on additional
debt for nothing.
I could see that Andrew and Amanda were capable of working
this plan though. As a matter of fact,
they were thrilled by it.
Paying off
their student loans had been a BHAG (big hairy audacious goal) for them since
graduation, and they were excited to start working on it in an intentional, mapped-out
way.
So The Moral Of The Story Is…
Is there a moral to this story? But of course! In short, mortgages are not a ‘one size fits
all’ thing. There are multiple ways to
structure a loan and a mortgage lender should be exploring all of them in light
of their buyer’s big-picture finances, not just through the lens of the
mortgage alone.
If you’re considering a home purchase and want a detailed
review to see what mortgage options will best benefit you, drop me an email at lori.hiscock@ruoff.com. I wish you all the best in your home shopping
adventure!
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.
Ohio Mortgage Broker Act License #MBMB.850220.000
The Florida Office of Financial Regulation License #MLD1182
