By the incredulous sound to his voice, I could tell that Mat thought I was crazy. His Realtor had referred him to me for a second opinion on his mortgage even though he was already preapproved with another lender, and he was clearly wondering what his Realtor had been thinking.
"Yes, Mat, I want you to consider paying a higher interest rate. If you do, your monthly mortgage payment will be lower and your tax refunds will be bigger. Are you open to hearing how we can get creative to save you some serious money?" I replied."OK...I'll listen. I already don't get it, but I'll listen. Lay it on me..."
All PMI Rates Are NOT The Same
Mat's suspicion made sense. The interest rate is what makes a mortgage payment higher or lower, right? well, yes, it is one piece that makes a payment higher or lower, but it's not the only piece. To understand this, you need to know exactly what makes up a mortgage payment.Typically, a mortgage payment includes the principal and interest on the mortgage loan, the property taxes on the house, the insurance on the house and something called private mortgage insurance (PMI). PMI is something a home buyer typically pays as part of their payment when they are not putting 20% down on the price.
What most home buyers don't realize is that all PMI rates are not the same. Different loan types require different amounts of coverage. If the required coverage is lower, the cost for PMI each month is lower making the total monthly payment lower.
"Mat, I want you to consider participating in a down payment assistance program offered by Indiana Housing and Community Development Authority, known as IHCDA. You would get a conventional loan, just like you'd wanted, with only 3% down needed. IHCDA would cover that 3% down payment for you."
"But I have 3% saved up for the down payment. I don't need down payment assistance so why should I pay a higher interest rate for it? Didn't you say this rate was 0.25% higher than what the other bank was quoting me?"
"I'm glad you have savings available because you'll need some of that for the closing costs and prepaid items when you buy. And yes, Mat, the interest rate with this program is 0.25% higher currently but, because this is a state sponsored program, the PMI coverage required for your credit score costs 0.37% less annually so paying the higher interest rate but lower PMI will make your total monthly payment lower."
"Really? That just seems so strange. I get what you're saying though, and I really do want the lowest payment I can get. But didn't you say something about my tax refund being bigger too? What was that part?"
"Ahh yes....the tax refund part...you're going to love this..."
Getting a (Much) Bigger Tax Refund
"Mat, the IHCDA program I'm recommending not only covers your down payment and gives you cheaper mortgage insurance, it lets your participate in a Mortgage Credit Certificate program."
"A what? I've never heard that phrase. The other lender didn't mention it at all. What is it?"
"A Mortgage Credit Certificate program, often referred to as a MCC, is a federal program for eligible first time home buyers that allows you to get between 20 and 35 percent of the interest you pay each year back as an income tax credit. I would estimate your credit at around $850 which means your tax refund after the first full year of home ownership should be around $850 more than it would be if you weren't enrolled in the MCC."
"Wow! Is that for the first year only? Or does it go three or five years or something?"
"Even better than that Mat. It goes for the entire life of your loan. As long as you live in this house and pay on this mortgage, you will be eligible for this credit."
"Well that's cool. Why didn't the other lender mention this stuff? He just quoted me a rate and didn't talk about it at all."
"That's why your Realtor recommended you talk to me too. I'm glad he did and I'm glad you listened to him. So shall we take the next steps to finish your preapproval?"
Mat said yes, and we got him fully preapproved and ready to roll. Three weeks later he found his house, used the IHCDA program, and closed a month later with less money needed at closing, a lower monthly payment and everything in place for even more savings at tax filing time.
Does bringing less upfront, having a lower payment and saving money at tax time sound interesting to you? If so, give me a call or drop me a line! Together we'll see if using IHCDA's down payment assistance program and the Mortgage Credit Certificate can help save you money too.
Lori Hiscock is a Sr. Loan Officer and Branch Manager 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
