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Posted by Jay Wolfe on June 22, 2005, 9:45 am
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Hello,
I hope this is the right group. I want to purchase a home for anywhere from
$300K to $500K and want to do an 80-20. So, the 20% ($60K to $100K) is put
into another loan. The questions is this, since the 2nd loan is another
liability to me, how does it affect my PITI? Is PITI now the sum of the two
loans? Is my front end ratio also calculated on both monthly payments or
just that of the first loan? How does it affect how much home I will qualify
for??
Thank you!
Jay
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Posted by Jeff Strickland on June 22, 2005, 11:39 am
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Good questions.
The 2nd is another liability, just as you suspect. It is on top of the car
payment, credit card payments, property taxes, and home owner's insurance.
Not to mention the principle and interest. Don't forget the home owner's
association dues, if any.
The short answer is, yes, the PITI is the sum of the 1st and the 2nd, plus
taxes and insurance. You asked about the front end ratio, but the larger
issue is the back end ratio, this is the total of your housing expense and
long term credit bills -- car payments and cards, school loans if any, etc.
The lenders will want to see your back end ratio stay below about 50%, some
will want it even lower than that. The 2nd will be the determining factor
here. We can take the first with a back end ratio of 50%, but then the 2nd
will push you over the top and kill the deal.
Your strategy of taking an 80/20 is a good one because the alternative is a
100% 1st with PMI (private mortgage insurance) tacked on. The total payment
of the 100% + PMI is generally in the range of $75 to $100 per month higher
than the combo loan you are looking at, and the PMI has no tax benefit. The
2nd has a tax benefit of being able to deduct the mortgage interest from
your income taxes, but you can not deduct the PMI. So, the 80/20 will save
you about $100 per month - give or take a few bucks - and you get a tax
deduction at the end of the year.
If you took a 400,000 loan, it would be 320k on the 1st and 80k on the 2nd.
Assuming you have good credit, your rate today will be about 5.75 on the 1st
and somewhere around 7.5 on the 2nd. The 1st would get a payment of 1867,
and the 2nd would be 559, for a total of 2426. Assuming you have $700 in car
payments and credit card debt, and property tax rate is 1.25% and the home
owner's insurance factor is .035, your taxes and insurance each month will
run you about 430. Add 2426 + 700 + 430 = 3556. You would need to be making
about 7100 per month to qualify. This is 85,200 per year. If your car
payments and long term debt don't come to 700, then you can lower the income
needed by whatever the difference is.
If you went with a 100% loan, the payment would be 2463, and it would go to
3060 when you added in the PMI and taxes and insurance. So, compare 3060 to
2426 + 430, and you see that in your case, the combo loan is actually better
by 204 per month. Your monthly payment is lower by 204, and you have a tax
advantage of deducting the interest of the 2nd Trust Deed.
In your case, it might be good to investigage an interest only loan for the
1st and the 2nd. With this loan program, your payment - not including taxes
and insurance which will remain at about 430 - will be 2033, assuming the
same interest rates used in the example above. To calculate the payment on
the interest only loan, multiply the loan amount by the interest rate, then
divide the result by 12. Multiplying the loan amount by the rate will tell
you the total interest that is due for the year, dividing that amount by 12
gives the monthly payment. (Remember that the interest rate of 5.750% is
expressed as .0575 when multiplying the loan by the rate.) The same property
on an interest only payment plan will create a payment of 2033 + 430 +700 =
3163. The income needed to support this loan, assuming a 50% back end ratio,
is about 6350. This is about 750 per month less income to get the same
house.
THE RISKS
The main risk with the interest only loan is that the fised rate period of
the program is going to be 5 years. What you need in 5 years is for the
house to be worth at least the same amount as you paid, or be worth more. If
it is worth the same, then you can refinance it for the same terms as you
have today, and if it is worth more then you can refiance it at a lower LTV
and roll the entire mortgage into a 1st Trust Deed. Let's say you buy today
for 400,000, and in 5 years the house is worth 500,000. You could roll both
the 1st and the 2nd into a new 1st that is 80% LTV (loan to value). If the
house is worth more than 500k, then the LTV will go down and this will
improve your situation, for example if the house is worth 600k, the new loan
will be 66% LTV, if you can get it below 65% LTV, we can lend against it by
effectively writing your name on a cocktail napkin and sending it in.
Back to the risks, if the house is worth less, then you will be faced with
an Adjustable Rate Mortgage after the 5th year. The payment will remain
interest only, but will vary once each year. The loan I am discussing is
called a 5/1 ARM, the first 5 years is fixed, then the loan becomes a 1-year
adjustable for the remaining 25 years. It could become a 6-month adjustable,
in which case it will adjust twice a year. (We set this feature today, and
the decision will figure into the interest rate you get.) The problem is
that if the house is worth less, then you can't get another 100% loan
because you will owe more than 100% of it's value. If you plan on living in
the house for a long time, or if you plan on selling it after a short time,
but can live with staying in it for a long time, then you will eventually
recover any loss and you can sell then and move on. For example, I bought my
house in 1990 and lost tens of thousands of dollars in the next 3 years or
so, but I stayed in the house and the market has returned. Today, my 150k
house is worth more than 450k. I stayed and recovered the paper losses, and
now have a huge paper gain. Had I been forced to sell during the downturn,
it would have been very painful - I stood to lose close to 50k (over 30% of
the purchase price) at one point - but I stayed with it and made the
payments as required.
THIS IS NOT AN OFFER TO LOAN, THE INFORMATION GIVEN IS PRESENTED TO
ILLUSTRATE THE SCENARIOS BEING DISCUSSED. LOAN RATES ARE SUBJECT TO CHANGE
ON A DAILY BASIS, AND SOMETIMES THEY CAN CHANGE DURING THE DAY. THE PERSON
MAKING THE INQUIRY CAN ADJUST THE LOAN NUMBERS -- BOTH RATE AND AMOUNT -- TO
FIND A LOAN PROGRAM THAT FITS HIS INCOME AND CURRENT DEBT LOAD.
> Hello,
>
> I hope this is the right group. I want to purchase a home for anywhere
from
> $300K to $500K and want to do an 80-20. So, the 20% ($60K to $100K) is
put
> into another loan. The questions is this, since the 2nd loan is another
> liability to me, how does it affect my PITI? Is PITI now the sum of the
two
> loans? Is my front end ratio also calculated on both monthly payments or
> just that of the first loan? How does it affect how much home I will
qualify
> for??
>
> Thank you!
>
> Jay
>
>
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Posted by Jay Wolfe on June 23, 2005, 11:45 am
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Wow, thank you so much for that explanation! It was indeed helpful to get my
head around all this stuff.
thanks again!
Jay
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Posted by Jeff Strickland on June 24, 2005, 1:02 pm
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If you are in California, Nevada, or Arizona, call me.
Jeff Strickland
City Mortgage Services
San Diego
(858) 217-2449
> Wow, thank you so much for that explanation! It was indeed helpful to get
my
> head around all this stuff.
>
> thanks again!
>
> Jay
>
>
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