Lower Rate or Less House?
When you’re shopping for a mortgage and your financial picture requires an unusual program from a lender, you will usually find yourself paying a higher than market interest rate on the loan. Does this mean that you might have to consider a less expensive house because the loan you need has a higher rate? Sometimes.
There are programs out there for almost every borrower, even those with credit issues. What the borrower needs to realize is that for every “concession” you want the lender to make to you in underwriting, the lender wants something in return, normally higher interest.
You want a 100% financing? Fine. It can cost up to a half point or more than if you put some money down. You want interest-only payments? Okay, the lender will probably charge some additional discount fee or increase your rate. You want stated income or stated assets? The risk is higher to the lender so the lender charges more.
So many people see advertisments for a particular rate on TV or the internet and they assume, because there is no explanation on the advertisement, that it’s available to every borrower. However, what they don’t realize is, to get that rate they have to have everything the lender wants….good credit, good income, little to no debt, and plenty of assets.
I have actually had people tell me they expected to get the lowest advertised rate, put no money down, and pay no closing costs when they have no money in the bank, limited income and poor credit. It doesn’t work that way.
I’ve also had people tell me they want to buy a $300,000 house, put no money down, pay no closing costs and have a monthly payment of not more than $800. No matter how low interest rates are, this is not a feasible scenario.
So, if the mortgage you qualify for has a rate that makes the payment on the $250,000 house you want more than you can comfortably afford each month, it would be better to decide on a $175,000 house. Then you have a mortgage, save on taxes and plan to move up a few years down the road, rather than continue to rent.
When clients balk at this notion, I explain that if they buy the $175,000 house today and make $1200 a month payments, a few years down the road they will have equity in the property and have experience significant tax savings during that time. If they continue to rent for 3 years, they have gained nothing and saved nothing. In some instances, it may even cost them more.
When we shop for anything, it can be difficult to restrain ourselves from considering a purchase that is more than we can afford. Buying a house is no different. The easiest way to avoid disappointment, when what you want and what you can afford don’t match, is to get qualified BEFORE you begin to look at property.
Know going in what type loan you can get, what rate you’ll have to pay and what price range house will fit your budget on a monthly payment basis. Then only look at properties that fit your criteria. You will be happier with the results in the long run.
Remember, home ownership is a great thing, being “house poor” isn’t. You want to enjoy owning a home, not just work to make the payments on it.