Two Loans for Home Purchase?

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Topic Author
Parlor Trick
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Joined: Wed Sep 04, 2013 6:22 pm

Two Loans for Home Purchase?

Post by Parlor Trick »

So I'm almost 30 years old, unmarried with no children, I have no real debt (recently paid off my car, have paid off my student loan debt from college) and I'm in the financial position where I could consider buying real estate instead of continuing to rent. I have a 401k I contribute a healthy amount to each month, I have a rainy day fund that is well funded, and I have a separate brokerage account where I put money that I want for "long term, but liquid" savings.

So the houses I've looked at would be around $175k-180k (around here this gets you 3 bedrooms, 1700-1800 sq. ft. in a nice neighborhood on .20-.25 of an acre), and I can currently deploy about $18k in cash for a down payment. Given estimated interest rates, PMI, property taxes etc my monthly payment would be around $1200. That is fine, that is around 18% of my pre-tax monthly income and according to every resource I've used is very affordable given my overall financial situation.

However, part of the reason I'm in pretty good financial shape at my age is I live very frugally, I rent an apartment in a "so-so" but not great part of town, and it's small, I drive a car I bought new but that was a small, economical, reliable car (not flashy whatsoever.) I shop at places like Aldi, I live very frugally and that part of me is a little unhappy with the prospect of being locked into $1200/mo for 30 years, so I am wondering if there are any ways to avoid that.

I'm curious if one could put down say, $18k, get a traditional mortgage to then cover say 80% of the home price (so $144,000) and then get some other form of loan for $18k to cover the "gap." That way I could get the home I want, and devote money I have extra each month to paying down that smaller loan (I estimate I could pay it off in 3-4 years.) After that, my monthly fixed housing expenses would go down to whatever the 30 year mortgage on the 80% of the house would be (I'd guess around $1000/mo or so.)

Now, if I just wanted to lock in that lower mortgage amount I could liquidate my brokerage account which has around $20k in it, but like I said, I want that to be for "long term, liquid" savings. I basically want that money to do nothing but grow until I'm much older. I could wait 3-4 years and double the amount I have for a down payment, but the whole reason I'm considering making a home purchase now is I've already missed the "bottom" of the mortgage interest rate trough and I don't see it doing anything but gradually going up over the next decade.
curmudgeon
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Re: Two Loans for Home Purchase?

Post by curmudgeon »

A much better reason for holding your primary mortgage to 80% is to avoid PMI (mortgage insurance). That is a significant expense. Whether you do it by pulling money out of your brokerage account, or taking a second, "piggyback" loan is more of a personal choice. The piggyback loan is definitely an option that gets used, but the lender will still apply their standard rules about payments/income against the total payments. If you are in a phase where your income is still likely to be growing, mortgage payments will diminish in impact over time (same potential with inflation).
SimonJester
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Re: Two Loans for Home Purchase?

Post by SimonJester »

From what I have heard the 80/20 loans disappeared after the housing bubble popped but are starting to make a comeback.
However I would not do one.

First what sort of emergency fund do you have. Do you have 3 to 6 months of expenses set aside apart from your home down payment?

Second how fact can you save up 36K?
"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." - Benjamin Franklin
Topic Author
Parlor Trick
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Re: Two Loans for Home Purchase?

Post by Parlor Trick »

The loans where you got 80% from a traditional mortgage and then another loan for the 20% down payment (thus paying 0 down) are pretty much gone unless you have a really unique situation. I think I read the CEO/Founder of Facebook actually got a 0 down loan at like 0.6% interest and there were reasons explained as to why he'd do that, but with several billion in assets obviously he's going to be evaluated for a relatively paltry home loan much differently than the average home buyer.

But what I'm talking about is putting 10% of my own cash down on the home, and borrowing 10% from one lender and the rest of the amount (80%) from yet another lender. You absolutely can get loans for 90% of the purchase price of the home with 10% down (you can get loans with only 5% down, too), I've spoken with my bank earlier in this process and with around $18k as a 10% down payment on a ~180k loan the bank is fine with that. The only reason I'm considering splitting that 90% of purchase price loan into two separate loans is I could pay the smaller loan down aggressively and in 3-5 years time I'd have a lower monthly mortgage payment. Otherwise there isn't really any way to lower your mortgage fixed payment over a 30 year mortgage unless you refinance to a lower interest rate (probably never going to happen over the next 30 years.)
crake
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Re: Two Loans for Home Purchase?

Post by crake »

It sounds a bit like you are playing mind games with yourself rather than doing a real analysis of the situation.

If I understand correctly You want to take out an additional 18k loan so your primary mortgage will be smaller. You will then aggressively pay down the 18k while also paying the regular mortgage payments and in 3-4 years the 18k will be paid off and your monthly payment will be smaller.

You could in effect do the same thing without an extra loan. For the first 3-4 years pay your regular mortgage and "aggressively" put extra money into a separate account ear marked for mortgage payments. After 3-4 years when you want a reduced mortgage payment just pay part of your mortgage from this special account and your monthly payment will be effectively reduced. When you put it this way it sounds pretty silly but it is exactly what you are proposing. In fact it is better because you get to collect interest on the money in the earmarked account versus pay interest on a bigger loan. If you can afford to aggressively pay down the mortgage now there's no reason why you shouldn't be able to continue to in the future. Your best bet is to take out a traditional mortage and just make extra payments so it is paid off early. I don't think your thinking should involve how to reduce monthly payments, rather you should think how to avoid total interest paid. That is the true cost, not the monthly payment.

An aside recommendation is to just wait till you have 20% saved so you don't have to pay PMI.
YttriumNitrate
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Re: Two Loans for Home Purchase?

Post by YttriumNitrate »

Parlor Trick wrote:My monthly payment would be around $1200. That is fine, that is around 18% of my pre-tax monthly income and according to every resource I've used is very affordable given my overall financial situation.
If my math is right, your annual pre-tax income is $80k.
Parlor Trick wrote:However, part of the reason I'm in pretty good financial shape at my age is I live very frugally, I rent an apartment in a "so-so" but not great part of town, and it's small, I drive a car I bought new but that was a small, economical, reliable car (not flashy whatsoever.) I shop at places like Aldi, I live very frugally.......I could wait 3-4 years and double the amount I have for a down payment, but the whole reason I'm considering making a home purchase now is I've already missed the "bottom" of the mortgage interest rate trough and I don't see it doing anything but gradually going up over the next decade.
I'd go with option B. Save up another $18k and put down 20%. If you put your mind to it, that should be doable in 5-6 months with your income. Figuring you'll be looking at houses for another month or two, and closing will take maybe 30 days, saving up 20% would maybe delay your housing purchase by 90 days.
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BrandonBogle
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Re: Two Loans for Home Purchase?

Post by BrandonBogle »

And just to add in case others wonder, this scenario is typically referred to as a "piggyback" loan as another poster said or a 80/10/10 purchase. As in, 80% 1st first mortgage, 10% second mortgage, 10% cash purchae.

Not advising to go down this route vs. saving more, but just saying thiat 80/10/10s are not that unusual to be worried about some "wierd" process to reach this. Also, PMI would only be requried on the second mortgage, not the first and the while the second mortgage might have a higher rate, that higher rate will not apply to the 80% loan.
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Watty
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Re: Two Loans for Home Purchase?

Post by Watty »

The only reason I'm considering splitting that 90% of purchase price loan into two separate loans is I could pay the smaller loan down aggressively and in 3-5 years time I'd have a lower monthly mortgage payment. Otherwise there isn't really any way to lower your mortgage fixed payment over a 30 year mortgage unless you refinance to a lower interest rate (probably never going to happen over the next 30 years.)
That is not true.

Google "recast mortgage".

Basically if you can do something like save up 25% of your mortgage balance then contact your lender ahead of time you can likely get them to agree to recast your mortgage and reduce your required payment by 25% if you pay off 25% of the balance. The interest rate and length of the loan would stay the same. This should only cost a couple of hundred dollars for a processing fee.

They are not required to do this but they have lots of financial incentives to agree to it so it is highly likely that they will recast it when you want them to.
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Meg77
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Re: Two Loans for Home Purchase?

Post by Meg77 »

I'm considering an 80/10/10 mortgage (80% first mortgage to avoid PMI, 10% second mortgage I'll pay down aggressively, 10% cash) for many of the same reasons you state. I have the money to put down 20% but would rather get a tax deductible low rate second mortgage and devote resources to other things (like still maxing out retirement accounts, rebuilding liquidity, and paying off student loans which are at a higher rate).

80/10/10 loans are easy to find, but an 80/20 loan structure (i.e. 0% down) not as much. You can do it all in one loan, but then you lose flexibility to lower your payment by paying off the second loan early and also you pay PMI on the whole mortgage. Be careful with "recasting" - many lenders don't allow this or charge you a hefty fee to re-amortize the loan.
"An investment in knowledge pays the best interest." - Benjamin Franklin
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FNK
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Re: Two Loans for Home Purchase?

Post by FNK »

If you don't like the thought of locking up $1200/month for 30 years, you might want to question why you want the house in the first place. If it's a lifestyle choice that you're consciously making and you'll have good use of three bedrooms, then you'll have to be prepared to pay both the purchase and the upkeep. However, if you're thinking of the house as an investment, or that you should do it because you can, or that it's a place for a future family, you might want to revisit that line of thinking. Maybe just renting a nicer apartment is a good move for now.

On the other hand, the house can be an investment. You can buy the place and rent out two of the bedrooms. That will kill your mortgage soon enough.
travellight
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Re: Two Loans for Home Purchase?

Post by travellight »

another option is to see if you can get seller financing. I did that with the house I am in right now. I was able to avoid PMI by putting down just 5%, seller financed 20% (at 5% interest over a 3 year term) and I got a conventional loan for 75%. I think the seller carried 167K which was an aggressive 3 year pay down. It all worked out; you just need a motivated seller who has assets to be able to carry that.

Currently, I am in role reversal. I sold a house that was an investment home and I financed the whole deal. So, now I am the seller and I am getting 8% interest on my money. In both situations and time, it was a win/win for both parties.
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