Mortgage APR 4.96% - too high?

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JuztVZ
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Mortgage APR 4.96% - too high?

Post by JuztVZ » Wed Mar 22, 2017 7:02 pm

We are looking to purchase our first house and are in the process of getting pre-approved. This will be a 30-year conventional loan. Maximum purchase price is $300,000 (hopefully less). Our down payment will be between 5% and 10% (I know 20% is suggested here, but this is what we can do at the moment if we want to live in a safe area, etc.)

Credit scores (we are a married couple) are "good" although not "excellent", between 700 and 750. We have stable jobs and make about $140,000 pre-tax combined (I know it is suggested here to look at properties that are at most double your gross income: 140x2 = 280, so in this case we are going with about 140x2.15~300). We live in Florida and this will be a new build. We are in our 30s, debt free (except for two car loans) and have enough saved in the emergency fund.

We were quoted an interest rate of 4.3% but an APR of 4.96% for a zero points loan. Does this seem a bit too high to anyone? We were able to see the breakdown of all the fees and it looks more or less like this: $4,000 for closing fees plus $4,000 for prepaid interest/escrow plus down payment.

Thanks for your advice!

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sunny_socal
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Re: Mortgage APR 4.96% - too high?

Post by sunny_socal » Wed Mar 22, 2017 7:24 pm

I put your numbers into bankrate.com and out popped 4.125%

Considering the following factors, your quoted APR is not that bad:
- You're a 1st time home buyer, more risk
- You're not putting down very much, more risk
- Credit score is ok but not excellent, more risk
- Bankrate.com probably quotes on the low end of the scale (teaser rates), actual rates likely higher

You can probably get a lower rate if you shop around. As a 1st time home buyer we went through a big "Brick & mortar" bank (Wells Fargo), the rates will definitely be higher at big banks compared to online direct lenders. Find a local mortgage broker if you want to quickly and easily get a lower rate, or head over to aimloan.com or amerisave.com.

Are you paying PMI because of the low down payment? Start planning on an exit strategy ASAP, the PMI is money down the drain. (ie. figure out a way to get 20% equity as soon as possible.)

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BrandonBogle
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Re: Mortgage APR 4.96% - too high?

Post by BrandonBogle » Wed Mar 22, 2017 7:40 pm

Without knowing all the details, my gut statement is "do not buy" until you save up your 20%. But there could very well be reasons you haven't shared. With $140k income and already having $14k for the down payment and only otherwise in debt for two car payments, it shouldn't take you more than a few weeks/months to save up another $14k. Then you get avoid any higher interest rates due to insufficient LTV and any potential PMI.

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JuztVZ
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Re: Mortgage APR 4.96% - too high?

Post by JuztVZ » Wed Mar 22, 2017 7:44 pm

Thanks for your reply!

This is also a big "brick & mortar" bank. There is a local mortgage broker that we want to talk to (lower rates, faster closing times), but we don't want to add another hard pull to our credit reports, which might lower our scores further. We are also considering whether to apply with the builder's preferred lender (but in many cases they offer incentives in exchange for higher rates).

We wish we could do 20% and not deal with PMI. We want to get to 20% as fast as possible after purchasing the house in order to get rid of it. PMI was quoted as $200 per month.

This is a side question: in terms of affordability, do we have a good plan?

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Re: Mortgage APR 4.96% - too high?

Post by bloom2708 » Wed Mar 22, 2017 7:47 pm

Reconsider new construction. Cost overruns and paying a premium for a new build should wait. You should have many good options in your price range. Save the 20%. Your future selves will thank you. Just my 2 cents.
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JuztVZ
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Re: Mortgage APR 4.96% - too high?

Post by JuztVZ » Wed Mar 22, 2017 7:48 pm

BrandonBogle, good point.

We have about 65K in savings. This amount includes emergency fund plus down payment plus closing costs. We have waited for a while to purchase a house until we were in a better position, and even though it's not perfect in terms of down payment, we don't want to wait too much and risk having the interest rates go up again (not sure if this is a valid reason or not, but something we have considered).

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JuztVZ
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Re: Mortgage APR 4.96% - too high?

Post by JuztVZ » Wed Mar 22, 2017 7:51 pm

bloom2708, we thought about this option too. However in this area pre-owned houses cost about the same as new builds! We were only looking at pre-owned houses at the beginning until we realized we could get the same house but new for about the same price.

orca91
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Re: Mortgage APR 4.96% - too high?

Post by orca91 » Wed Mar 22, 2017 8:04 pm

Seem like quite a spread between the interest rate and the APR. Most are less than 0.5% spread nowadays. Of course, I have checked into a PMI mortgage for a while so maybe that's why it seems high to me.

Are either of you Veterans... the VA loan an option?

Check with the preferred lender. They might give $5k towards closing costs or so. Maybe a higher interest rate, but probably not by much. And, that's $5k closer to getting rid of PMI then. Worth a look.

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JuztVZ
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Re: Mortgage APR 4.96% - too high?

Post by JuztVZ » Wed Mar 22, 2017 8:17 pm

orca91, I also thought it was a big difference between 4.3 and 4.9. Sadly a VA loan won't be an option.

We want to check with the preferred lender but are unsure about having another hard pull in our credit reports.

orca91
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Re: Mortgage APR 4.96% - too high?

Post by orca91 » Wed Mar 22, 2017 8:21 pm

If the different pulls are done within 30 days, I think it counts as one. I could be wrong, but I believe it works that way. Specifically for shopping for mortgages or car loan, they accept many credit checks in roughly the same month as one pull.

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Re: Mortgage APR 4.96% - too high?

Post by nps » Wed Mar 22, 2017 8:23 pm

JuztVZ wrote:We want to check with the preferred lender but are unsure about having another hard pull in our credit reports.
Don't sweat it. Multiple pulls count as one for mortgage loans if they occur within a short period of time, believe it is on the order of weeks.

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JuztVZ
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Re: Mortgage APR 4.96% - too high?

Post by JuztVZ » Wed Mar 22, 2017 8:55 pm

orca91 and nps, thank you for this info, I didn't know that multiple pulls in this case counted as one. I'll look into it.

So it seems most of you agree that 4.9% seems a bit high right?

I don't know if we should wait until we can pay 20% (this will take at least a couple years), because we'll be risking higher interest rates as the market keeps recovering.

orca91
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Re: Mortgage APR 4.96% - too high?

Post by orca91 » Wed Mar 22, 2017 9:09 pm

It seems high to me. But, I am able to use the VA loan and more recently was able to put more than 20% down. So, I avoided PMI on both of those. I did have PMI on an older home, but that was in the mid-2000's and I think the PMI rules changed since then. I don't even remember the terms or APR of that old loan, but I know PMI was not much back then... under $100 a month. Does PMI factor into APR? It may be what it is for you if it does.

Check this site out and read the questions and article, lots of good info... https://www.mtgprofessor.com/home.aspx

Could be a tough call... wait and hope interest rates don't go up a lot, or buy now and try to get rid of PMI ASAP. How much do you love/want these new build homes? Could be worth it to pay PMI for a bit. Not that it's fun, but to get a house you really love....

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JuztVZ
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Re: Mortgage APR 4.96% - too high?

Post by JuztVZ » Wed Mar 22, 2017 9:23 pm

Thank orca91, I've been reading the mtgprofessor site a lot, very useful.

It's not only the interest rates going up, the house prices (both new and pre-owned) have been increasing dramatically over the past couple years around here and might continue to do so.

So it's a matter of either waiting a couple/few years to save up to 20% to get rid of the PMI and risking both rates and house prices going up, or going with the max we can for down payment now (10%) and try to pay PMI as soon as possible.

In a stable market environment waiting to have 20% saved is a no-brainer. But during these conditions, I feel this rule is not so black and white anymore. I'm not an expert by any means though, but it's how I'm leaning.

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Re: Mortgage APR 4.96% - too high?

Post by Rick Rock » Wed Mar 22, 2017 9:26 pm

You have 20% (and then some) saved now.... presuming stable dual incomes as you describe above, this would be a situation where I'd use the money in my emergency fund for the down payment and build the e-fund back up over time.

Check out the thread on emergency funds and creative uses/sources for more inspiration -- but I wouldn't pay thousands more to a bank over the life of your loan when you have the solution under your mattress making 1%.

Just my $0.02 and I'm sure plenty of others here will tell me I'm wrong. But this should move your rate closer to 4% - closing on a place in a couple weeks at 4.375% (and yes we're using most of our emergency fund to do it and we'll build it back up over time).

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Re: Mortgage APR 4.96% - too high?

Post by BrandonBogle » Wed Mar 22, 2017 9:29 pm

JuztVZ wrote: We wish we could do 20% and not deal with PMI. We want to get to 20% as fast as possible after purchasing the house in order to get rid of it. PMI was quoted as $200 per month.
JuztVZ wrote:We have about 65K in savings. This amount includes emergency fund plus down payment plus closing costs. We have waited for a while to purchase a house until we were in a better position, and even though it's not perfect in terms of down payment, we don't want to wait too much and risk having the interest rates go up again (not sure if this is a valid reason or not, but something we have considered).
I would tap into the emergency savings to avoid PMI and rebuild emergency savings with at least the $200/mo you aren't paying to the insurance company.

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Re: Mortgage APR 4.96% - too high?

Post by orca91 » Wed Mar 22, 2017 9:31 pm

Stable... has the housing market ever been stable? :happy

I bought in 2005 because I thought housing prices would just go up forever. I got into a horrible interest only 1st and 2nd mortgage deal. I couldn't afford the mortgage when it reset and luckily got to refinance to a fixed mortgage I could afford in 2008. Oh, and I owed more on the house than it was worth at the time of the refinance because the market went down.

Luckily lending standards aren't as loose as they once were.

Buy when you're ready, is my best advice. No market goes up continuously. It may go up for a couple more years... or, it may not. Tough for any of us to predict.

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Re: Mortgage APR 4.96% - too high?

Post by BrandonBogle » Wed Mar 22, 2017 9:32 pm

JuztVZ wrote:I don't know if we should wait until we can pay 20% (this will take at least a couple years), because we'll be risking higher interest rates as the market keeps recovering.
This concerns me. If you have $140k income, no state income taxes, and already have 10% of $300k saved for a down payment, it should NOT take you years to get to 20%. If it would, then you need to holistically take a look at your expenses as you are living too close to your income versus "living below your means".

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JuztVZ
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Re: Mortgage APR 4.96% - too high?

Post by JuztVZ » Wed Mar 22, 2017 9:41 pm

orca91, that's true! The market, by definition, is never a stable thing. It's just that in this case there's a high probability that rates and prices will keep going up. Decisions :moneybag

Thank you for the advice BrandonBogle. Regarding your last comment, you're right. I guess it was a bit of an exaggeration when I said we will need years to save for that. Just in case, 140K is gross not take-home.

ETA - this part here was meant for Rick Rock as well as BrandonBogle:
So you're saying that if we have 65K saved, we might as well use 60K for the down payment? How about closing costs and any other buffer money? Closing costs would probably be more than 5K and that will leave us with negative savings. It's possible that I'm missing something here.

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BrandonBogle
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Re: Mortgage APR 4.96% - too high?

Post by BrandonBogle » Wed Mar 22, 2017 9:47 pm

JuztVZ wrote: ETA - this part here was meant for Rick Rock as well as BrandonBogle:
So you're saying that if we have 65K saved, we might as well use 60K for the down payment? How about closing costs and any other buffer money? Closing costs would probably be more than 5K and that will leave us with negative savings. It's possible that I'm missing something here.
Perhaps I misunderstood. You have $65k including what is earmarked for down payment, or you have 5-10% + $65k? In the latter, use some of the $65k. In the former, I don't know about going to $5k emergency funds, but I still would do what I can to avoid PMI. While I personally do NOT live a Mr. Money Mustache lifestyle, I would use his thoughts on saving more between now and closing so that it wouldn't be just $5k left.
  • Call Comcast immediately and cancel cable + phone (leave Internet-only)
  • If you are not on a contract with a cell carrier right now, call Cricket or T-Mobile and switch.
  • Other than picking up subs/sandwiches at Publix, no more eating out from now until closing. Absolutely no Wendy's, Pollo Tropical, or anything over $6 per person
  • No Starbucks between now and closing
  • Anything else that you can short-term sacrifice to save

FYI, I lived in Fort Lauderdale on under $40k/year until the early 2000s. If you count college years in North Florida, I was even a homeowner on under $25k/year. You can totally cut back expenses significantly between now and closing in all likelihood.

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JuztVZ
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Re: Mortgage APR 4.96% - too high?

Post by JuztVZ » Wed Mar 22, 2017 9:51 pm

BrandonBogle, gotcha, to clarify we have $65k including what is earmarked for down payment. That would leave us with 5K in the emergency fund, which would be used for any closing fees and we'd still fall short.

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Re: Mortgage APR 4.96% - too high?

Post by orca91 » Wed Mar 22, 2017 9:54 pm

Do you have a Roth IRA you could withdraw from, or a 401k to take a loan from? This may be a case where doing one of those to avoid PMI could make sense.

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JuztVZ
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Re: Mortgage APR 4.96% - too high?

Post by JuztVZ » Wed Mar 22, 2017 9:56 pm

orca91, that is an idea that we've had in the backburner. We will have to think long about that one though.

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Re: Mortgage APR 4.96% - too high?

Post by Raryn » Thu Mar 23, 2017 7:17 am

sunny_socal wrote:I put your numbers into bankrate.com and out popped 4.125%

Considering the following factors, your quoted APR is not that bad:
- You're a 1st time home buyer, more risk
- You're not putting down very much, more risk
- Credit score is ok but not excellent, more risk
- Bankrate.com probably quotes on the low end of the scale (teaser rates), actual rates likely higher

You can probably get a lower rate if you shop around. As a 1st time home buyer we went through a big "Brick & mortar" bank (Wells Fargo), the rates will definitely be higher at big banks compared to online direct lenders. Find a local mortgage broker if you want to quickly and easily get a lower rate, or head over to aimloan.com or amerisave.com.

Are you paying PMI because of the low down payment? Start planning on an exit strategy ASAP, the PMI is money down the drain. (ie. figure out a way to get 20% equity as soon as possible.)
How close are bankrate.com rates to reality typically? I'm in the process of looking at mortgages myself and have 3 quotes from reputable banks that are within 0.1% of each other, but the ones listed on that website are another 0.4% lower! (And me and my SO have ~790 credit scores, 20% down, etc)

If those are truly obtainable, I might have to go back to the drawing board, but I'd really rather not give my phone number/email out to yet another set of companies to harass me for a few days if it's BS.

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JDCarpenter
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Re: Mortgage APR 4.96% - too high?

Post by JDCarpenter » Thu Mar 23, 2017 7:31 am

Raryn wrote: ...
How close are bankrate.com rates to reality typically? I'm in the process of looking at mortgages myself and have 3 quotes from reputable banks that are within 0.1% of each other, but the ones listed on that website are another 0.4% lower! (And me and my SO have ~790 credit scores, 20% down, etc)

If those are truly obtainable, I might have to go back to the drawing board, but I'd really rather not give my phone number/email out to yet another set of companies to harass me for a few days if it's BS.
In our case last year, they were dead on. (I think it was bankrate; at least it was one of the online quote generators....)

But, we were probably close to a best case from an underwriting standpoint. (Refinancing halfway through a 10 year jumbo to a 15 year conventional with greater than 50% equity, credit scores above 800 (one of the advantages of being over 50!), no other significant debt, and household income more than double the amount of the loan sought.)

Bank of America, despite the touted platinum honors discount, couldn't come close.
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Re: Mortgage APR 4.96% - too high?

Post by ZenInvestor » Thu Mar 23, 2017 8:05 am

JuztVZ wrote:We are in our 30s, debt free (except for two car loans) and have enough saved in the emergency fund.
You are not debt free.

Angelus359
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Re: Mortgage APR 4.96% - too high?

Post by Angelus359 » Thu Mar 23, 2017 8:16 am

Raryn wrote:
sunny_socal wrote:I put your numbers into bankrate.com and out popped 4.125%

Considering the following factors, your quoted APR is not that bad:
- You're a 1st time home buyer, more risk
- You're not putting down very much, more risk
- Credit score is ok but not excellent, more risk
- Bankrate.com probably quotes on the low end of the scale (teaser rates), actual rates likely higher

You can probably get a lower rate if you shop around. As a 1st time home buyer we went through a big "Brick & mortar" bank (Wells Fargo), the rates will definitely be higher at big banks compared to online direct lenders. Find a local mortgage broker if you want to quickly and easily get a lower rate, or head over to aimloan.com or amerisave.com.

Are you paying PMI because of the low down payment? Start planning on an exit strategy ASAP, the PMI is money down the drain. (ie. figure out a way to get 20% equity as soon as possible.)
How close are bankrate.com rates to reality typically? I'm in the process of looking at mortgages myself and have 3 quotes from reputable banks that are within 0.1% of each other, but the ones listed on that website are another 0.4% lower! (And me and my SO have ~790 credit scores, 20% down, etc)

If those are truly obtainable, I might have to go back to the drawing board, but I'd really rather not give my phone number/email out to yet another set of companies to harass me for a few days if it's BS.
Bankrate.com offered me 2.99% for a 15 year. I got exactly what they offered.

I was a first time home buyer with 25% down. It would have been 3.24% with 20% down.

I bought a condo for 112k in an area where starting house prices are near 300k for the same size.

It has a home owners association fee, but the lower taxes and insurance on a condo, made it cheaper than a house even after the HOA fees.
Last edited by Angelus359 on Thu Mar 23, 2017 8:18 am, edited 1 time in total.
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Re: Mortgage APR 4.96% - too high?

Post by bloom2708 » Thu Mar 23, 2017 8:18 am

JuztVZ wrote:bloom2708, we thought about this option too. However in this area pre-owned houses cost about the same as new builds! We were only looking at pre-owned houses at the beginning until we realized we could get the same house but new for about the same price.
I wonder how many new homes built come in under or on budget? Is landscaping included in the home price? Appliances? Do some additional research here.

There several other "new home" threads recently. Many new homes are built with the minimum spec for most everything. Basic drawer pulls, basic light fixtures, basic plumbing fixtures, no window coverings. Price out reasonable blinds for 20 windows. Find a house that the previous owner took care of and updated is doable. Good luck and let us know how things go.
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Re: Mortgage APR 4.96% - too high?

Post by sterlingcooper05 » Thu Mar 23, 2017 8:20 am

Mid-Thirties here...closing on a 3.375% 15 year mortgage in a few weeks. The savings is incredible over a 30 year at a higher interest rate. Wait till you have more money for the down payment.

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Re: Mortgage APR 4.96% - too high?

Post by JamesSFO » Thu Mar 23, 2017 8:22 am

Just to emphasize, the FOMO (fear of missing out; e.g. on rates/appreciating homes) is causing you to rush into the purchase when the right answer is likely to rent a bit more. After taxes you should be taking home on the order of $8-10K/month you need about $20-30K extra saved up this should be a matter of <<6 months to build up.

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BrandonBogle
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Re: Mortgage APR 4.96% - too high?

Post by BrandonBogle » Thu Mar 23, 2017 9:04 am

sterlingcooper05 wrote:Mid-Thirties here...closing on a 3.375% 15 year mortgage in a few weeks. The savings is incredible over a 30 year at a higher interest rate. Wait till you have more money for the down payment.
I suspect their high LTV is causing a higher rate. I just closed on a refinance this week at 70% LTV for 2.875%. I locked my rate on 2/8/2017.

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Re: Mortgage APR 4.96% - too high?

Post by Jack FFR1846 » Thu Mar 23, 2017 9:12 am

Consider an already built home. Maybe something 5 years old or older. We went looking for new construction in our town some years ago. Even with starting prices of $900k, there were a few "minor" things that were NOT included.

Any landscaping was extra
Finishing a lawn was extra
Gutters were extra
Carpet that didn't look like garbage was extra
Number of outlets, any data lines, any cable, any extra lights were extra
Cabinets that didn't look like they came from a salvage yard were extra
counter tops that weren't laminated garbage were extra
A driveway that would last more than one year was extra (our driveway contractor was given the opportunity to bid and the thickness of gravel, base coat and top coat were all 1/2 of industry standard.

In the end, a "nice" house was more like $1.3MM. We passed altogether and stayed where we were.
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Re: Mortgage APR 4.96% - too high?

Post by JGoneRiding » Thu Mar 23, 2017 9:22 am

JuztVZ wrote:Thanks for your reply!

This is also a big "brick & mortar" bank. There is a local mortgage broker that we want to talk to (lower rates, faster closing times), but we don't want to add another hard pull to our credit reports, which might lower our scores further. We are also considering whether to apply with the builder's preferred lender (but in many cases they offer incentives in exchange for higher rates).

We wish we could do 20% and not deal with PMI. We want to get to 20% as fast as possible after purchasing the house in order to get rid of it. PMI was quoted as $200 per month.

This is a side question: in terms of affordability, do we have a good plan?
Generally speaking several hard pulls for mortgage in a short period won't ding you to much as they realize you are shopping for a rate. BUT if you can they should do a soft pull first and only do the hard pull later once you sign---IE they give you a quote and a GFE without the hard pull

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Re: Mortgage APR 4.96% - too high?

Post by sunny_socal » Thu Mar 23, 2017 9:34 am

OP after seeing that you have more cash put away - put down more money and buy the house! Don't do the PMI. We have some new construction going up in our neighborhood and those homes are nice! They are "what you see is what you get" - appliances seem solid, they come with solar already installed, materials look good throughout. Our home is ~15 years old but it would take a lot of money to upgrade it to equal those new homes.

Older homes come with their share of problems despite doing a home inspection. Here's all the "sweat equity" (ie. repairs :wink: ) I've built up during our ownership years:
- Mold in bathroom floor: tore down entire bathroom to the studs and rebuilt it (except for walls and bathtub)
- Leaking roof: patched it up (never replaced the roof, sold the house)
- Flooding sufficient to fill entire living room, due to improper drainage in yard: brand new landscaping front & back! (~3 weeks of work)
- Mold in carpets: brand new hardwood flooring throughout house (~2weeks of work)
- Cat pee in carpets from prev owner: New carpets
- No rain gutters: installed new (this is common here in SoCal, the assumption is "it's never going to rain" - until it does)
- Leaking pipes within walls: Rip open the walls, repair pipes

That's not including all the works we've had Pros do (pavers in back yard, solar panels, concrete pours....) Our current house also has a laundry list of things that must get done (new landscaping & irrigation in back yard, new garage doors, new flooring in living room.) Houses are a maintenance money pit, I wouldn't mind taking a few years off from all the work and living in a new home :beer

PS. Before anyone freaks out about the mold, those were due to water leaks or improper drainage, root causes all fixed.

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JuztVZ
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Re: Mortgage APR 4.96% - too high?

Post by JuztVZ » Thu Mar 23, 2017 9:52 am

Hi everyone, I'm at work and haven't been able to reply to each of you individually. But I would like to thank you for all the advice provided here, it has definitely given us a lot of food for thought and just this morning we sat down and had a conversation about some of the input provided here.

To the person who said I'm not debt free, you're right, that was maybe poor wording on my part. We are not debt free because we have car loans.

We're working hard to see if we can do 20% down payment sooner than later, that is one of our main goals now. Saving is the top priority. We're also still looking at older houses and haven't discarded that option. I know that with new builds you have to add extra money (maybe 10%-20%) on top of the listing price, so in that sense we're not blinded by those "nice" prices on the flyers.

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Re: Mortgage APR 4.96% - too high?

Post by prudent » Thu Mar 23, 2017 9:58 am

Is there any possibility of boosting your credit scores? Do you know why your scores aren't higher?

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Re: Mortgage APR 4.96% - too high?

Post by JuztVZ » Thu Mar 23, 2017 10:55 am

prudent, our utilization is good (below 29%) and we haven't missed any payments, so I'm guessing it's because of both the length of credit history and that we don't have that many open credit accounts (some credit cards, the car loans, etc.)

petulant
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Re: Mortgage APR 4.96% - too high?

Post by petulant » Thu Mar 23, 2017 11:11 am

There's a lot of feedback on purchasing a new home and whether to wait for a bigger down payment to avoid PMI. I don't think OP asked about those issues, and I think OP should take people's advice with a grain of salt on those since we don't have much information on OP's specific market, jobs, or other pieces of context. That said, it's worth considering the risks and costs of new homes and PMI.

OP asked whether an APR quote of 4.9% is a high. Nobody has given OP an explanation of how APR works. APR is a legal measure required by the Truth in Lending Act on many loans. It's intended to create a standard way to compare interest rates and non-interest financing costs like up-front fees. So the 4.9% number includes OP's interest along with a special calculation to convert the closing costs/fees into a rate. As such, it's a useless number. It's also not especially high given the interest rate included in the quote.

For mortgage loans, OP should shop for two numbers: 1) the interest rate and 2) total closing costs excluding escrow and items under buyer's control. Some lenders will give a better deal on both numbers, but sometimes buyers may need to choose between the trade-offs of higher rates or higher closing costs. That's a function of liquidity preferences, the loan term, tax consequences, and beliefs about future interest rates.

TLDR: 4.9% APR is not high compared to the interest rate, and it's a useless number. Shop around on closing costs and interest rates based on liquidity and time horizon.

EDIT: Another question might be, is 4.3% too high on the interest rate? No, that's in line with the market. But one should always get at least 3, preferably 5, bids for a home mortgage loan. The credit inquiries won't hurt your mortgage chances if done in the same timeframe, as others have said.

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JuztVZ
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Re: Mortgage APR 4.96% - too high?

Post by JuztVZ » Thu Mar 23, 2017 2:43 pm

petulant, thank you for tackling the APR specifically in your reply, this was helpful!

It's interesting because I actually thought it was a big gap between 4.3% and 4.9%, so that's why I decided to post the question in the forum to see what you guys take on it was.

For reference, I've talked further with the bank and the 4.9% APR was for a 5% down payment, it goes down to 4.7% with a 10%, and to 4.4% with a 20%. The main thing driving down the APR is of course the mortgage insurance.

Closing costs amount to $4,000 in all cases. Escrow and prepaid interest are an additional $4,000 or so.

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Meg77
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Re: Mortgage APR 4.96% - too high?

Post by Meg77 » Thu Mar 23, 2017 3:38 pm

Mortgage banker here. It pays to shop around in your case given that you are on the bubble with your credit scores and also your down payment desires. Lenders use different risk categories for different variables to determine pricing. For example some lenders may look at a down payment of 0-5% as the most risky category (in other words there's no difference between putting down 0% or 5% for your rate). While others have 0-3% as as one category and another slot for 3-9.99% with 10% - 15% being a much better risk score. Knowing this might push you to put down a bit more to get into a better pricing category.

Same with your credit score. Some lenders look at 700-720 the same but give you a better score if you're 720-750. Others may look at anything over 720 as the best category/pricing.

Quit using and pay down credit cards immediately to boost your score; even if you pay them off in full each month the credit bureau will show that you have a balance based on whatever happened to be outstanding the day they reported to the bureaus. Having utilization ratio under 5% will jack up your score a bit in the short term. Hard pulls only ding your score slightly though, and you aren't supposed to be penalized for multiple hard pulls within one or two week periods since it's assumed you're shopping around.

Another idea: ask about an "80-10-10" loan structure. That's where you get an 80% first lien - best rates and no PMI - and you take out a second 10% mortgage at the same time for the purchase. That loan may be at 6-8% and on a 15 year term, but avoiding PMI and getting a much lower rate on your first mortgage can make it worth it. Not all banks allow this but some do; I think Wells Fargo allows it but they don't do the second mortgages themselves; they refer you to another bank. Otherwise check the PMI rules; some lenders allow you to get it removed after 2 years based a new appraisal while others may require you to refinance to get rid of it later.

Edited to add: you have a pretty good quote though, considering your 5-10% down payment, assuming it's for a 30 year fixed loan. Closing costs of less than 1.5% look very competitive (most of that is probably title fees anyway and other non-negotiables). And 4.3% is less than half a point above market for the best priced loans which would require 20% down and scores over 720. Bottom line, if you end up going with that bank you have a pretty good deal for putting down so little (assuming that quote still stands...rates change daily).
"An investment in knowledge pays the best interest." - Benjamin Franklin

Beach
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Re: Mortgage APR 4.96% - too high?

Post by Beach » Thu Mar 23, 2017 3:57 pm

orca91 wrote:Do you have a Roth IRA you could withdraw from, or a 401k to take a loan from? This may be a case where doing one of those to avoid PMI could make sense.
I don't think this is good advice, Dave Ramsey would certainly agree. Better to pay a little PMI and pay down the loan quickly than risk tapping into your retirement. Or worse yet, have something happen and be forced to pay back the 401K loan or take a huge penalty say you lost your job. PMI is also tiered based on your LTV, so see where the tiers are and try to get under a more favorable LTV percentage to save money on the PMI without straining your savings.

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Re: Mortgage APR 4.96% - too high?

Post by Danzangdc » Thu Mar 23, 2017 5:46 pm

You can make your loan significantly cheaper by (1) raising your credit and (2) increasing your down payment. Those two things go hand in hand. If you hold off buying for six months or a year, you'll have longer credit histories, lower utilization, and more money saved. Now, interest rates may go up, but you can't know that or control for it. They could go down too. I think you should wait and shore yourselves up a bit.

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Re: Mortgage APR 4.96% - too high?

Post by miketheboglehead » Thu Mar 23, 2017 6:27 pm

PMI was a deal breaker for us so we waited until we had 20% for a down payment. Particularly because you cannot shed PMI anymore when you obtain 20% equity. Everyone's priorities differ.

If your mind is made up, one option we considered was paying a bit higher rate for 'lender paid' PMI. It was termed a first time homebuyer option at a local credit union, aimed at competing with FHA options.

If you buy with less than 20% down, the only way to get rid of PMI that I know of would be a refinance (more fees, current interest rates...). I believe the 20% equity rule for PmI changed about 4 to 5 yrs ago.

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Re: Mortgage APR 4.96% - too high?

Post by orca91 » Thu Mar 23, 2017 7:47 pm

luderiffic wrote:
orca91 wrote:Do you have a Roth IRA you could withdraw from, or a 401k to take a loan from? This may be a case where doing one of those to avoid PMI could make sense.
I don't think this is good advice, Dave Ramsey would certainly agree. Better to pay a little PMI and pay down the loan quickly than risk tapping into your retirement. Or worse yet, have something happen and be forced to pay back the 401K loan or take a huge penalty say you lost your job. PMI is also tiered based on your LTV, so see where the tiers are and try to get under a more favorable LTV percentage to save money on the PMI without straining your savings.
Well, if Dave Ramsey says so.... :wink: :happy

I didn't say it was the optimal choice, just threw it out there as a possibility.

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Re: Mortgage APR 4.96% - too high?

Post by orca91 » Thu Mar 23, 2017 7:48 pm

JuztVZ wrote:For reference, I've talked further with the bank and the 4.9% APR was for a 5% down payment, it goes down to 4.7% with a 10%, and to 4.4% with a 20%. The main thing driving down the APR is of course the mortgage insurance.
Ahh, that makes more sense.

TOJ
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Re: Mortgage APR 4.96% - too high?

Post by TOJ » Thu Mar 23, 2017 10:01 pm

JuztVZ wrote:petulant, thank you for tackling the APR specifically in your reply, this was helpful!

It's interesting because I actually thought it was a big gap between 4.3% and 4.9%, so that's why I decided to post the question in the forum to see what you guys take on it was.

For reference, I've talked further with the bank and the 4.9% APR was for a 5% down payment, it goes down to 4.7% with a 10%, and to 4.4% with a 20%. The main thing driving down the APR is of course the mortgage insurance.

Closing costs amount to $4,000 in all cases. Escrow and prepaid interest are an additional $4,000 or so.

Mortgage insurance and interest rate are different things.

hightower
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Re: Mortgage APR 4.96% - too high?

Post by hightower » Thu Mar 23, 2017 10:26 pm

Though there's nothing wrong with trying to get the lowest rate possible, I think its important to remember that rates are still very low and a rate of 4.96% is pretty darn good historically speaking. Plus, the interest you pay is tax deductible so your actual rate is lower when you factor in the tax advantage.

petulant
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Re: Mortgage APR 4.96% - too high?

Post by petulant » Thu Mar 23, 2017 10:49 pm

TOJ wrote:
JuztVZ wrote:petulant, thank you for tackling the APR specifically in your reply, this was helpful!

It's interesting because I actually thought it was a big gap between 4.3% and 4.9%, so that's why I decided to post the question in the forum to see what you guys take on it was.

For reference, I've talked further with the bank and the 4.9% APR was for a 5% down payment, it goes down to 4.7% with a 10%, and to 4.4% with a 20%. The main thing driving down the APR is of course the mortgage insurance.

Closing costs amount to $4,000 in all cases. Escrow and prepaid interest are an additional $4,000 or so.

Mortgage insurance and interest rate are different things.
Exactly. That's why he's saying mortgage insurance drives the APR. Or don't you understand that interest rate and APR are different things?

For OP, I continue to encourage you to ignore the APR and assess closing costs/fees and the interest rate separately.

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sunny_socal
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Re: Mortgage APR 4.96% - too high?

Post by sunny_socal » Thu Mar 23, 2017 11:03 pm

luderiffic wrote:
orca91 wrote:Do you have a Roth IRA you could withdraw from, or a 401k to take a loan from? This may be a case where doing one of those to avoid PMI could make sense.
I don't think this is good advice, Dave Ramsey would certainly agree. Better to pay a little PMI and pay down the loan quickly than risk tapping into your retirement. Or worse yet, have something happen and be forced to pay back the 401K loan or take a huge penalty say you lost your job. PMI is also tiered based on your LTV, so see where the tiers are and try to get under a more favorable LTV percentage to save money on the PMI without straining your savings.
I've used 401k loans many times and I would certainly 'borrow' (not take) from my Roth in order to avoid PMI. You could even immediately take the money saved in monthly cashflow and being paying them back. If you have a reasonably steady job, a 401k loan is an ideal way to get quick cash. They'll ask for documentation but there is zero hassle with the loan since it doesn't show up as a debt. You just have more cash at closing.

PMI can be difficult to remove and certain loans do not even allow it (eg. newer FHA loans.) Someone threw out the idea of an 80-10-10 loan, I think that's another great solution. Anything to NOT have PMI!

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Re: Mortgage APR 4.96% - too high?

Post by JGoneRiding » Thu Mar 23, 2017 11:14 pm

miketheboglehead wrote:PMI was a deal breaker for us so we waited until we had 20% for a down payment. Particularly because you cannot shed PMI anymore when you obtain 20% equity. Everyone's priorities differ.

If your mind is made up, one option we considered was paying a bit higher rate for 'lender paid' PMI. It was termed a first time homebuyer option at a local credit union, aimed at competing with FHA options.

If you buy with less than 20% down, the only way to get rid of PMI that I know of would be a refinance (more fees, current interest rates...). I believe the 20% equity rule for PmI changed about 4 to 5 yrs ago.
This really depends on your lender. As long as not an FHA loan they will always remove it at some point if they are trying to conform with fannie/fredie which most are.

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