Challenging Conventional Wisdom
Always put 20% down if you have it, always pick the lowest interest rate,…..
Ah, conventional wisdom. Ideas that are so widely accepted that they go unquestioned. It’s amazing how often conventional wisdom is actually not wise. This is especially true in home financing, where old tired ideas continue to be pervasive in the way consumers think. The area where this is most obvious is when considering how much money a home buyer needs to put down to get the best mortgage.
Most lenders out there have tunnel vision. When doing what they think is best for their client their only consideration is, “how can I get them the lowest rate” when they should actually be concerned with how to put them in the best overall financial situation. Often the loan program with the lowest interest rate is the best option for the client but for many others programs that offer more flexibility are better options. The other piece of conventional wisdom I like to challenge is the idea that you should put 20% down if you can to avoid mortgage insurance. Below you’ll find 2 examples:
1. An acquaintance of mine was working with an online lender. She was having some issues and asked for my advice. (Aside from you should have called me in the first place) She was a first time buyer, had an extremely high credit score, not a lot of money to put down and irregular income. The online lender had her in an FHA loan. I advised her that a Home Ready loan might work better for her because it required a lower down payment (3% vs 3.5%) and at her credit score the price for the monthly mortgage insurance would be lower. In addition to that the MI on the Home Ready is automatically removed 8 years or so into the loan, whereas the FHA loan it remains for the life of the loan. When she questioned the online lender his response was that Home Ready is FHA! It’s not, it’s a Fannie Mae product. When she pointed that out he responded that the rate on the FHA program was lower. So even though the overall cost of the loan for FHA was higher, his argument was for the lower interest rate. Let’s just say the rest of the loan process with the online lender went as well as expected. That’s one example where conventional wisdom should be ignored.
2. A recent client had sold a home a few months back and was living with family. When he found the home he wanted to purchase he wanted to put 20% down, which was all of the money he had in the bank. Past lenders that he worked with led him to believe that you should avoid mortgage insurance at all costs. My view is always that if you can leave some money in the bank after closing you should. So I showed him an option of putting 15% down with lender paid mortgage insurance. Sometimes with LPMI you see a little higher interest rate but that is because it’s more often used for those putting down 5 to 10%. I’ll fill you in on a little secret, banks and investors like having a little bit of MI on a loan, so quite often you’ll actually get a better interest rate with 15% down than you will with 20%. In his case doing the Lender Paid MI left the rate exactly the same as if he were to put 20-25% down. The bottom line is he got to keep $22,000 in his pocket and the mortgage payment increased by less than $100 per month. Had he put the full 20% down he’d have been in a new home with $0 in the bank.
That’s just two recent examples I can site where conventional mortgage wisdom proved incorrect. There are countless others, so be sure that whoever you are working with has the tools and the patience to present you with more than just one option and is willing to take the time to explain the pros and cons of each. Adhering to conventional wisdom could potentially cost you thousands of dollars.
Mike Tizzano NMLS #1015837
Sr. Loan Officer- The Tizzano Team @ Fairway Independent Mortgage Corporation