Confused about buy down and monthly mortgage

Home Forums Purchase Program Confused about buy down and monthly mortgage

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  • #63114
    FutureHomeownercrew
    Participant

    Hi

    I’m very new to NACA and just left my intake session. I was told that I could get qualified for a monthly mortgage of $1393 with a purchase price of 235,000.

    But I’m confused because I thought according to the book i got from the workshop that a $1393 monthly mortgage could qualify for about 290,000 since the current rates are 3.75 with NACA.

    I asked my MC about putting money towards buy down to get the monthly mortgage lower and they said that putting money towards buy down would only increase my purchase price but do nothing towards the monthly mortgage amount. Is this true as well because I could have sworn the book says different. Please help.

    I’m getting a little discouraged because for one I would like a higher purchase price of about 330,000 honestly. And according to the book I got if I got an interest rate of 1% that could take it down to a monthly payment of $1061 but my MC is saying that a monthly mortgage approval of $1393 only gets me 235,000.

    So confused. Thanks in advance!

    #63116
    FutureHomeownercrew
    Participant

    Also if possible to achieve a purchase purchase price of 340,000 with monthly mortgage approval of 1393 how much would I need to put towards buy down to achieve that?

    #63117
    Nelsont
    Member

    So first of so first of all the workbook is only talking about the principle and interest part of your monthly payment. The taxes and insurance are not factored in because those are specific and unique to the actual house you buy. Insurance might run you 500 to 1000 per year and taxes might run you 3000 to 5000 per year. All told that will add 500 per month to your payment. So a mortgage of 1393 might actually cost 1800 per month. You weren’t approved for a mortgage of 1393 you were approved for a total payment of 1393. If you think that is wrong then maybe you debt? The most you can be approved for is 31% of your gross income. To buy a house at around 300k without using any buy down funds you would need to have an income of at least 75k.

    The only way you can increase your monthly payment amount is if you were not approved for 31% of your DTI and you are able to pay off your debt. By buying down the interest you make the affordability higher. So your 225k house can be 1200 per month because the interest part of the principle interest taxes and insurance was lowered by 200 per month. So that’s how you can buy a more expensive house. You bring the interest part of the total payment down to affordable levels. The higher you go though the more the taxes. So buying down the interest on a 235k house might cost you 10k to get 1.625% but 1.625% on a 340k house will cost 17k.

    As of right now you cannot take a 30 year loan below 1.625. If you are below 80% of the MSA income you get an extra half percent chopped off. Bank of America ran out of funds in August. Unless or until they negotiate a new program you probably cannot get to 1% unfortunately.

    #63121
    FutureHomeownercrew
    Participant

    Thank you so much. I think I am understanding more clearly now. So my gross income is 3900 monthly. So max monthly approval of 31% would be 1209 actually?

    So are you saying to get a purchase price of 340k from my current 235k I would need to put about 17k for buy down?

    #63122
    FutureHomeownercrew
    Participant

    Also, I am below 80% of the MSA income. So would that still only get me to the lowest of a 1.625 with maximizing my buy down? Or would I get an extra half percent chopped off? If I get the half percent chopped off would that take it down to 1.025%?

    Sorry I’m bad with math and just trying to understand. I appreciate your help.

    #63125
    Nelsont
    Member

    The buy down formula is as follows: You can lower the interest rate in 0.25% increments at the cost of 1% of the loan amount. A loan of 340K would cost you $3,400 for every 0.25% decrease in interest rate. Right now you can decrease the interest rate a maximum of 5 points (5 x 0.25 = 1.25% rate decrease) which would cost 3400 x 5 = 17000. You can get all or most of this by asking your seller to contribute which is very common and happens very regularly.

    The interest rate flucutates. Right now it is 3.375. Tomorrow it could be 3.8 the next day it could be 2.9. But being below 80% you automatically get the extra 0.5% decrease on top of the ability to buy down 1.25% for a total rate decrease of 1.75%. At today’s rate that means 1.625% is the absolute lowest you can get on a 30 year loan.

    #63127
    Peapod0609
    Member

    @FutureHomeownercrew I think your MC is confused or maybe worded that slightly weird, because buying down your interest rate absolutely does lower your monthly mortgage payment. However, that may be a moot point for you, as it sounds like you would have to buy down a bunch of interest to even get your payment to $1,393 with the purchase prices you’re talking about.

    As @Nelsont said it really depends on your taxes and home owners insurance. Your “mortgage” is just principle and interest, but your total payment (which also includes property taxes and home owners insurance) would be much higher.

    Without knowing where you are looking to buy, it’s hard to know the property taxes and insurance you’re looking at to give an accurate answer.

    • This reply was modified 1 year, 11 months ago by Peapod0609.
    #63133
    Nelsont
    Member

    I also think it’s worth noting to get a maximum payment of 1393 including taxes and insurance you are probably looking at a maximum loan value in the mid to high 200’s even with the buy down option. A 340k house with the maximum you can buy down will probably be in the 1500-2000/month range with 1200-1500 being principle and interest and the rest being taxes and insurance. Remember your 1393 is the total package which means you are looking at a maximum “mortgage” amount of maybe 900-1000 or so. Banks automatically include taxes and insurance on your martgage bill because they pay on your behalf and stick you with the bill. Normally you can elect to pay yourself if have $5000 in savings every year – the government does not take monthly payments – the bank puts your monthly tax payments into escrow and pays the government all at once when they get billed, but NACA I do not think allows you to do this and in fact most banks discourage it because you can get a lien on your house and have your house taken away from you AND THE BANK even if you have never missed a mortgage payment.

    Another note – I think you need to realize that if you were not going through NACA you would be be getting no lower than 4% interest and more likley 5-6% unless you have a 750 or 800 credit score. That will increase your monthly payment a couple hundred dollars and decrease what you can afford. You will also be required to pay a down payment and pay for closing costs and none of this will decrease your interest rate. You might also be required to pay private mortgage insurance which will add $100 to $200 to your mortgage payment.

    All of this is saying that if you do not go through NACA you will need a 6 figure income to afford most houses in the 340k range and your 1393 monthly payment will get a house in the 180-200k range. NACA is immediately benefiting you in that regard.

    #63144
    TTrumble
    Member

    Hello FutureHomeownercrew,

    Reducing your interest rate can either lower your monthly payment, increase your maximum purchase price, or a combination of the two.

    The big variable, as Nelsont noted, will be the taxes and insurance. With a monthly gross income of $3,900, your maximum possible payment is $1,209. ($3,900×31%)

    Backing out taxes and insurance is a bit of a guessing game, especially because tax rates fluctuate so wildly from area to area. Insurance rates do too, but not quite so much unless you are also required to buy flood insurance or have other high-risk factors. Determining exactly how much those are for the area in which you want to buy can be done in about two minutes online however.

    For this example though, we will use a fairly typical tax rate if 12 mils (12 cents per $100 of assessed value) and a pretty average insurance rate of $50 per month ($600 per year).

    Assuming you would be able to buy down the interest rate 1.25% (the five point maximum) and also qualify for the additional half-percent reduction from BOA, this would result in a maximum purchase price of $258,000 with $12,900 in buy down funds required and an interest rate of 1.625%.

    The only way to achieve a higher purchase amount would to be to increase income which in turn would raise the figure for the 31% cap.

    Tim Trumble
    Online Operations, NACA
    ttrumble@naca.com

    #63152
    FutureHomeownercrew
    Participant

    Thanks so much to you all. It’s all making much more sense to me now. And I agree Nelsont, I am seeing that NACA is offering me more options with the buy down option versus a conventional loan. I’m assuming if I decided to include a down payment that would help me with increasing purchase price correct?

    I know they aren’t required, but are down payments accepted through the NACA program? And will they make much of a difference in terms of the purchase price?

    #63155
    Peapod0609
    Member

    Yes, as Tim said above you can make a down payment to reduce the principal, especially if it helps with your affordability. Your contributions will go to interest rate buy-down first until you max out on that. After that, you can continue to reduce the principle.

    Keep in mind, though, of the terms you are using. Purchase price refers to how much the home costs, buy-down or down payments arent going to change that. If you buy a house for $250,000, the purchase price is $250,000. If you buy a house for $250,000 and put down $15,000 for interest buy down, the purchase price is still $250,000. Same if you reduce the principle, the purchase price is still $250,000, but you will be taking less of a loan out and financing less of that $250,000.

    It is important to use the right terms so you do not get confused! By purchase price did you mean monthly payment, maybe? That would be lowered by putting in buydown and principle reduction.

    • This reply was modified 1 year, 11 months ago by Peapod0609.
    #63160
    FutureHomeownercrew
    Participant

    Yes, I did get the terms confused there, thank you for clarifying. I just have a final question/example to make sure I’m getting it.

    So a house I’ve been looking at cost 310k. The property tax is 309 and home insurance is 109, which both equal to 418. With a qualified total monthly mortgage amount of 1383, that means that the monthly mortgage payment amount (the PITI) would need to be $965 right, since 965+418 equals the total monthly 1383 figure they gave me at the intake session.

    Looking at the chart a purchase price of 310k, I would need to buy down to .5 or so to not go above that $965 monthly mortgage payment, and since at the current time I can’t buy down that low, are there other options to achieve that?

    #63161
    Peapod0609
    Member

    As far as the PITI thing goes, yes you are understanding it correctly. You got all the math correct!

    As far as not being able to buy down that low you can continue to buy down the principle as well to lower your payment if you have enough savings to do so. Otherwise you will have to increase your income/reduce your debts to achieve a higher affordability. There’s no way around that, really.

    Or, try looking in other neighborhoods, as well. Prices vary a lot within an area sometimes.

    #63162
    Nelsont
    Member

    @FutureHomeownercrew The bottom line is you cannot go over your monthly approved payment. Using Tim’s example above with average insurance and tax information It would cost you $12900 in order to afford the largest loan you can possibly get with today’s rates. If you wanted to buy a house that costs more than 258k, say 275k, you would need at least $2750 x 5 = $13750 just to buy the interest down to the max and then an additional $17000 just to get the loan down from 275k to 258k. Keep in mind the house will probably have higher taxes which means it’s possible you would need a loan of much less than 258K maybe say 245k or 250k just to make your payment. Granted you can get your seller to contribute a significant portion but, you are looking at, when buying down to the max and also buying down principle, spending $30,000 or $40,000 or more even – cash – money that cannot come from a personal loan you took out just to cover. There’s also a break even point. You will be saving approximately $150/month buy buying down to the max versus having a loan at 3.375%. That’s $1800/year. That means it will take you a little over 7 years just to break even! You can do it. I did it and many of us on here did too. If you don’t plan on staying in your house for many years it might not be worth it. Just something to think about.

    • This reply was modified 1 year, 11 months ago by Nelsont.
    #63164
    FutureHomeownercrew
    Participant

    OK, I understand much better now. Thank you so so much @peapod0609 and @Nelsont

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