- Your mortgage options
Many new and existing homeowners do not have ample savings for a down payment on a home. Growing your wealth for a large purchase like a home is often not an easy task. An individual that is in a cycle of renting, or short on equity from the sale of his or her last home, can especially feel the pressure. When it comes time to make the purchase, an applicant with little to no down payment has a few mortgage products he or she can choose
For a homebuyer that is strapped for a down payment, an FHA loan may immediately come to mind. Creditors will typically administer a high ratio loan as long as the applicant obtains private mortgage insurance (PMI). But, due to the additional cost of PMI, loans kept above 80% loan-to-value (LTV) can become an expensive choice.
Luckily, that’s not the only choice for would-be homeowners. Another route is to take out two loans simultaneously, a first and second mortgage, to avoid paying PMI.
A borrower that keeps his or her first mortgage at 80% LTV, while putting the remainder of the balance into a second mortgage, could save a lot of money. Since the higher rate second mortgage only accounts for a small portion of the total borrowing, the overall interest rate doesn’t spike too much.
Finally, a jumbo loan can be an option for borrowers with a strong credit profile, that already have some money for a down payment. As a result of the tougher qualifying criteria, borrowers can generally obtain a blended rate mortgage with less difficulty.
When considering a blended rate mortgage, it’s vital to assess all the aspects of borrowing. That means looking carefully at the lending requirements, closing costs and interest rates being offered. It can also be beneficial to compare your blended rate to other loan products on the market to illustrate what is best for you.
- Blended rate mortgage compared to other loans
A blended rate mortgage is most easily compared to an FHA loan or a jumbo loan to illustrate its benefits and risks. There are subtle differences between each product. The blended rate mortgage uses two loans for one purchase, while an FHA mortgage is a flexible loan with PMI. By contrast, a jumbo loan provides a single rate for creditworthy applicants up to 90% LTV.
For the following examples, let's use a $250,000 home financed over a 30-year term.
Loan type LTV Interest rate PMI Monthly payment/td> Blended 100% 4.9% (4.5% blended with 6.5%) $0 $1,327 FHA 96.5% 4% Upfront $4,375 + yearly $2,125 $ 1,327 (PMI incl.) Jumbo 90% 4.4% $0 $1,127
Total interest Down payment Total cost of purchase $227,653 $0 $477,653 $173,206 $8,750 (3.5%) $490,845 $180,617 $25,000 (10%) $430,684
Based on the information in the table, it stands to reason that a jumbo loan would be the most cost-effective option. However, the jumbo loan also requires a substantial down payment. The product with the least initial impact on cash flow is the blended rate, which offers friendlier fees than an FHA loan but less protection in case of default. The price of insurance premiums for an FHA mortgage can make it a costly option to pursue. However, for homebuyers with a weaker credit profile, this may be the only option.
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- Using the calculator
The calculator is very straightforward to use. You’ll need to add some of your financing details to the system to generate the blended rate of two mortgage loans. You can use market averages or quotes that you already received from potential creditors. Let’s review this together.
Step 1: On the first line of the calculator, under financing needs, you can add the purchase price of the home.
Step 2: On line two, add the down payment you would like to use for the home purchase. Zeros can be factored in if you prefer not to make a prepayment.
Step 3: In the next section of the questionnaire, you should include your first mortgage offer. Begin by inputting the loan amount, and then the interest rate followed by the term length. If it is an interest only mortgage check off the box in the top right-hand corner.
Step 4: The final section, called loan two, will automatically fill in the remaining loan amount to complete your purchase. In this segment, you'll just have to add the interest rate on the loan and the term length on the second mortgage.
Step 5: Lastly, you can choose how you would like to view your report, whether monthly or annually.
Step 6: Proceed to your results.
- Your results
Once you have completed the questionnaire, you can view various prompts and graphs that model your blended rate mortgage. To the right of the inputs are three smart summaries of the information you provided. Be sure to verify this information before continuing to the integrated reports.
Directly below the inputs is the smart prompt of the rate on your blended mortgage. Since the first and second mortgage are weighted differently, the blended rate is usually not too many points higher than the first mortgage. For more detailed information, you can view the information in the following tabs:
The first tab, principal balances, outlines your loan payoff. You’ll notice that most of the interest is paid in the beginning years of your loan, while most of the principal gets paid off later. You can hold your mouse over any point of the line graph to get an exact reading of the outstanding loan balance at that time.
The second tab, amortization schedule, provides an itemized summary of all your required payments. Here you can get a clear indication of what portion of your payment is going towards principal and interest. You can also switch between annual and monthly reports in the questionnaire without restarting the calculator.
With this information, you should get an idea of how a blended rate mortgage will work for you. Interest rates may end up higher than a similar FHA loan, but you'll save a ton of money by avoiding PMI payments.