Mortgage Myth Busters: Comparing FHA loans & Conventional loans with 10 & 3.5 percent down – Part 2 of 2 – Cash is King

Comparing FHA loans & Conventional loans with 10 & 3.5 percent down – Part 2 of 2 – Cash is King

 

How many of you like to have money left over after making a major purchase? I would think many of us would say yes to this. There are some mortgage experts that tell you to put 20 percent down or that you should pay off your mortgage as soon as possible. I will tend to disagree with this. In my opinion, “Cash is king” … I think we can agree on this statement, right? In my comparison between FHA loans and conventional loans, I showed that even with 10 percent down and a 699 credit score, that FHA loans were slightly cheaper. (you can read about this in the link at the bottom – Part 1)

In my next example, I want to show you the difference with the FHA mandatory requirement of 3.5 percent down and compare it to 10 percent down. As many of you know, I am a firm believer in keeping the money in your pocket, even if you have the down payment.  Again, some will tell you to put more down. Unless you have lots of money saved as a backup, why strap yourself. You can’t predict emergencies, it’s just a fact.

 

Comparing FHA loans with 10 percent & 3.5 percent down

In the chart above, you can see that your mortgage payment only increases $107 per month if you put less down, yet you put $16,250 back into your bank account. The logical sense here is to have more money left over for emergencies, such as :

  • Medical emergencies
  • Home repairs to include repairing the roof, air conditioner, plumbing, or electrical
  • Loss of job or reduced work hours

 

 

I want to show you if you pay 1 extra point to lower the interest rate.

showing if you pay one extra point on a fha loan

As you can see in the chart above, you could pay a point to lower your monthly payment and still keep plenty of cash in your pocket.  You can also write off a portion of your points, depending on your income tax bracket. If you were in the 30% tax bracket, you would get to write off an additional $730. Please speak to a professional tax accountant or CPA.

 

 

Summary : I just think people need to have a plan, have goals, and a real budget. There are to many out there getting you to buy into the fact that you must pay your home off as soon as possible.  Some of these so-called well-known people have you pay for courses, showing you how to use your money and or pay down your mortgages, acting like it’s the best for you. Keeping in mind that you need to have goals to make these decisions. But in my opinion, available cash is king. You can’t walk up to your house and demand to get your money back at that split moment.

 

Reminder : The conventional pricing hits will change for the worst effective April 1st, 2011. Pricing hits for conventional loans in April 2011

And many lenders/investors are making this change now and not on April 1st.

 

 

 

 

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For more information on FHA loans, please go to this link. The FHA Expert

For important mortgage insight to watch for, please read : Consumers need to be aware of these Red Flags!

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For information about FHA myths & FHA rumors, please read : FHA Myths & Rumors

 

Copyright © 2011 by Jeff Belonger of Infinity Home Mortgage Company, Inc

Comment balloon 9 commentsJeff Belonger • February 05 2011 09:15AM

Comments

Jeff - I love this comparison posts between the various programs.  I agree that cash is king.  At the end of the day, it comes down to the purchasor.  Some folks like to have equity in their home and if they have it, then why not.  But if it is all the money you have, it totally makes sense to go with the 3.5 percent down and save money for emergencies and so forth, that is why it so important to have a a professional mortgage person to go over all the options.  Great post !  ~ Chris

Posted by The Somers Team, Delivering Real Estate Happiness (The Somers Team at KW Philadelphia) almost 10 years ago

Great post in comparing the difference Jeff. Some clients due to media or whatever always think they should put down more money. But as you stated you never know when an emergency is going to come up. Although the montly savings are nice if you can afford the payment why not keep the extra 13k instead of the extra 1200/year.

Posted by Andres Munar, Experience The Difference (Keystone Alliance Mortgage ) almost 10 years ago

What I most appreciate is that you are willing to do the work to show people the difference between their options. You do a wonderful job educating consumers.

Posted by Leslie Ebersole, I help brokers build businesses they love. (Swanepoel T3 Group) almost 10 years ago

Jeff - I respect and admire your professionalism.  Great job at showcasing the reasons to plan and budget instead of just "buying a home".  I have never believed it is a good idea to pay off your home.  never!  Besides the reasons you have already stated I have a few more:  If your home is paid off you better carry every type of insurance know to man.  Sink hole, earthquake, flood etc.  If all of your nest egg is in your home and you aren't covered for the unexpected you lose it all!  Not to mention my money grows faster invested.  After taxes my effective rate may be 3.5% so paying off my home saves me 3.5%.  Whereas investing at 6,7 or 8% return IMO is more beneficial and I can get to the money immediately if I need it.

Posted by Nevin Williams, Senior Mortgage Advisor (Fairway Independent Mortgage Corporation) almost 10 years ago

It is always good to have a cash reserve, unfortunately so many younger buyers do not have the cash in the first place, but like the various examples, really let's buyers see the differences that the different options create.

Posted by Nick Vandekar, 610-203-4543, Tredyffrin Easttown Realtor, Philly Main Line (Long & Foster Real Estate Inc 610-225-7400) almost 10 years ago

 

CHRIS... . I actually love doing these kinds of comparisons, because it also re-enforces what I think and talk about. And it's easy to point the consumer to these kinds of posts, so they can understand and make a decision.. and not just based on words or thought out opinions. And thanks for the polite compliment.

ANDRES... . it's great to get a viewpoint of another loan officer when talking about this topic... and not just because you seem to agree with me.  ;o)  And yes, it's the media or those loan officers that are in the news often as experts that preach certain ways and or methods.. yet they don't break it down like this.. and wait, those same people have books published, but only show one way... hhhmmm.. thanks for the compliment

LESLIE... . As I mentioned to Chris above, I love doing these kinds of comparisons... and I think consumers need to actually see their options and not just because the loan officer said so... and thanks for the kind words and for the compliment.

 

Posted by Jeff Belonger, The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans ( Social Media - Infinity Home Mortgage Company, Inc) almost 10 years ago

 

NEVIN... . you bring up some other excellent points that I really don't get into, because if they understand the basics mentioned above, the rest is just a prize for them per se.. a gift.  I do have a post in mind to go into more detail, as you mentioned.. but they are just so boring.. lol  Definitely the return on your money is important.. as you stated, you can make more money with the money that you saved than putting it into your home. I just brought that part up to a buyer last night.. and who has a $8,000 credit card with a $165 a month payment.. and I said, I am saving you $6,000 on your down payment by putting less down.. take that and pay off your credit card... overall, there are so many ways to look at this..  Example : Dave Ramsey... I don't like his methods or style... and swears that you need to pay off your house as soon as.. shows methods... and people think he is a god at this... and follows him religiously...  but I coulod point negative reasons why this is bad... Anyhoo, don't get me started.. thanks for the kind words..

NICK.. . we definitely agree on the fact that it's always good to have cash reserves.. and yes, many don't have much to begin with... I will be writing about this soon... and I think it's up to the loan officers to make buyers aware of this... thanks

 

Posted by Jeff Belonger, The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans ( Social Media - Infinity Home Mortgage Company, Inc) almost 10 years ago

Dave Ramsey filed Bankruptcy many years ago.  Now he is too conservative.  Susy Ormand and a couple of other radio/tv personalitites have a cookie cutter approaxh to their "advice" that one size fits all.  Personally I think they are all a bunch of has beens and their advice only pertains to people who can't save money.

I have shared my reasons in great detail along with a retirement plan to financial planners, Chartered financial consultants and the like. All of themn agreed with me and 2 changed their positions on believeing paying off a home was best  after hearing what I had to say.  You get it as do I but many don't even many LO's!

Posted by Nevin Williams, Senior Mortgage Advisor (Fairway Independent Mortgage Corporation) almost 10 years ago
Again Jeff I like seeing the comparison charts to see the differences...great presentation for buyers.
Posted by Ginny Gorman, Homes for Sale in Southern RI and beyond (RI Real Estate Services ~ 401-529-7849~ RI Waterfront Real Estate) almost 10 years ago

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