To Pay or Not to Pay…that is the question

by Daniel E. Giroux, Owner, A-Plus Mortgage

Today’s mortgage market gives the borrower much more flexibility. The days of 20% down are a thing of the past. Today programs offer 100% financing for Veterans, first time home buyers, and on USDA loans, 96.5% financing for FHA buyers and 95-97% financing on conventional programs. The biggest question is, what you qualify for and how much should you put down when buying a property. Recently I had a client that was looking to purchase a $400,000 property. He had great co scores, money in the bank, great income, and wanted to put (20%) $80,000 dollars as a down payment. The client’s goal was to have a lower payment by putting as much money as he could down on this property. What the client did not know was he had options. He was under the impression that he needed to put 20% down. After a bit of conversation and research, it was discovered that the client had $35,000 in credit card debt that was costing him about $900 a month. We discussed the pros and cons of putting down a large down payment and the pros and cons of paying the credit card debt and putting less money down on the purchase.

1. Credit cards have much higher interest than a mortgage

2. Credit card interest is not tax deductable

3. The payments on $35,000 worth of credit card debt was $900 a month

Many clients believe that if they don’t put down 20% they will be required to pay mortgage insurance and will have a much higher rate. This is not the case. In today’s mortgage market we can offer great rates with less down and there is a program called Lender paid mortgage insurance that eliminates the borrowers needs to pay a monthly mortgage insurance premium. Every loan and every person’s situation are always different, but in this particular case here was the final result.

Client thought they wanted: $400,000 purchase with $80,000 down and $320,000 loan size. The principal and interest payment on a 30 year mortgage would have been $1528 plus the remaining credit card debt ($35000) at $900 per month leaving the borrower paying $2428 per month.

The client decided to go with: $400,000 purchase price with $40,000 down and a $360,000 loan size. The principal and interest on a 30 year mortgage payment is $1771, the credit cards are paid off and the client still has $5000 left from the $80,000 to buy new furniture for his new home.

In this case, the client saved $657 of monthly cash ow and kept $5000 in his pocket. If the client was to apply these saving directly back to the principal of their mortgage each month they would have their mortgage paid in full in less than 15 years.

My point in sharing this story is to show home buyers that you have options. Sometimes you need to step back, take a deep breath and explore those options before you jump in. Buying a home is more than a purchase price and a down payment. It’s an investment into your future.

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