My first suggestion is to consult with a mortgage broker who is a professional in their field. You want someone who is going to advise you of all your options and also solve some of the problems you may encounter in your home financing situation.
This person, if they are honest, will not: hide anything from you, work for you all the while considering your best interest (no pun intended) in order to get you the best rate possible.
I can share a story of a friend who recently purchased a home a few months ago and the struggles he went through to the find the right mortgage broker and financing options.
For the sake of this story, as well as to protect privacy, my friends name is John. John is a hard working young man who lives in Staten Island, New York. John was renting an apartment with his significant other prior to looking for a prospective home to purchase.
Between him and his significant other they both had a good income and savings but always were put off at the thought of buying a home due to their friends and family members always stating, the minimum they needed to put down was 20% to purchase a home. Also, coupled with the fact interest rates have more than doubled since January of 2022 to July 2022, John and his significant other were concerned and anxious about the home buying process; specifically the financing side.
Regardless of all of this, John and his significant other were tired of renting. They rented a one bedroom apartment for 2 years at $1500 per month, which they had no equity in, their landlord never wanted to fix any problems in their apartment, they were outgrowing the apartment between the two of them, and they were even considering having a child-they were putting off the inevitable- they had to move. This is July of 2022 and they wanted to be out of their apartment and purchase a home by August of 2022 the latest which proved to be a feat in a hot real estate market.
They started working with an agent in July to start identifying and showing them homes within their desired budget, specific location (based off what was close to their family,) as well as the amenities they wanted (3 bedroom, 1-2 bathroom, detached home.)
Their agent showed them 3-5 homes in July, and they were set on purchasing the home of their dreams. They weren’t sure about the financing side of things and didn’t know where to turn, so they consulted with their parents as many new homebuyers do; instead of the professionals. This proved to be a mistake- but we will get to that part.
John’s parents advised him to reach out to their Friend Salvatore who was a mortgage broker. Salvatore consulted with John and his significant other regarding their financing options. He mentioned they could do a conventional loan through a bank or a FHA loan as they were first time home buyers.
Salvatore told them if they decide to go conventional on the purchase price of the home at $700,000: they could put down 5% of the purchase price ($35,000), they would have to pay PMI (mortgage insurance at a bit over $200 per month) considering they didn’t put 20% down, the taxes and insurance on the property would be around $700 per month, and the principal and interest would be around $4300 per month. Total expense between principal, interest, taxes, and insurance, and PMI was right around $5200 per month. Their mortgage broker quoted them a rate of 6.75% on a conventional loan.
Salvatore also gave them the option to go FHA, however, the PMI or MIP in this case, was much more expensive which drove up the monthly expenses even further. John and his significant other figured with the conventional loan they were already stretching their budget and they didn’t have the extra funds to pay nearly triple the price for PMI or MIP due to putting a small down payment on the home.
They decided to go the conventional route, locked their rate at 6.75%, and started the process with their mortgage broker Salvatore.
In the interim period, John told his friend he was buying a home who was a professional real estate agent. The agent inquired about the rate, to which John obliged, and they exclaimed, “6.75%?!” After his friend, the agent, provided him with their few recommendations for mortgage brokers. John reached out to a few of them and settled on one of them who was: very professional, helped him ease his concerns, and wound up saving him a whole lot of money.
After consulting with Jacob, the aforementioned mortgage broker, he provided John with options the other broker didn’t all the while using the same type of loan that worked for John and his significant other (30 year fixed rate conventional loan with 5 percent of purchase price down.)
Jacob started with stating, the quote of 6.65% was nearly 1 percent higher than what he should have been paying considering the current market for interest rates. In the mortgage industry, their is something called, a yield spread, which is the difference between the going mortgage rate and the extra interest charged; the mortgage broker makes extra comission if they can get their client to pay over the current market interest rate- in this case 5.65%. The mortgage broker Salvatore wasn’t working in John and his significant others best interest!
Over the term of the loan, using a 30 year fixed rate conventional mortgage; John and his significant other were expected to save $250,000 in interest. What a relief! Furthermore, Jacob stated if John was able to come up with more money towards the down payment he could get him the lowest possible rate. Lastly, the previous broker did not advise John to remove his significant other off the application as her credit was not as high as John’s and this caused their rate to be affected as banks look at the party with the lowest credit score. Just a few simple suggestions made a world of difference in their financing experience.
So John, took the advice of Jacob, he came up with the extra money, he took his significant other off the mortgage application and just put his name on there and as a result he lowered his rate from 6.75% to 5.65% a very competitive rate in the market as of July 2022! In turn, their payment went from more than $5200 per month to $4500 per month (all in- principal, interest, taxes, insurance, and PMI.)
John and his significant other were elated and even had some extra money to put towards the savings they needed to start their new family.
This story goes to show that, you don’t need to put 20% down to purchase a home, you should always consult with multiple mortgage brokers prior to purchasing a home to compare rates, use your best judgement when deciding what mortgage broker to go with, and perhaps consult with an agent; they are constantly involved in the field and for the most part have a general idea as to where the mortgage rates are.
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