4/4/11 NOTE: FHA mortgage insurance premiums have changed since this was first published June 29th, 2009. Disregard the specific dollar amounts in the examples, the strategy is still as effective.
Down payment and closing cost assistance programs seem to be a rarity in today’s strict lending market. With the reinstatement of the CalHFA California Homebuyer Downpayment Assistance Program (CHDAP) earlier in June, 2009 – we now have some great opportunities to help first time homebuyers buy homes.
Although there are several ways to skin a cat (I apologize if i’ve offended any cat lovers here – insert “dog” if you wish) – I would like to talk about just one.
OK, here’s the scenario – You are going to use an FHA loan, you have the minimum 3.5% down payment saved up. Let’s look at the potential mortgage payment savings with a $300,000 purchase price.
For this scenario, we are going to assume that all closing costs come out to 3% of the sales price….and we have a 3% seller concession. The “closing costs” are a wash.
With an FHA loan, in exchange for only having to come in with a 3.5% down payment, there is an upfront Mortgage Insurance Premium (MIP) of 1.75% of the loan amount.
- Loan Amount with 3.5% Down: $289,500
- FHA Upfront MIP 1.75% of loan: $5,066.25
If you don’t have an extra $5,066.25 lying around to pay the MIP, you may add it to your loan amount. Your monthly payments are now based on this new “financed” loan amount of $294,566.25
- If you finance MIP – New Loan is : $294,566.25
For example purposes only – we’re going to call the interest rate 6% even. 30 year fixed rate mortgage. Let’s look at the payments on this new mortgage.
Also, for the purposes of this example, we are only going to look at the Principle & Interest payment (PI) – Taxes and insurance will vary depending on your community and do not affect the actual loan payment because you do not finance either of these expenses. Ok, back to our purchase…..
- Mortgage payment based on New Loan is: $1,766.07
Here’s where the CalHFA CHDAP program really triumphs as a money saving tool. CHDAP is a deferred payment junior loan. This means you do not make payments on this loan unless you sell or refinance the first mortgage. The interest rate on a CHDAP is about half of typical market rates. Here’s one way to use the CHDAP loan to lower your mortgage payment….
- CHDAP loan is 3% of PURCHASE PRICE: $9,000
- Use $5,066.25 of this to pay your FHA upfront MIP
- Use the remaining $3,933.75 toward your down payment
Let’s take a look at what you just did to your mortgage payment –
- Original loan Amount with 3.5% Down: $289,500
- You are no longer financing the upfront MIP
- Contribute another $3,933.75 to down payment
- Your new financed loan amount is: $285,566.25
Same loan, same financing as above when we determined the payment to be $1,766.07……..drum roll please…..
- Your New mortgage payment is $1,712.11
Hmmmm…..not sure if a drum roll was necessary to reduce your payment $53.96 a month?
Let’s take a closer look
- Your first year’s savings: $647.52 – That might be a car payment? A contribution to your child’s college fund? Not too shabby right?
- Your five year savings: $3,237.60 – Now we’re talking…can you say family vacation?
- Let’s look at life of loan: (30 years) $19,425.60 – If you channeled this into an investment account or applied it back toward the principle balance of your loan the benefit becomes too great to measure here.
This is just one way to use CHDAP to help you buy your first home. Talk to your loan specialist and have a discussion about the best way to use this program to meet your family’s specific buying goals.
CHDAP does not have to be used with FHA only. It can be used with any other financing that is approved through the California Finance Agency. Make sure your lender is qualified to offer CalHFA loan programs.
CHDAP is a special program offered by the State of California and has specific qualfying requirements that are difference from FHA or Fannie Mae first mortgages. An experienced lender will be able to explain the requirements for being eligible for this program.