In my recent blog post Are you really prepared to buy (and finance) a house?, we discussed all the major factors that make up the home financing process and that are important for you to know so that you are adequately prepared and experience a smoother process than most. Having your ducks in a row when it comes to financing a home is extremely important because you will be potentially impacting both your near term and long term financial health. As we brought up, you need to make sure that you are adequately prepared to fit the new payment as well as any potential increases for taxes/insurance into your budget without relying on the lender to tell you how much you should be comfortable with. From a cost perspective, having your ducks in a row is so vital because it can be the difference in spending thousands of dollars less than you would otherwise. This includes differences in closing costs, points, other fees, and interest. Consider the below example, where a $200K home is purchased on a traditional 30-year note, financing $190K, at slightly different interest rates to reflect two people with different credit scores:
Person A Person B
Credit Score 740 700
Interest Rate 4.0% 4.25%
P&I Payment $907.09 $934.69
Total Interest Due: $136,552.06 $146,486.89
Check out the difference in interest paid over 30 years. Person A spends around $10,000 less!
Imagine going shopping for a shiny, new, must have widget and because you weren’t willing to wait for it to go on sale, you spend $10K more. Doesn’t that sound asinine? Wait for this one- That $10K invested at 8% for 30 years becomes $100K! That’s exactly what we are facing here from a 0.25% difference in interest rate alone, not even including the likelihood of higher costs paid in the form of points. Now you might be saying “Yea, but the average American lives in their home 7 years or less, not the full length of a 30-year mortgage.” This may be true, but when the homeowner sells the home, what does he or she go do? They go buy another home. And what if they are to repeat this process every several years? They end up paying all that extra interest and then some.
You see, the interest paid over time on a mortgage is a whopping ton. My wife and I got a great deal on our most recent home purchase. In a hot seller’s market, we got the house for below value and financed at a below market rate in the 3’s, with no PMI, down payment, or closing costs. But even still, if we took all 30 years to pay off our mortgage, we would end up paying $106,478.34 in interest alone! Being the penny pincher that I am, these numbers absolutely disgust me. I want to keep that money, not give it to the bank!! Now, that would be cut down drastically to $49,638.15 had we gone with at 15 year mortgage (same interest rate). This would ideally be the term you would want to go with for those that are making an income that far exceeds the mortgage payment and the rest of your expenses. But I know for most folks this is tougher, and a budget strainer. My recommendation for most is to go with the 30 year (especially in a still relatively low interest rate environment) for flexibility, and add more to your payments to pay it off in 15 or sooner, thus saving interest (Just make sure there aren’t any pre-payment penalties). For us, because our current rate of return on some of our investment projects supersede our lower mortgage rate, we keep those funds growing in investments rather than paying off the mortgage completely.
Money Nate’s Mortgage Amortization Calculator
MORTGAGE AMORT APPS-
(WRITING)
Where to get the best deal
So you can see why good credit matters and getting a good deal ALSO matters. I take it you are going to do your part and work on the credit aspect (if need be) to give yourself the upper hand. J Because we’re a team, I am now going to share with you the absolute best deals in America, why I believe they are the best, and each of their pros and cons. As a homeowner and longtime MLO who’s worked with and researched many of the major lenders and brokerages, these are the best deals I’ve EVER seen:
- NACA (primary home only)
The Neighborhood Assistance Corporation of America (NACA) is a non-profit homeownership organization that is dedicated to delivering the dream of homeownership to working class (low and moderate income) people, and is by far the best deal in existence today. I financed my home through NACA, and if I ever considered financing another home again, this would be who I’d choose in my sleep. My friends who have been in the mortgage business their whole lives are blown away and still do not believe me when I share with them the financing that I obtained and how much money I saved.
The lowdown-
Pros: NACA provides far better terms than even the top-tier individual would receive in the prime market. Anyone that is approved for a NACA mortgage can finance their home at 100% without a down payment, no PMI (Private Mortgage Insurance), no closing costs, no fees (except for a $25-$30 membership fee), no perfect credit required, and at a below market rate that no other company or lender can offer you without paying points. If you even fall below certain income thresholds, they give you the option to buy your interest rate down… to as low as 0.125%. Sound too good to be true? It’s not, I’m living proof.
Cons: You must attend several seminars and go through their home counseling program, which can take several months or longer. Having my ducks in a row and being familiar with what documentation to have prepared and ready to go allowed me to be fully approved within 6 weeks. They have their own process for making sure that a buyer is educated and financially ready to purchase a home. They are going to verify your information like any other lender and even though there is no credit score requirement, NACA can be slightly stricter than others out there on certain items that might seem nitpicky like showing that you can save X number of dollars for 3+ months and requiring your credit report to reflect that you’re current on your debts and bills. They do also have certain purchase price limitations since they are trying to focus more on serving a particular economic class. This is based off your income and area of purchase. From what I can recall the max purchase price for where I purchased here in Texas was around $266K. If you live in a higher priced area or need a larger loan or even a jumbo loan, this obviously won’t work too well. Consider SoFi and Quicken, which after NACA are my 2nd and 3rd favorite choices. One other pain point is that NACA’s HAND (Home and Neighborhood Development) department which addresses repair, rehab, and inspection concerns can be quite sticklers. This is likely only an issue if you’re buying an older home (we had to go back to the sellers and negotiate repairs so that we met compliance with HAND standards). I would also imagine that your experience may also depend on how far the nearest office is in relation to your target area, and how backlogged their loan officers are. All in all, in my opinion the temporary hoops you jump through are worth it- once you close, you’ve got a deal of a lifetime.
- SoFi (primary and second homes)
SoFi (Social Finance) is a new age, online financial services firm that offers a number of loan financing options, insurance, and wealth management services. I am extremely impressed with the quality and competitiveness of many of the services that they provide, especially their mortgages. While SoFi doesn’t yet have the name recognition that a large, mortgage only lender like Quicken has, they do offer more unique, money saving products and therefore I’d expect them to gain a lot more notoriety and be a major player in the not too distant future.
The lowdown-
Pros: I am a huge SoFi fan. It is the 2nd best deal I’ve ever seen. And even though there are areas where NACA takes the cake, there are just as many areas where SoFi is stronger than NACA. For starters, SoFi offers conventional financing well into the jumbo territory (up to $3 million), allowing them to potentially serve higher market areas that many lenders don’t reach. Their loans require down payments that begin at 10%, which is a huge benefit to those financing large amounts because most lenders that even do jumbo financing ($417K and above) require a 20-30% minimum down. Like NACA, none of SoFi’s loans have PMI, and there are also no lender fees charged whatsoever. You will just need to pay your standard non-lender closing fees like the home appraisal, title fees, etc. SoFi takes a non-traditional approach to looking at your credit (somewhat like NACA), looking more at things like your disposable income to potentially qualify you for more home. Just be wary though, as we preach here at The Money Grove, not to rely on a lender to tell you how much you can actually comfortably afford. Like Quicken, SoFi’s cutting edge, streamlined mortgage systems offer online easy, quick, and efficient mortgage qualifying and closing (unlike NACA’s grueling process). Their rates are very competitive, and they even offer rate discounts for current SoFi members that have other products with the company.
Cons: To me the biggest and only drawback to SoFi is their somewhat higher down payment requirement of 10%. This is primarily due to a lack of government financing options like FHA loans that Quicken and other large lenders have (And NACA’s anomaly, 100% financing loan). Do remember though, that most of these other lenders loans require PMI, and SoFi doesn’t! The down payment is your equity going into the home that you will see again, PMI is a waste for you as the consumer, money that you will NEVER see again. Also, most will likely meet this, but they do require a minimum financed amount of $100K. SoFi is not able to offer financing in all states, so make sure to check out their website for a complete list.
- Quicken Loans (primary, second, and investment homes)
Quicken Loans is an online only mortgage lender that leads the way in the virtual mortgage industry, charting new paths and ahead of the curve in both processes and technology. In fact, their digital Rocket Mortgage is part of a new breed of mortgage technologies that seeks to streamline the entire application process and make it as easy as buying a plane ticket.
The lowdown-
Pros: Quicken Loans is at the very top when it comes to convenience and ease of doing business. Allowing more and more individuals to complete the application entirely online and at their convenience, at any time of day is one of their greatest strengths. You can import most of your information into Quicken’s online portal, saving time and effort entering data. In addition, Quicken has phenomenal customer service, earning top satisfaction rankings year over year (since 2010) by J.D. Power. You can know how much you’ll qualify for within minutes, and the majority of customers seem to also experience quick closing times from contract to signing of 30 days or less. From an offering perspective, Quicken provides a full range of products and various terms on Conventional Loans, VA loans, FHA loans, and adjustable rate options. Even if you aren’t eligible for a VA loan, Quicken Loans has first time home buyer options allowing you to put down as little as 3%. My absolute favorite offering from Quicken is their YOURgage product. This is an awesome product that allows you to choose your own term based on your own personal budget- anywhere from 8 to 30 years. Most companies only offer fixed terms at 15 or 30 years.
Cons: Although Quicken has more mortgage options and far superior online services than many others out there, from a deal perspective, they really aren’t any better than most lenders. Closing costs and total fees paid aren’t high, but fall right in line with the industry standard. The same goes for the range of interest rates available. This should not be a surprise as most lenders offer fairly comparable rates. Also, unless you are able to put down 20%, you will have PMI on most loans. Through Quicken you may also potentially miss out on specific local market deals that sometimes a community bank or credit union might offer. In summary, don’t expect to save as much on your rate and fees as you would with NACA or SoFi, but do expect a much shorter, smoother, and more efficient process than NACA will provide.
While the best mortgage product for you will ultimately vary based on your own individual needs, the above options are again the best I’ve ever seen, saving you time, money, and helping you live a more abundant life, one step at a time.
“An investment in knowledge pays the best interest.” – Benjamin Franklin