As Fannie
Mae and Freddie
Mac must continue to increase homeownership, buy more loans
and overall have a big, fat, happy life, they need to find other
people to make loans to, right? If the current homeownership
rate is hovering near, give or take, 68 percent, then what about
the other 32 percent who don't yet have homes? Well, maybe they
don't have enough money for a downpayment while at the same time
their credit is not so good. For these folks, it might not be
their best choice to grab a conventional loan. It might be
better to go sub-prime.
Few may know it but some of the better interest rates
available through "alternative" or
"sub-prime" lenders can be just as competitive as
those found in the conventional environment. Both loan officers
and borrowers sometimes hear the word "sub-prime" and
immediately conjure up pictures of fire-breathing dragons and
interest rates in the high twenties. Not so. In fact, a little
homework can show that often a sub-prime loan needs to be
considered shoulder-to-shoulder. I'll give you a couple of
examples.
The first is a couple with good credit and scores above 720.
A conventional loan is an automatic, right? Maybe not. A
conventional rate quote on a 30-year fixed-rate mortgage with
zero money down can be found for around 5.75 percent by most
lenders who offer such a product. That's not the best interest
rate available, but it's competitive for 100 percent financing.
On a $200,000 mortgage loan at 5.75 percent interest the
principal and interest payment is $1,167. At the same time an
alternate lender might offer a zero-money-down loan at a higher
rate, say seven percent. That makes the principal and interest
payment $1,330 -- $163 higher than a conventional quote. But
hold your horses. Conventional loans still require a mortgage
insurance payment for all loans with less than 20 percent in
equity. And for zero-money-down loans, that premium is much
higher than for loans with 5 or 10 percent down.
A mortgage insurance payment on a $200,000 no-money-down loan
can be around $165. If you add that $165 to the principal and
interest payment of $1,167, your total payment comes to $1,332.
Nearly identical but the big difference is that mortgage
insurance is not a tax-deductible item whereas mortgage interest
is. One huge caveat: most sub-prime loans carry a two- or
three-year prepayment penalty, but really, with little or no
money down who refinances after two or three years, anyway?
Let's take this one step further. Let's say the couple has
damaged credit, maybe a score of 600 instead of 720. Most
conventional fare for zero down requires good credit, and even
if the conventional loan did have an interest rate to compare
with sub-prime, the borrowers wouldn't get approved. Using that
same scenario with no money down but with a credit score of 600,
the rate on the sub-prime loan rises another 1.25 percent to
8.25 percent. The new payment is now $1,502 -- higher than both
the 5.75 percent rate with private mortgage insurance and the
7.0 percent sub-prime rate, but really not that much more.
If you find yourself wanting to buy a home with no money
down, don't fret; there are choices available to you. You need
to give sub-prime and alternative lending a shot.
Published: February 27, 2004
