When is a 4.75% Rate Less than 3.75%

When is 4.75% less than 3.75%?

As a Loan Officer, my job and obligation is to provide my clients with the best loan possible. Yesterday I met with a first time homebuyer who was referred by one of the Realtors I work with. He came to me after being pre-approved by one of the big four commercial banks. They pre-approved him for an 80% LTV 30-year fixed rate Conventional loan with a 3.75% interest rate. An excellent rate! An excellent loan! Is this the best loan for this first time buyer?

The purchase price is $285,000 and the loan amount will be $228,000. Based on a 3.75% rate, the principle and interest payment will be $1,055.90. After adding the county taxes and homeowner’s hazard insurance, I estimate the PITI payment will be $1.271.53.

Why would I recommend a program with a 4.75%  interest rate? After looking at the costs; I am convinced that the Nevada Housing Division “Home is Possible” 4% Non-Repayable Grant Conventional loan with a 4.75% interest rate combined with the Nevada Rural Housing Authority “Home at Last” Mortgage Tax Credit Program for first time buyers is a much less expensive loan. How can that be?  Based on a 4.75% rate, the principle and interest increases to $1,189.36 and the estimated PITI payment jumps to $1,404.99. At first glance, the savings with the 3.75% loan is $133.46 a month. If you were to keep the loan for 30 years the total savings would $48,045. No brainer, right?

3.75 or 4.75

But wait a minute; we aren’t talking about a normal Conventional loan. We’re talking about the Nevada Housing Division “Home is Possible” conventional loan with a 4% non-repayable grant combined with “Home at Last” mortgage tax credits.

In this example, the NHD “Home is Possible” non-repayable grant has a value of $9,120. After paying the fees associated with this loan and the cost of the mortgage tax credit program, the amount of money the buyer will have to come in with is about $5,960 less than with the 3.75% loan.

My proposal combines the NHD “Home is Possible” 4% Non-Repayable Grant Program with the NRHA “Home at Last’ tax credit program. “Home at Last” provides a dollar for dollar annual tax credit equal to the lesser of $2,000 or 40% of the annual interest. If the annual interest is $5,000 or more, the annual tax credit is $2,000 or $166.66 a month. Based on @ $228,000 loan amount, the first time home buyer will receive the maximum $2,000 tax credit for the first 21 years. It will take 23 years for the net monthly payment for the NHD “Home is Possible” 4.75% rate loan payment to be more than the payment for the loan with the 3.75% interest rate.

ferguson sumary

In this example, the credit will be 40% of the annual interest for the remaining 9 years. If the first time buyer were to keep the loan for the full 30 years, the tax credits would have a value of $51,598. You can calculate this yourself using any amortization calculator. The cost after 30 years is no longer $48,045 more than the loan with a 3.75%; in fact the net total payments after 30 years with the NHD “Home is Possible” 4.75% rate loan when combined with the “Home at Last” mortgage tax credits is actually $3,553 less.

The additional fees associated with the Nevada Housing Division “Home is Possible” 4% Non-Repayable Grant Program total $610 and the cost of the NRHA “Home at Last” Mortgage Tax Credit Program is 1% of the loan amount, plus a $175 processing fee. As a result; the cash required to close in this example is $5,961 less than with the 3.75% loan. The savings after combining the NHD “Home is Possible” 4% Non-Repayable Grant with the NRHA “Home at Last” Mortgage Tax Credit Program totals about $9,500 at the end of 30 years.

What if you don’t keep the loan 30 years? The NHD “Home is Possible” 4% Non-Repayable Grant saved you $5,961 at closing. In this example, the combined NHD “Home is Possible” 4% Non-Repayable Grant and NRHA “Home at Last” Mortgage Tax Credit Program will save you about $7,950 at the end of the first 5 years, $9,545 at the end of 10 years, $11,930 at the end of 15 years, and $13,920 at the end of 20 years. After the 23rd year your start to cut into the savings; but you still end up saving $9,500 keeping the loan for the full 30 years.

possible comparison

Based on a $228K loan amount, you will receive the maximum $2,000 a year or $166.66 a month tax credit for the first 21 years. After subtracting the $166.66 a month tax credit from the $1,189.36 principle and interest payment; the net monthly payment is $1,022.70. To match this net payment, your interest rate would be 3.49%.

When is a 4.75% less than a 3.75%? When you are a qualified first time buyer in Nevada, buying a home with the combined Nevada Housing Division “Home is Possible” 4% Non-Repayable Grant / Nevada Rural Housing Authority Mortgage Tax Credit Program. We all know 3.75% is less than 4.75%; yet at no time will the 3.75% loan cost you less than with the Nevada Housing Division “Home is Possible” 4% Non-Repayable Grant / Nevada Rural Housing Authority Mortgage Tax Credit Programs with the current 4.75% interest rate.

The “Home at Last” mortgage tax credit allows you to increase your take home pay in an amount equal to 1/12th of your annual tax credit without increasing your year end tax liability. With the NRHA “Home at Last” Mortgage Tax Credit Program, we are allowed to increase your qualifying income by as much as $2,000 a year or $166.66 a month. At today’s rates, this could increase you buying power by as much as $30,000. With the current shortage of inventory, this can make a huge difference when shopping for a suitable home.

State agencies are now offering programs similar to “Home is Possible” and ”Home at Last” in 14 states and the District of Columbia. The mission of the Nevada Housing Division and the Nevada Rural Housing Authority is “improving the life for Nevadans through affordable housing opportunities.” It is clear to me; that through these programs both agencies have met their mission. If you are a first time buyer and would like to learn more about these programs, or find out how much you will qualify for, call me at (775) 828-7006 or send an email to doug.kaller@academymortgage.com. My goal is “helping you realize the dream of owning your own home.”

 

Doug Kaller

Loan Officer

 

 Academy Mortgage

5250 South Virginia Suite 240

Reno, NV 89502

( D: (775) 828-7006 | C: (775) 250-4421

( F: (888) 449-7473 | O: (775) 825-4545

*doug.kaller@AcademyMortgage.com

www.AcademyMortgage.com/dougkaller

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