When a 4.625% fixed might be better than a 4.00% fixed rate

When a 4.625% fixed might be better than a 4.00% fixed rate


I was working with first time home buyers who said they wanted a 4.00% fixed rate CHFA loan. They are putting down 10% on a 250,000 purchase with a final loan amount of 225,000. This couple are in their early twenties, have no children – their long term plans are to have children and move to a larger house in 5 – 10 years. They want a fixed rate mortgage. They have excellent credit scores and about 40,000 saved for this purchase.

With CHFA there is mortgage insurance, which is an additional $207.00 per month. And the point to pay for the CHFA rate is 1% or $2,250.00. The monthly mortgage payment would be 1074.18 + 207.00 = 1218.18 per month.

A conventional 30 year fixed rate is 4.625% with 0 points for the rate. The one time mortgage insurance premium will be about 2% or 4,500. The monthly mortgage payment is 1156.82

In 5 years – which is the minimum time required to keep CHFA mortgage insurance on the loan, the Mortgage insurance payment = 12,420, The point for the rate is 2,250 and the total 5 year loan payments = 64,458.80- or a total paid in 5 years = 79,120.

With the conventional fixed rate loan, 4500 for the mortgage insurance and total 5 year loan payments = 69,409.20 + 4500 = 73,909.00.

Assume the CHFA mortgage insurance is eliminated at the end of year 5 – and the loan must be paid down, it cannot be eliminated with property value appreciation.

322,254 is the 25 year amount to pay off the CHFA loan.
347,046 is the 25 year amount to pay off the conventional loan.

The life of the CHAF loan cost = 401,374.
The life of the conventional loan cost = 420,955

Or a difference of $55.00 per month less for the CHFA loan for 30 years.

They now know the real numbers of the cost of a 4.00% fixed rate loan – and can make an informed decision when they chose their loan program. They may still opt for the CHFA. They may also take the cost of the CHFA loan and buy down the conventional mortgage to 4.250% - and save some real money on this purchase loan.

Having the lowest rate in the wrong program for a borrowers needs is just bad business, and my business is making sure the borrower has the right program for their long and short term borrowing needs.