These 5 mortgage options can help you purchase your first home, pull cash out from your current mortgage, and save you money in the long run.
When buying a home, most people need the assistance of a mortgage lender. The buyer provides a down payment, and the lender provides the rest of the purchase price at closing. Different mortgage programs offer unique benefits and advantages depending on each homebuyer’s circumstances.
These are five lesser-known options that our buyers regularly take advantage of.
1. DPA Programs
As mentioned earlier, a seller receives money from two sources at closing: the buyer and the lender. The buyer’s portion of the purchase price that they pay at closing is known as the down payment. The more money a buyer can put towards a down payment, the less money they will have to borrow - and the less they will have to pay in interest when paying back the loan.
Some buyers may be able to take advantage of down payment assistance (DPA) programs offered by city, county, and state government agencies. These programs help prospective homebuyers who might not be able to afford the down payment for a residential property. They provide buyers with anywhere between three and six percent of the total purchase price. The funds can go towards the down payment or the closing costs.
Eligibility for DPA programs may depend on factors like income, credit score, debt-to-income ratio (DTI), and geographic location. The purpose of these programs is to help people who might not otherwise be able to afford a home, so most programs set an upper limit of income.
» READ MORE: Six Examples of DPA Programs (Including Grants)!
2. Paying for Points before Closing
Most mortgage lenders let buyers reduce the interest rate on their loan with “mortgage points.” These are fees paid to the lender before closing. Each point costs one percent of the total mortgage amount.
For every point you pay, your interest rate reduces. The amount by which it is reduced will vary according to many factors. But the reduction in interest will bring significant savings if you pay off the loan over the course of thirty years.
The main factor to consider with mortgage points is how long it will take for the savings on interest to exceed the cost of the points. The amount of time it will take to recoup the points is known as the break-even period. An experienced mortgage advisor will help you calculate whether buying points is worth it for you.
Mortgage points offer a quick, simple way to reduce the interest rate on a loan. Refinancing is the only widely available method for getting a lower interest rate after closing.
3. Cash-out Refinance
Refinancing a mortgage allows you to pay off your old mortgage with a new mortgage loan. Homeowners often do this to take advantage of lower interest rates.
A cash-out refinance allows homeowners to take out money from the current equity they already have. A homeowner with a home worth $400,000 with $300,000 remaining on their mortgage balance would have $100,000 in equity. The $100,000 in equity is the portion they would pull the cash out from.
You can use this cash for anything you want. However, this will set back your progress on paying off the loan. Eligibility for a cash-out refinance may depend on credit score and DTI, as well as the amount of the homeowner’s equity in the home.
4. Renovation Loan
A program offered through the Federal Housing Administration (FHA) allows eligible homebuyers to borrow money for renovations at the same time they are borrowing money to buy a home. It’s convenient and may offer better terms compared to getting a separate loan from another company in addition to your mortgage.
The FHA 203(k) program is one example. It allows renovation costs to be added to the purchase of their home, subject to certain rules.
The Homestyle Renovation program is another example. It’s attached to conventional loan purchases. The restrictions for this program are looser than the FHA’s.
The renovation money goes into an escrow account at closing. It is disbursed to cover the costs of renovations.
5. First-time Homebuyer Programs
Programs offered by state and federal government agencies and private lenders are available to help eligible individuals purchase their first homes. The FHA, for example, only requires a down payment for first-time buyers of 3.5 percent of the sales price.
The Texas State Affordable Housing Corporation, a nonprofit organization with a board appointed by the governor, offers assistance with down payments and mortgage interest rates.
Using “First-time” Homebuyer Programs Multiple Times
An interesting feature of many of these programs is that “first-time homebuyer” does not always have the meaning you might expect. Rather than someone who has never purchased a home before, it can mean someone who has not owned a home within a certain amount of time. Even FHA loans can be used multiple times if you meet certain conditions.
You may be able to reuse Freddie Mac’s Home One Mortgage program as soon as three years after your most recent purchase. A homebuyer who last owned a home in 2018 could be considered a “first-time homebuyer” under this program in 2021.
Which option would work for you?
Whether you’re a first-time homebuyer or a seasoned purchaser, the Wood Group of Fairway can identify your best loan options. Get started on your free pre-approval now!