$4,320 Down to Buy a $432,000 Home, Really? : San Mateo CA

Yes, only for California first-time home buyers! by Jed Thidbodeau, Bankers Preferred Mortgage

It gets even better with a below market interest rate on a 30 year fixed rate mortgage.

Thanks to the California Housing Financing Agency (Cal HFA), first-time home shoppers can finance the purchase of their home with just about the same amount of money needed for a security deposit and first month’s rent required to move into a rental home.

Cal HFA currently provides 1.0% down payment, below market interest rate financing along with a little closing cost assistance to help home buyers finance the purchase of their first home.  This program combines the Cal HFA FHA 30 year fixed rate mortgage currently (as of December 17, 2010) at 4.0% (APR 4.81%) with the California Homebuyer Down Payment Assistance Program (CHDAP) simple interest, silent mortgage at 3.25% (APR 3.25%).  The CHDAP loan amount cannot exceed 3.0% of the lessor of the purchase price or appraised value.  To take advantage of the low interest rates, the Cal HFA FHA and CHDAP programs must be used concurrently.  The numbers…

Down Payment & Loan Amount

The maximum loan amount for this program adheres to the national conforming loan limit of $417,000.  With this loan amount and the minimum down payment requirement, a $432,000 purchase price reaches just below the upper limit for use of this program.  Let’s look at some numbers based on a $432,000 purchase price.

Rate & Payment

The Federal Housing Administration (FHA) loan serves as the foundation for the Cal HFA program.  FHA loans require a minimum 3.5% down payment.  The CHDAP program allows up to 2.5% of the 3.0% maximum loan to be used for down payment assistance, which leaves a 1.0% down payment requirement for the first-time home buyer!  With this $432,000 purchase example, the down payment equals $4,320.  Additionally, the home buyer who negotiates their purchase contract such that the seller covers their closing costs can potentially purchase a $432,000 home for nothing more than $4,320 out of pocket.  That’s exciting!

Rate & Payment

As mentioned above, this first-time buyer loan boasts a below market interest rate of 4.0% (APR 4.81%).  Here’s how the monthly payment figures look for a $432,000 purchase…

Down payment & Loan Amts On the 1st mortgage, the principal component of the monthly payment actually equals $606.66!  The below market rate of 4.00% drives the principal reduction amount up to this level.  At over $600 principal balance reduction per month, the unpaid principal balance shrinks quickly.  This means that when the home owner sells their home the unpaid principal balance absorbs less of the sales proceeds, putting more money in the home seller’s pocket upon sale.

The CHDAP loan sometimes goes by the moniker of “silent second” in that the loan does not require monthly payments.  The loan becomes due in full upon either the end of the first mortgage 30 year term, upon transfer of title to the property securing the loans (e.g., sale of the property), or upon refinance of the 1st mortgage.  Terms of the CHDAP provide the borrower with the liberty to make payments without penalty at any time during the life of the loan.  Payments apply to reduce accrued interest first, then to reduce principal.

Interest on the CHDAP loan accrues via simple interest. The principal balance of this loan does not increase.  Without principal reduction payments the CHDAP loan in our example accrues $421.20 annually.  A monthly payment of $35.10 covers the accrued interest, leaving the principal balance undiminished.  Payment of $56.40 or $91.07 includes principal reduction and retires the entire principal balance in 30 years or 15 years, respectively, via amortization.

Below-Market Rate vs. Market Rate Comparison

Aside from the minimal down payment feature, Cal HFA FHA & CHDAP program provide interest rates lower than a rate available in the general market place for non-first-time buyers.  As of the date of this writing, the market rate for an FHA 30 Yr. Fixed program hovers around 4.75% (APR 5.567%).  Interest rate markets currently move with a high degree of volatility for a variety of reasons, therefor, the rates shown in this comparison may become obsolete shortly after this writing.  However, this comparison does illustrate the relative benefit of a lower interest rate mortgage.  The following numbers represent the total interest expense and mortgage insurance expense over the first seven years of these loans.

BMR rates

These numbers illustrate the benefit of lower interest rates.  The Cal HFA FHA program provides 99% financing vs. 96.5% finance with standard FHA programs.  Essentially, a first-time home buyer borrows more money with Cal HFA FHA and CHDAP, but pays less interest.  Interesting, isn’t it?  The below-market rate feature provides this long term benefit for the entire life of the Cal HFA FHA and CHDAP loans.

First Come, First Serve

California has limited funds available for this program.  The funds will be disbursed to qualified loan applicants on a first come, first serve basis.  Take advantage of the low interest rate, 30 year fixed rate mortgage while funds last.

Contact the Wilkas Group at info at wilkasgroup.com to start the search for your first home today.

You’re welcome to contact me at jedt at bankerspref.com to determine you eligibility for this first-time home buyer program.

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