I need $$$!

June 21, 2005 6:20 PM

MortgageFilter: I've found the perfect place, good price etc. but it has come along a lot earlier than anticipated. What are some recommended ways of raising enough $$ for the down payment?

I don't really have anything to sell or offer as collateral. I have excellent credit standing (never defaulted on a bill/loan payment) which is what resulted in mortgage approval in the first place. My parents have offered a certain amount as an interest-free loan, but I would rather not go down that route if I can avoid it (no reason, other than I'd rather do this on my own).

Here's the mortgage details:
5 year fixed rate at 4.3% with $20,000 down (outside of closing costs). If this is not quite the deal I think it is please let me know (and why).

So, basically, I need a way of raising $20,000 for a down payment. Any advice would be greatly appreciated. Thanks.

posted by purephase to home & garden (17 comments total)

Sometimes, you can get grants or loans from local government, if the neighborhood needs to be developed, or if you're a first-time buyer. You might look into it.

And I don't know why you wouldn't take the loan from your parents. It's not like finding $20,000 is going to be easy.
posted by ThePinkSuperhero at 6:37 PM on June 21, 2005 [1 favorite]

I bought my house under similar circumstances; the perfect place came along before I was ready. I told the seller I would pay $5000 over his asking price if he paid my down payment. At closing, I only paid the fees.
posted by mischief at 6:38 PM on June 21, 2005

You need to post more details about the mortgage if you want informed feedback. It sounds like a 5 year fixed, 25 year adjustable. Among other things:

-- What are the estimated closing costs that you'll pay (roughly, total amount)?

-- What is the mortgage indexed to? How fast can the interest rate increase each year, starting in year 6 (that is, what is the annual cap)? How high can the rate go, overall (what is the lifetime cap)?

-- Is there any prepayment penalty?

To answer your basic question: your options include (and can be done in combination):

* Getting a different mortgage (there are some that are essentially no down payment, but of course the interest rate is higher);

* Increasing the offering price, with the seller to credit back the increase against closing costs and/or mortgage (as mentioned by mischief);

* Getting a loan from parents (can be less than $20K) [in the past, lenders have been unhappy with this, since it gives the appearance of financial strength that in fact is lacking; don't know if that is still true]

* Qualifying for first-time buyers program grant (this is actually related to the first bulleted item - often there are special, lower-cost, 100% mortgages available)

This is the sort of question you ought to pose to your real estate agent and whoever offered you the mortgage - both have a vested interest in helping you figure out how to buy the house you want.
posted by WestCoaster at 7:00 PM on June 21, 2005

You can get a no money down mortgage but it will ultimately cost more. Take the money from your parents and pay them back quickly. You will make them feel good for being able to help you out and you will be better off. Don't let pride get in the way at the very least. If pride rules you, a 10% down mortgage is quite common, and perhaps you can raise that kind of cash. It will involve PMI; just make sure you can get rid of it without a refinance when you get over 20% equity, preferably based on a future assessed value rather than a present assessed value. That way if the value rises you can ditch the PMI even if you haven't paid much principal. Check the fees and requirements before you sign.
posted by caddis at 7:24 PM on June 21, 2005

Thanks for the answers. This is the first time I've ever been involved in this type of process so I am really unsure of how to proceed. 100% of what I do know I've gleaned from reading stuff online and, as always, I take all that with a grain of salt.

Thanks for the suggestions.

WestCoaster: As to your questions:

-- 1 1/2% for closing.
-- No idea, not even sure what this means.
-- No idea.

I have done a couple of pre-approval's at different banks and this is by far the best offer I have received.

mischief: Is this something that the seller and broker should work-out? I know that there is a prior relationship between the two that I'm dealing with, would that help in this sort of situation?

As to the grant idea, that's fantastic. I'm currently researching it through the Canada Mortgage and Housing Corporation. I've never even heard of this organization before.

Thanks!

On preview: caddis, it's not pride, and it's not something I've ruled-out entirely. I have a lot of siblings that are in much worse financial situations than I am and I would prefer that my parent's disposable $$ is available if they need it. Thanks for your suggestions though.
posted by purephase at 7:37 PM on June 21, 2005

A few things... You don't want any pre-payment penalties, they'll screw you when you want to refinance or sell the house. That is unless of course it's just a 3-year pre-payment penalty and you're going to live there at least 3 years...

With rates as low as they are today, and likely to be higher in 5 years, I'd personally go with a 30-year fixed loan rather than a 5 year ARM unless the ARM was the ONLY option or was SIGNIFICANTLY lower priced than the 30-year fixed. Your mortgage broker can tell you why they are suggesting the ARM.

Actually though, it sounds like you probably don't have a mortgage broker but rather have one person who has offered you a loan. Ask some friends who own property if they used a broker and give one a call. They will look around for you and find the best mortgage you can get in your situation. Much better to use a broker in my opinion than to try to do it on your own.

Lastly, why don't you think about (read: ask a broker about...) a no money down loan as a possible option. Yeah, you'll pay for it over 30 years but you will not loose 20 grand in liquid that you'd have to immediately put into the house. Just an option but worth thinking about.
posted by pwb503 at 7:53 PM on June 21, 2005

You need to have much more than just the down payment to invest in a home. At the minimum, you should have about 8 months of living expenses stashed away somewhere in case of job loss, illness, etc. In your case, it would be living expenses, plus mortgage interest payments, plus paying off the $20,000 loan from wherever you got it. Otherwise, should something unexpected happen, you could be in some serious financial trouble.

As for the mortgage index question, it's basically how will the interest rate change after the fixed period? Is it tied to (indexed to) some steady indicator, say what the Bank of Canada sets as prime? This can dramatically change your mortgage payments from one year to the next.
posted by orangskye at 7:54 PM on June 21, 2005

I just made the offer, and then threw the onus of getting everything accomplished on the seller's broker because two days after the closing was set, I discovered I had to be 1500 miles away on a business trip. I gave my wife power of attorney to act for me at the closing. Except for that, her name was not attached to the house in any way.
posted by mischief at 8:19 PM on June 21, 2005

If it's your first home, and you have money socked away in a 403b or 401k, you are allowed to take out $10k, tax free and without penalty for your first home.

My wife and I did it to cover our downpayment and it worked out great (each spouse is allowed to do a maximum of 10k each)
posted by mathowie at 8:52 PM on June 21, 2005

Since I know purephase is Canadian, I'll amend Mathowie's advice by saying you can borrow up to $20K from your RRSP, and you will have 15 years to pay it back.
posted by orange swan at 9:01 PM on June 21, 2005

If you've got $20,000.00 (or anything) in your RRSP and you decide to go that route, do read up on dates and deadlines. I nearly hooped myself waiting for the last minute. All your forms and information can be found here, or get them from your bank or realtor.

Some lenders will permit you to borrow funds to establish an RRSP for the tax refund, and then let you use the refund for your down payment. I'm not sure how useful this is, but it's something.

If you're buying a brand new home or condo conversion from a developer or builder, your home's price will include GST. Sometimes you can get an equivalent discount on the purchase price, depending how fast things are selling.

Also, if you "double-end"* your purchase by using a realtor from the same office as the realtor the seller is using, sometimes they'll cut you a deal. The seller pays commission, but since the realtors work in the same place, and therefore don't have to split commission with a competitor, they'll often play ball and share this wealth with both the seller and you rather than lose a sale. This would only be about enough to cover closing costs, but hey. (*This may or may not be legal practice for realtors in Ontario.)

In Canada, a first-time homebuyer can often get away with a 5% down payment, but there are restrictions on how much your home can be worth at purchase. You will also find that if you are able to cover at least 20% as a down payment, you won't have to pay for the mortgage insurance premium (MIP, from GE or the CMHC). If you don't have 20%, but you have more than 5%, it's worth it to borrow enough to get up there. On a $200k home, this can save you six or seven thousand dollars.

If you have more than 5% and can't "top it off" to 20%, my advice is if you qualify for a mortgage on the 95% value of your home, use the 5% down option and keep the change for the inevitable extra expenses.

You don't mention the value of the home, but logic and your down payment amount says it must be between $100k and $400k. The interest rate on your mortgage looks great for a five year fixed -- you've got mine beat by a point or so. Pay biweekly for the best deal. If your house price is at the lower end of my estimate, you'll probably have enough equity at the end of five years to set up a nice line of credit and live like those guys on the bank commercial.

My bank made me sign a paper indicating that my mother's kind contribution to my funding was a gift, not a loan. They want you to be unencumbered, or at least be willing to sign a paper saying you're unencumbered.

Don't tell my mom.
posted by Sallyfur at 2:35 AM on June 22, 2005

Sorry, I can't believe I didn't put the purchase price. It's $269,000 for a newly built loft in a great area of Toronto. It's resale value in 2-3 years will no doubt be higher than it's purchase price which is one of the reasons I am really considering all options rather than pass due to the lack of startup funds.

Also, the fact that it's just been built may hold-off those "inevitable extra expenses" (not entirely, but just enough that I might be able to squeeze out a little more for down payment).
posted by purephase at 4:51 AM on June 22, 2005

Try reading a few web sites to get a general idea of what all the terminology means. Even though this one is US-centric, it may be similar to how things work in Canada.

Also, really try to wrap your head around the concept of ARM versus fixed rates compared to your personal situation. You will have very adamant people in either camp saying why one is better than the other. But in reality, it depends on how long you plan on living in, or holding onto, the property you're going to buy.

In addition, pay careful attention to what caddis said about PMI. Many people assume you can use the inflated/appraised value of the home to remove that insurance, when you may be tied to the purchase price of the home. So unless you're paying the loan off quickly enough to reduce the LTV, you may be stuck with the PMI. Find out if you're going to be subject to PMI with your loan, and exactly how the PMI company handles removing that.

Although your figures seem great at the moment, don't discount checking with other mortgage brokers in the area for a little comparison shopping on what programs are available to you that may reduce your need for such a high down payment that you don't currently have.
posted by cyniczny at 6:43 AM on June 22, 2005

Purephase,

You need to find out a few more things about this ARM. Is there a cap for the rate, meaning that the rate can not go up more than a certain number of percentage points over the entire life of loan? For example, a typical cap may be 6 percentage points, which means the highest your rate can ever be is 10.3%.

You also need to find out if there is a cap on how high the rate can go in one year, e.g., 2 percentage points in one year but not to exceed 6 points over the life of the loan. (I am assuming that this is a 5/1 ARM, meaning that your loan will adjust only once a year after the five-year initial rate lock. You should verify this if you are unsure, though.)

As others have suggested, you definitely need to find out if there is a prepayment penalty. These penalties can be incurred if you sell the home or refinance the mortgage at a cost of thousands of dollars to you.

Finding out which index is worth knowing too. There are several indexes on which your interest rate could be based--e.g. LIBOR, COSI, CODI. Some of these indexes are more volatile than others and some adjust more frequently. If you chose an ARM attached to an index that moves quickly with the market, you may experience higher rates when the loan adjusts. I am not an expert in this area but you should investigate further.

I did a lot of research on the ARM vs. fixed-rate mortgage last year when I was buying. A lot of people will steer you away from an ARM without really understanding the loan product.

In your situation, if you took out a 5/1 ARM at 4.3% for $249,000, your monthly principal and interest would be $1,232.

If you went with a fixed-rate mortgage with a rate of 5.5% for the same amount of money, your monthly payment would be $1,414.

Over the five years that you are locked in at the lower rate, you will save $10,920 in interest.

Now let's say that in the sixth year of your mortgage, your rate jumps to 6.3% Your monthly payment will now be $1,542. Over the course of one year, you will pay $1,536 more in interest that you would with a fixed-rate mortgage.

Even if the rate on the ARM continues to rise a point or two a year, it would take several years for the increased interest costs to surpass that interest you saved over the first five years of the loan. In fact, the research I've read shows that a 5/1 ARM beats a fixed-rate for about the first 8 years of home ownership.

Now if you're buying this property with the plan to leave it only in a pine box, a fixed-rate makes more sense, especially considering how low interest levels are.

As for raising capital, I would pour over your living expenses and see if there is spending that can be cut. My husband and I were able to raise a lot of money in six months just by cutting back on stuff like movies, clothing and restaurants.

Check to see if your city has a first-time homebuyer program as well. In Chicago, the city will give you 5% of the purchase price as long as you meet certain income guidelines, which are surprisingly generous.

Finally, as people have pointed out, don't forget to consider the cost of owning. There is insurance, taxes and assessments, along with all the incidental crap that comes along. A financial adviser I met with told me that most people spend $8,000 on their home in the first year of ownership.
posted by Sully6 at 10:15 AM on June 22, 2005

Now let's say that in the sixth year of your mortgage, your rate jumps to 6.3%

That's a very optimistic guess. I would say 10% to 12% is just as likely, maybe more so. Of course it is anyone's guess.

Another option is a 30-year, fixed-rate loan in which you pay interest only for the first 10 years, then interest + principal for the last 20 years. We were just quoted a mortgage like this with a fixed rate of 5.75% for the life of the loan.

As for the down payment, there is also the option of getting a home equity loan for a portion of the down payment (say, 50%), which will be added into your monthly payment and will carry a slightly higher interest rate than your mortgage. The option we've looked at required this loan to be paid off in 10 years. This will also help you avoid PMI.

Good luck.
posted by _sirmissalot_ at 10:59 AM on June 22, 2005

Note that it seems to me (and I am no expert but I am on to my second home next week) that some of these financial/loan tools are quite US specific. In Canada, as far as I know, you really have to HAVE the downpayment in your pocket. 5% is a minimum, but 10% is much more common. Lenders will insist that any money from others be unencumbered, for sure, so it must be a gift (though you can have another arrangement on the sly).

Beyond that, I think there's considerable reason to be quite a bit more optimistic about Canadian interest rates than US rates. The fundamentals of the Canadian economy are quite a bit different than in the US, and although if they go up so will we, there will likely be a delayed reaction and, according to what I have read, any peak will likely not be as severe. Add to that the fact that in most areas of Toronto that I know of, your loft will at least retain its value no matter what happens to the economy - AFAIK Toronto is not in a real estate bubble at this time, though prices are relatively high as always in the metropolis of the country.

Based on this, I would most definitely look at a floating rate mortgage, but one that will let you lock in at any time for no/small fee on a pre-published rate schedule. Most lenders in Canada right now will give you a discount off their best rate for the first few months - half a point or better - so your interest rate will end up being more like 3.5% for 6-9 months, 4.2% or so following, and when/if things start going up (and monitor US rates, because they're the canary in the coalmine here) you can lock in at a rate that will protect you from further increases. You have to keep your head in the game a bit more, but it's worth it.

The equity thing is important though. I would definitely consider getting the "gift" from your parents - and judging by people I know, you'd be surprised at how common this is among folks from any economic background. I was lucky to have such a gift as well, and more than doubled it (net after agent's fees) in just over two years.

The nice thing about all of this is that by the time you get to thinking about your second property, this will all get easier. Banks are amazingly (kidding) receptive once you have REAL equity to put into a house. So once you get a couple or three years of payments under your belt - even though that's mostly interest - and a couple or three years of appreciation under your belt as well, you will have a much wider range of options next time around. At least that has been my experience, and we're closing the sale of my place tomorrow afternoon!
posted by mikel at 12:22 PM on June 22, 2005

I would say 10% to 12% is just as likely, maybe more so. Of course it is anyone's guess.

I think you misread my comments. I am basing my figures on a 5/1 ARM with a per annum cap of 2 percentage points and a lifetime cap of 6 points. It's not an uncommon loan product, at least in my experience buying in the US. I would not recommend any ARM that doesn't have a cap on rates, just to avoid the scenario you describe.

A 5/1 ARM with rate caps is a good loan product for many people because the interest savings up front offset the rising rates for several years later and most folks move or refinance within eight years of buying.

That said, my husband and I bought with the intention of staying at least 10 years, so we got a fixed-rate mortgage.

Good luck to you, Purephase.
posted by Sully6 at 3:16 PM on June 22, 2005