<p>My husband and I are planning to buy a home for my son to live in while in medical school next year. He will live in the home for four years and if he stays for residency, maybe another 4-6 years. We originally thought we would buy this as a second home and take the tax benefits. Our mortgage broker now suggested a different loan. He thinks we should go with a 30 year fixed rate assumable FHA loan at approx. 6% interest rate. The great part about this loan is it only requires 3% down! Yes, I know the monthly notes will be higher (about $250 more,) but it is so much better than coming up with the 20% down payment with a conventional 30 year fixed.</p>
<p>It is my understanding that this loan will be government insured and we don’t have to worry about so many market fluctuations. Also, as my son will be on the loan, he will be building credit. I understand we can take this 3% loan under the kiddle condo rule and are allowed to rent out the other bedroom. Assuming rates will be higher at the time my son sells the home, this loan being assumable would make this home an attractive buy for someone.</p>
<p>Am I missing something here? Why would I not take this loan at the same 6% as another 30 year conventional fixed rate loan? I am using 6% as a round number, but I believe that is close. I do not know yet as far as points, etc…, but that information is coming. I know we will have to pay PMI, but if we pull that money out of savings/investments, we would lose the interest there, so the total amount spent on PMI might be more or less of the lost interest. Monthly payments will be higher, but again with a renter and not taking the cash out of investments seems like a better move.</p>
<p>I am not a money person, so go easy on me! My husband takes care of the investments, taxes, etc… and leaves everything else to me.</p>
<p>With the mortgage market in crisis I’m surprised 3% down loans are still available. If the value of the house drops, you may owe more than the house is worth. Possibly.</p>
<p>I had thought that, today, 5% down was the minimum (in practice if not in theory) even for FHA - still good, though. </p>
<p>If you can handle the extra monthly payment, I agree that it is a good idea. barrons may be right, but you should consider - if you will need or very much want to sell the house after the 4 years - that you are increasing the possibility that it will be worth less than your outstanding mortgage balance. Which would mean, in effect, that you would have to pull the money out of your assets at that point instead of now. Maybe you are willing to gamble on that, because chances are the house will NOT be worth less (but no guarantees).</p>
<p>If my D was going to graduate school somewhere cheaper (ie, not downtown Chicago!), I’d be looking into this also.</p>
<p>If you haven’t already, you can go to the FHA website and search for the Kiddie Condo mortgage and all the details are spelled out. </p>
<p>jmmom makes a good point about value after 4 years. However, if you would be buying/selling in a college town, you may be less hostage to the vagaries of the market.</p>
<p>I wish we could do this for D—if only she’d gone to that other school…</p>
<p>Just check into make sure that the FHA isn’t going to require PMI (priv mortgage ins), if so this can be very expensive. Have your mtg person give you a good faith on both, the 3% and the 5%. PMI can be very very expensive, so expensive that in the end the 5% would be much cheaper, not only monthly but at closing. Also look to see if they are going to give a loan discount for the origination fee, typically 1%.</p>
<p>We are not worried about the resell as this is a medical town, not a college town. Plus there is the chance he will be there 8 years, but maybe not.</p>
<p>Yes, we will need to pay PMI with this loan, but it is doable as we won’t be taking the money out of investments. My husband has been taking to the mortgage broker (a cousin), our accountant (also a cousin) and our financial planner (not a cousin, but a friend!) It looks like the only thing we need to decided is if we want to put 3-5% down, paying PMI as well as some other fees, or put 20% down and avoid PMI. Whether we lose the cash now with the 20% or month to month with the 3-5% doesn’t seem to make that much difference according to our “team.” It looks looks the consensus is that either way is fine; not much difference with one loan over the other for us.</p>
<p>I like that my son will be building credit, and it will be good credit; we are too anal to let a payment be late!! He is real good about paying his bills and already does online bill pay, so I know this will not be a problem for him. It is also possible we will pay the note and have the room mate pay us.</p>
<p>Forgot to remind you PMI is also paid at closing so you are hit 2x…once at closing (tax deductible0 and every month, add in the extra interest over the life of the loan, you might be better off selling some mutuals that have been held long term so you pay a lower tax rate, remember you will re-coup part of it with what is deductible in int and taxes.</p>
<p>Also if you take an 80-15-5, you won’t have PMI.</p>
<p>Or if you put 20 down, then you can try to get an equity line for 10%, putting you back in an 80-10-10</p>
<p>Curiuoser - I looked, can you give a link?
"If you haven’t already, you can go to the FHA website and search for the Kiddie Condo mortgage and all the details are spelled out. "</p>
<p>I’m sorry, dragonmom, but I don’t know how to do the link properly.
However, this is the web address I had…I saved it in my Favorites for future use, just in case!</p>
<p>I was unaware that PMI could be avoided by putting 20% in this FHA program - our mortgage broker never mentioned that.( I know it is allowed in other mortgages)
Is this true, snowball and others?</p>