In last weeks post, I mentioned that we bought a house. So today, I want to focus on first-time homebuyers programs.
Buying a house comes with an overwhelming amount of decisions that need to be made.
Things like, “is now a good time to buy,?”
“Which lender should we use?”
“Should we look for a for-sale-by-owner house?”
“Do we have money for closing costs?”
“Should we have the seller fix certain things in our offer letter?”
“What are the houses in the area going for?”
“How can we get the best interest rate?”
On and on it goes.
When we first started looking at purchasing a home, I was told, “make sure you take advantage of any first-time homebuyers programs.”
I thought, “that’s great that they offer incentives to become a homeowner.”
My plan was to find the best first-time homebuyers program. After shopping around at three different lenders we had six pre-approval letters each with different terms.
What is a first-time homebuyers program?
When you hear “first-time homebuyers program,” what do you typically think of? Down payment assistance programs, closing costs coverage program, etc.
These programs allow prospective first-time homeowners to purchase a house with little to no money down and/or little to no money in closing costs. Such loans like the USDA loan require no money out of pocket but this was not available to us in our area.
On a typical conventional real estate investment transaction you’re required to put down 20%. For a $200,000 house that’s $40,000. Most people starting out don’t have that kind of cash sitting around so it’s not uncommon to have loans that only require 3% — 5% down for a primary residence.
Even at 3% down, we’re talking $6,000 and with closing costs, we’re easily talking about a minimum of 10K being due at the closing.
What about those people with good jobs and good credit they just don’t have $10,000+ laying around? With a first-time homebuyers program, this person could own the house with zero money out of pocket.
Now that sounds like an awesome plan!
Are they the best option?
Pros
Some of the pros of using a first-time homebuyers program:
- You want to become a homeowner but don’t have the money for a down payment or closing costs. This works for many first-time homebuyers.
- You have the money but don’t want to dump it into your house. You’d rather use it for something like pursuing a higher rate of return in the stock market or starting a business, etc.
- Lastly, you don’t qualify based on the normal terms and a first-time homebuyers program could get you into a house.
These are all perfectly good reasons to use such programs.
But is it the most optimal thing to do?
Cons
I compared the prequalification letters trying to decide which one was going to be the best. The biggest thing I focused on was the interest rate.
These were our three options:
- 3% down with up to 6% in closing cost assistance
- 3.5% down FHA loan
- 5% down conventional loan
With 2 & 3 we didn’t have help with closing costs and were required to put down more.
It would have made sense to go with the first option of only putting 3% down and paying no closing costs!
The second loan is an FHA loan with 3.5% down that was touting no PMI. Most lenders require Private Mortgage Insurance if you have less than 20% equity in the house. With this loan we would have to put $5,320 down and pay all of the closing costs (make sure you negotiate closing costs with the seller. It was a mistake we made).
The third option was a conventional loan with 5% which required us to pay PMI and pay for the closing costs. This is the one we decided to go with.
Interest rates:
- 5.75%
- 5.25%
- 3.75%
These might not seem like big differences but here’s how much in interest we would have paid over the life of the loan for each loan.
- $167,330
- $150,166
- $101,418
The difference between #1 and #3 is $65,912!
The question I have to ask myself is would I rather work an entire year or put down an extra $3,040 now in order to save myself $66,000 in interest? I think yes.
When you stack this on top of all of the other things I’ve mentioned on my blog, like cutting expenses and decreasing fees, you’re cutting years off your working career and you’ll be able to reach financial independence much faster.
I get that not everyone could put 5% down or more (especially in really expensive cities). And in no way am I shaming you if you did use a first-time homebuyers program.
My purpose in writing this is to point out the pros and cons of first-time homebuyers programs so you can make the most informed decision possible on your home purchase.
In our case, we decided the most optimal choice was not to use one.
