farewell, Sold the IS350
07-20-11, 08:29 AM
#16
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[QUOTE=calvin2376;6546614]LEASE QUESTIONSQUOTE]
Ok here goes:
People lease for a few reasons:
1. Lower payment then purchasing
2. New car every 2-3 years
3. Bury negative equity and get out of it quickly
There are 3 factors that go into determining what a lease payment is:
Residual %, what the car is worth after 24/36/48mos (varies by miles per yr)
Money factor, .00042 and the like. This is the interest rate. Usually very low
Term, how long the lease is for (Shorter term = higher residual % and vice versa)
Leasing a good option for people who plan on paying cash for a vehicle they plan on trading in in a few years anyway to reduce the amount of depreciation they incur. One pay leases are the best for this because there are no payments, you pay a lump sum and the money factor is generally = 2% in APR. Lexus vehicles in particular lease well when it comes to equity after 1 1/2 - 2 years on a 3 year lease. We trade people off lease all the time that put down no money and have sometimes up to $3000 of trade equity after 2 years. With that said it is due to the fact that intially they do not have the most aggresive residuals which in turn cause a little bit higher payment on a leased vehicle. Not a major problem however.
When you pay cash for a car you have no gaurantee to what the car will be worth when it comes time to trade it in. By leasing the vehicle you ensure that the car is worth XXX at time of trade at ***MINIMUM*** it can be worth more based on market conditions. Lets say the used car market is the exact opposite in 3years what it is now. The car could be worth 5k less than the residual but it wouldnt matter if it was leased, only if purchased.
When you lease you only borrow a portion of the vehicle, typically 35% or so on 24 months and closer to 40-50% on 36 months. That is all your payment is based off of and keeps then payment less than a retail purchase in all cases.
Lets say a person wants to purchase a vehicle but has no money down and has $5000 of negative equity. They have decent credit somewhere in the high 600s to low 700s and looking at both new and used. Customer find a 2009 IS250 for 32761 and has to finance the 5000 difference in trade. This is where it gets confusing.
The amount financed on this vehicle would be over $40,000
The clean trade amount is $28,275 thus making the LTV for the bank 142%.
No bank is going to finance that type of advance so regardless of payment the customer would have to front the cash down to get to a more reasonable %120-125% The payment would be $675
The same situation would arise on a new car:
The MSRP for round numbers we will say is 42000 and the invoice is 38000.
Lets just say the customer pays MSRP and then rolls the negative in, the LTV is still 135%, which is closer but still a ways off. The payment would be $820 per month @72months.
Now we get to our final option a lease.
Customer makes enough income afford a $700~ payment and really want to get out of their over mileage vehicle that has depreciated rather poorly.
Leases calculate LTV based off the MSRP of a vehicle not the invoice. So for this customer it helps immensely for both the dealership to sell a car and the customer to put no cash down. On the tier 1 lease you will get 120% of MSRP which in this case would be $50,400 which is well in line for what the customer is looking to finance because there are no upfront taxes on a lease as well. So instead of financing a car for 72months and having to put money down in order to get out of their current upside down loan, they can pay their more reasonable 700 payment for 24-36 months and start over with no negative equity at all...
Sorry for the long post, PM if you have more specific questions on leasing
Ok here goes:
People lease for a few reasons:
1. Lower payment then purchasing
2. New car every 2-3 years
3. Bury negative equity and get out of it quickly
There are 3 factors that go into determining what a lease payment is:
Residual %, what the car is worth after 24/36/48mos (varies by miles per yr)
Money factor, .00042 and the like. This is the interest rate. Usually very low
Term, how long the lease is for (Shorter term = higher residual % and vice versa)
Leasing a good option for people who plan on paying cash for a vehicle they plan on trading in in a few years anyway to reduce the amount of depreciation they incur. One pay leases are the best for this because there are no payments, you pay a lump sum and the money factor is generally = 2% in APR. Lexus vehicles in particular lease well when it comes to equity after 1 1/2 - 2 years on a 3 year lease. We trade people off lease all the time that put down no money and have sometimes up to $3000 of trade equity after 2 years. With that said it is due to the fact that intially they do not have the most aggresive residuals which in turn cause a little bit higher payment on a leased vehicle. Not a major problem however.
When you pay cash for a car you have no gaurantee to what the car will be worth when it comes time to trade it in. By leasing the vehicle you ensure that the car is worth XXX at time of trade at ***MINIMUM*** it can be worth more based on market conditions. Lets say the used car market is the exact opposite in 3years what it is now. The car could be worth 5k less than the residual but it wouldnt matter if it was leased, only if purchased.
When you lease you only borrow a portion of the vehicle, typically 35% or so on 24 months and closer to 40-50% on 36 months. That is all your payment is based off of and keeps then payment less than a retail purchase in all cases.
Lets say a person wants to purchase a vehicle but has no money down and has $5000 of negative equity. They have decent credit somewhere in the high 600s to low 700s and looking at both new and used. Customer find a 2009 IS250 for 32761 and has to finance the 5000 difference in trade. This is where it gets confusing.
The amount financed on this vehicle would be over $40,000
The clean trade amount is $28,275 thus making the LTV for the bank 142%.
No bank is going to finance that type of advance so regardless of payment the customer would have to front the cash down to get to a more reasonable %120-125% The payment would be $675
The same situation would arise on a new car:
The MSRP for round numbers we will say is 42000 and the invoice is 38000.
Lets just say the customer pays MSRP and then rolls the negative in, the LTV is still 135%, which is closer but still a ways off. The payment would be $820 per month @72months.
Now we get to our final option a lease.
Customer makes enough income afford a $700~ payment and really want to get out of their over mileage vehicle that has depreciated rather poorly.
Leases calculate LTV based off the MSRP of a vehicle not the invoice. So for this customer it helps immensely for both the dealership to sell a car and the customer to put no cash down. On the tier 1 lease you will get 120% of MSRP which in this case would be $50,400 which is well in line for what the customer is looking to finance because there are no upfront taxes on a lease as well. So instead of financing a car for 72months and having to put money down in order to get out of their current upside down loan, they can pay their more reasonable 700 payment for 24-36 months and start over with no negative equity at all...
Sorry for the long post, PM if you have more specific questions on leasing
07-20-11, 08:55 AM
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07-20-11, 09:42 AM
#20
What I don't know much about is leasing new cars, and have never really looked into it too much because at least in my cursory research, the numbers just never made sense to me. I can't of course speak to all cases, but in the cases I've looked at, the payments were as high or higher than if I were to purchase the car, and at the end of a lease you have nothing to show for it, vs. purchasing the car when you can then sell the car for its residual value. It seems to me to be analogous to purchasing a home rather than renting. When I last moved, I found that my payment if I bought a home was quite a bit less than if I rented an apartment with similar features and square footage. Clearly it made financial sense to buy rather than rent, even if the housing market weakened further. If the apartment rent was $1000 a month and I lived there 2 years, I could afford to take a loss of $24,000 on my house and still come out ahead vs. renting, since if I'd rented all that $24,000 would have been down the drain. Obviously a lot of this is contingent upon what interest rate you qualify for, etc.
Can someone tell me why, then, anyone would ever consider leasing a car for the same monthly payment (or a higher monthly payment) than if one were to purchase that same car? It seems to me that if I'm looking at a 335i (just using this as an example), and I have the option to buy or lease, and my payments will be exactly the same, I would always choose buying. The monthly lease payment would have to be much lower than the payment if I purchased it for me to consider leasing.
Can someone tell me why, then, anyone would ever consider leasing a car for the same monthly payment (or a higher monthly payment) than if one were to purchase that same car? It seems to me that if I'm looking at a 335i (just using this as an example), and I have the option to buy or lease, and my payments will be exactly the same, I would always choose buying. The monthly lease payment would have to be much lower than the payment if I purchased it for me to consider leasing.
the house is a different situation...you have to come up with 20% downpayment somehow.....
07-20-11, 10:16 AM
#21
Driver School Candidate
This seems as good a thread as any to pose a question I've wondered about for years, and hopefully someone can help me out.
It seems there are 3 main ways people acquire cars: 1) buy new, 2) buy used, 3) lease new. I've always bought my cars used. It was my dad's philosophy, and it always made sense to me so I just continued it. I will never buy new - the depreciation hit on a new car is just far too great. I'd much rather buy a car that's even just a year and a few thousand miles old - that way I get the benefit of some warranty but also don't take the off-the-lot depreciation hit myself.
What I don't know much about is leasing new cars, and have never really looked into it too much because at least in my cursory research, the numbers just never made sense to me. I can't of course speak to all cases, but in the cases I've looked at, the payments were as high or higher than if I were to purchase the car, and at the end of a lease you have nothing to show for it, vs. purchasing the car when you can then sell the car for its residual value. It seems to me to be analogous to purchasing a home rather than renting. When I last moved, I found that my payment if I bought a home was quite a bit less than if I rented an apartment with similar features and square footage. Clearly it made financial sense to buy rather than rent, even if the housing market weakened further. If the apartment rent was $1000 a month and I lived there 2 years, I could afford to take a loss of $24,000 on my house and still come out ahead vs. renting, since if I'd rented all that $24,000 would have been down the drain. Obviously a lot of this is contingent upon what interest rate you qualify for, etc.
Can someone tell me why, then, anyone would ever consider leasing a car for the same monthly payment (or a higher monthly payment) than if one were to purchase that same car? It seems to me that if I'm looking at a 335i (just using this as an example), and I have the option to buy or lease, and my payments will be exactly the same, I would always choose buying. The monthly lease payment would have to be much lower than the payment if I purchased it for me to consider leasing.
So for those who lease or know about leasing vs. buying, what am I missing? What are the major considerations? Is leasing attractive because you don't take the depreciation hit when selling a car you bought new? I'm just trying to understand the thought process, would love to get your insights.
It seems there are 3 main ways people acquire cars: 1) buy new, 2) buy used, 3) lease new. I've always bought my cars used. It was my dad's philosophy, and it always made sense to me so I just continued it. I will never buy new - the depreciation hit on a new car is just far too great. I'd much rather buy a car that's even just a year and a few thousand miles old - that way I get the benefit of some warranty but also don't take the off-the-lot depreciation hit myself.
What I don't know much about is leasing new cars, and have never really looked into it too much because at least in my cursory research, the numbers just never made sense to me. I can't of course speak to all cases, but in the cases I've looked at, the payments were as high or higher than if I were to purchase the car, and at the end of a lease you have nothing to show for it, vs. purchasing the car when you can then sell the car for its residual value. It seems to me to be analogous to purchasing a home rather than renting. When I last moved, I found that my payment if I bought a home was quite a bit less than if I rented an apartment with similar features and square footage. Clearly it made financial sense to buy rather than rent, even if the housing market weakened further. If the apartment rent was $1000 a month and I lived there 2 years, I could afford to take a loss of $24,000 on my house and still come out ahead vs. renting, since if I'd rented all that $24,000 would have been down the drain. Obviously a lot of this is contingent upon what interest rate you qualify for, etc.
Can someone tell me why, then, anyone would ever consider leasing a car for the same monthly payment (or a higher monthly payment) than if one were to purchase that same car? It seems to me that if I'm looking at a 335i (just using this as an example), and I have the option to buy or lease, and my payments will be exactly the same, I would always choose buying. The monthly lease payment would have to be much lower than the payment if I purchased it for me to consider leasing.
So for those who lease or know about leasing vs. buying, what am I missing? What are the major considerations? Is leasing attractive because you don't take the depreciation hit when selling a car you bought new? I'm just trying to understand the thought process, would love to get your insights.
A lease should never cost you more $$$ per month than buying new does. I don't compare to what some one else does because their situation could be different. IE better trade in, different down payment etc..
I leased a Ford Escape back in 2006 (a 2007 model) Sticker on the Vehicle was like $27,500 or something like that. To buy the car new my monthly payment (with my trade and no money down) would have been in the upper $400 to $500/month If I remember right. I was looking at used Escapes that were 2-3 years old and The payment I got on the lease was just a bit less than what it would have cost me for those used ones with about 30k on the clock (all were off lease vehicles)
So for me, I was able to get a new ride, for the cost of a used one. and then I figured I'd buy it after the lease was up. (which I did) At the time I was concerned with getting my monthly payment low, as the wife hadn't yet finished school.
The trade off to all this is while I have a much lower payment than if I would have bought new right away, I'm paying for 8 years instead of 5. But now my payment is so low I'll have it paid off well before 8 years. Even if I'd take the full 8 years to pay (3yr lease + 5 year loan) It would work out to paying the same $$$ for the car if I would have bought it new, and had a 5 year payment.
I don't remember the exact amount I would have paid brand new, but it would have been somewhere around $450 I think for 60 months. I paid $310 for 36 months and now pay $267 for 60 months.
07-20-11, 11:10 AM
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This seems as good a thread as any to pose a question I've wondered about for years, and hopefully someone can help me out.
It seems there are 3 main ways people acquire cars: 1) buy new, 2) buy used, 3) lease new. I've always bought my cars used. It was my dad's philosophy, and it always made sense to me so I just continued it. I will never buy new - the depreciation hit on a new car is just far too great. I'd much rather buy a car that's even just a year and a few thousand miles old - that way I get the benefit of some warranty but also don't take the off-the-lot depreciation hit myself.
What I don't know much about is leasing new cars, and have never really looked into it too much because at least in my cursory research, the numbers just never made sense to me. I can't of course speak to all cases, but in the cases I've looked at, the payments were as high or higher than if I were to purchase the car, and at the end of a lease you have nothing to show for it, vs. purchasing the car when you can then sell the car for its residual value. It seems to me to be analogous to purchasing a home rather than renting. When I last moved, I found that my payment if I bought a home was quite a bit less than if I rented an apartment with similar features and square footage. Clearly it made financial sense to buy rather than rent, even if the housing market weakened further. If the apartment rent was $1000 a month and I lived there 2 years, I could afford to take a loss of $24,000 on my house and still come out ahead vs. renting, since if I'd rented all that $24,000 would have been down the drain. Obviously a lot of this is contingent upon what interest rate you qualify for, etc.
Can someone tell me why, then, anyone would ever consider leasing a car for the same monthly payment (or a higher monthly payment) than if one were to purchase that same car? It seems to me that if I'm looking at a 335i (just using this as an example), and I have the option to buy or lease, and my payments will be exactly the same, I would always choose buying. The monthly lease payment would have to be much lower than the payment if I purchased it for me to consider leasing.
So for those who lease or know about leasing vs. buying, what am I missing? What are the major considerations? Is leasing attractive because you don't take the depreciation hit when selling a car you bought new? I'm just trying to understand the thought process, would love to get your insights.
It seems there are 3 main ways people acquire cars: 1) buy new, 2) buy used, 3) lease new. I've always bought my cars used. It was my dad's philosophy, and it always made sense to me so I just continued it. I will never buy new - the depreciation hit on a new car is just far too great. I'd much rather buy a car that's even just a year and a few thousand miles old - that way I get the benefit of some warranty but also don't take the off-the-lot depreciation hit myself.
What I don't know much about is leasing new cars, and have never really looked into it too much because at least in my cursory research, the numbers just never made sense to me. I can't of course speak to all cases, but in the cases I've looked at, the payments were as high or higher than if I were to purchase the car, and at the end of a lease you have nothing to show for it, vs. purchasing the car when you can then sell the car for its residual value. It seems to me to be analogous to purchasing a home rather than renting. When I last moved, I found that my payment if I bought a home was quite a bit less than if I rented an apartment with similar features and square footage. Clearly it made financial sense to buy rather than rent, even if the housing market weakened further. If the apartment rent was $1000 a month and I lived there 2 years, I could afford to take a loss of $24,000 on my house and still come out ahead vs. renting, since if I'd rented all that $24,000 would have been down the drain. Obviously a lot of this is contingent upon what interest rate you qualify for, etc.
Can someone tell me why, then, anyone would ever consider leasing a car for the same monthly payment (or a higher monthly payment) than if one were to purchase that same car? It seems to me that if I'm looking at a 335i (just using this as an example), and I have the option to buy or lease, and my payments will be exactly the same, I would always choose buying. The monthly lease payment would have to be much lower than the payment if I purchased it for me to consider leasing.
So for those who lease or know about leasing vs. buying, what am I missing? What are the major considerations? Is leasing attractive because you don't take the depreciation hit when selling a car you bought new? I'm just trying to understand the thought process, would love to get your insights.
Lease payments often come out to the same price as purchase, when you have significant down payment amounts. If you don't, a car payment, even over an extended term, may be staggering.
Leasing fundamentally allows you to get into a more expensive car than you're willing/able to buy, because you aren't paying for the whole vehicle, you're essentially renting it.
For some people, they prefer leasing because they will always be under a manufacturer's warranty. Others prefer to drive a more expensive car than they could afford to buy outright. Still others own businesses where there is a tax advantage to leasing that is not available for buying.
07-20-11, 11:48 AM
#23
The best thing for the guy with $5000 neg equity and no cash is to drive his car until he pays it off, then save money money driving it until the wheels fall off so he can have a down payment on his next car.
Just becuase others make stupid financial decisions everyday and the car dealers and lenders allow them to doesnt mean that they should continue to do it. Dealers want the car sold so they make money (from the sale, back end products, and fee from financing with banks and credit unions). The bank/credit unions are so cash heavy right now that they are willing to take greater risks on car loans to try and earn a better return on the car loan than they would on an investment since rates are so low. (I audit/examine financial institutions for a living).
So in a "perfect" world or "fantasy" world as threeevo stated, banks and CUs would only lend to those with a down payment and good credit history. All the financial institutions wish that this were the case but they all know that if they stop lending above 100% LTV then they wouldnt hardley be able to make loans, so they all keep doing it.
FYI, the average charge-off rate for auto loans is roughly 2% per year, and the average recovery rate is about 50%. So if the financial institution has a $1billion auto loan portfolio they will charge off roughly $20million a year and recover $10million back from the sale of the repossessed autos. Resulting in a 1% net loss. So if they are earning an average rate of 4-5% on the loan portfolio, their cost of funds is 1% (rates they have to pay customers to have money on deposit), and their loss rate is 1% then they are down to 2-3% yield on the auto loan portfolio. When you add in operating expenses for the institution and the money they have to pay to the dealers to refer loans (generally 2-2.5% of the amount of the loan, up front), many institutions are not very profitable, if at all. Some lenders are trying to lend their way out of the problem, hoping to increase revenue without increasing fixed costs, but usually they just end up taking on worse loans and end up with higher charge-off rates and lower recovery rates due to higher than average LTV on thier portfolio.
In the end, its bad for the consumer with the high LTV loan, and the financial institution, but usually better for the car dealer because they sell more cars.
ThreeevoIS, do you work at a dealer?
BTW...
I bought my last Lexus when it was 7 years old with 74,000 miles. The original MSRP was $38,xxx and I paid $11,000, drove it for 7 years and 100,000mi and sold it for $4,800. So the original owner paid over $27,000 to have the car for 7 years and I paid $6,200 to have it just as long. Yes, I had repair bills but nothing major and I did most of it myself.
My current 2006 IS350 I bought this year for $25,000 with 14,000 mi, the original MSRP is over $45,000. I plan to have it 5 years and sell it for maybe $10,000, we'll see, either way I think I'm getting a good deal.
Last edited by BLexodus; 07-20-11 at 11:53 AM.
07-20-11, 11:59 AM
#25
It does happen everyday but that doesnt mean that it should. Just like 100%+ LTV mortgage puchases used to happen everyday, but now its rare as lenders realized that they were killing themselves. Back in the day a 20% down payment was required and delinquency on a home was rare.
The best thing for the guy with $5000 neg equity and no cash is to drive his car until he pays it off, then save money money driving it until the wheels fall off so he can have a down payment on his next car.
Just becuase others make stupid financial decisions everyday and the car dealers and lenders allow them to doesnt mean that they should continue to do it. Dealers want the car sold so they make money (from the sale, back end products, and fee from financing with banks and credit unions). The bank/credit unions are so cash heavy right now that they are willing to take greater risks on car loans to try and earn a better return on the car loan than they would on an investment since rates are so low. (I audit/examine financial institutions for a living).
So in a "perfect" world or "fantasy" world as threeevo stated, banks and CUs would only lend to those with a down payment and good credit history. All the financial institutions wish that this were the case but they all know that if they stop lending above 100% LTV then they wouldnt hardley be able to make loans, so they all keep doing it.
FYI, the average charge-off rate for auto loans is roughly 2% per year, and the average recovery rate is about 50%. So if the financial institution has a $1billion auto loan portfolio they will charge off roughly $20million a year and recover $10million back from the sale of the repossessed autos. Resulting in a 1% net loss. So if they are earning an average rate of 4-5% on the loan portfolio, their cost of funds is 1% (rates they have to pay customers to have money on deposit), and their loss rate is 1% then they are down to 2-3% yield on the auto loan portfolio. When you add in operating expenses for the institution and the money they have to pay to the dealers to refer loans (generally 2-2.5% of the amount of the loan, up front), many institutions are not very profitable, if at all. Some lenders are trying to lend their way out of the problem, hoping to increase revenue without increasing fixed costs, but usually they just end up taking on worse loans and end up with higher charge-off rates and lower recovery rates due to higher than average LTV on thier portfolio.
In the end, its bad for the consumer with the high LTV loan, and the financial institution, but usually better for the car dealer because they sell more cars.
The best thing for the guy with $5000 neg equity and no cash is to drive his car until he pays it off, then save money money driving it until the wheels fall off so he can have a down payment on his next car.
Just becuase others make stupid financial decisions everyday and the car dealers and lenders allow them to doesnt mean that they should continue to do it. Dealers want the car sold so they make money (from the sale, back end products, and fee from financing with banks and credit unions). The bank/credit unions are so cash heavy right now that they are willing to take greater risks on car loans to try and earn a better return on the car loan than they would on an investment since rates are so low. (I audit/examine financial institutions for a living).
So in a "perfect" world or "fantasy" world as threeevo stated, banks and CUs would only lend to those with a down payment and good credit history. All the financial institutions wish that this were the case but they all know that if they stop lending above 100% LTV then they wouldnt hardley be able to make loans, so they all keep doing it.
FYI, the average charge-off rate for auto loans is roughly 2% per year, and the average recovery rate is about 50%. So if the financial institution has a $1billion auto loan portfolio they will charge off roughly $20million a year and recover $10million back from the sale of the repossessed autos. Resulting in a 1% net loss. So if they are earning an average rate of 4-5% on the loan portfolio, their cost of funds is 1% (rates they have to pay customers to have money on deposit), and their loss rate is 1% then they are down to 2-3% yield on the auto loan portfolio. When you add in operating expenses for the institution and the money they have to pay to the dealers to refer loans (generally 2-2.5% of the amount of the loan, up front), many institutions are not very profitable, if at all. Some lenders are trying to lend their way out of the problem, hoping to increase revenue without increasing fixed costs, but usually they just end up taking on worse loans and end up with higher charge-off rates and lower recovery rates due to higher than average LTV on thier portfolio.
In the end, its bad for the consumer with the high LTV loan, and the financial institution, but usually better for the car dealer because they sell more cars.
I bought my last Lexus when it was 7 years old with 74,000 miles. The original MSRP was $38,xxx and I paid $11,000, drove it for 7 years and 100,000mi and sold it for $4,800. So the original owner paid over $27,000 to have the car for 7 years and I paid $6,200 to have it just as long. Yes, I had repair bills but nothing major and I did most of it myself.
07-20-11, 12:03 PM
#26
This is correct. The more you put down, the lower your interest rate will be, so you have to determine how much you want to put down based on what interest rate you can afford. I sat down with my loan officer and did sensitivity analysis to see what my interest rate would be based on what percent I put down. However, the minimum was around 2-5%, not anywhere near 20%.
07-20-11, 12:25 PM
#27
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i do work at a dealer and love customers that are buried (to a reasonable extent) it makes me a lot of money selling GAP policies and marking up rates because they can either put down 3-5k or pay a little higher payment with none.. lol
07-20-11, 02:00 PM
#28
This is correct. The more you put down, the lower your interest rate will be, so you have to determine how much you want to put down based on what interest rate you can afford. I sat down with my loan officer and did sensitivity analysis to see what my interest rate would be based on what percent I put down. However, the minimum was around 2-5%, not anywhere near 20%.
5% down, as long as your credit score is decent, gets you as good rates as 20% down.
Looking at bankrate.com right now for example on a $200,000 loan- at 20% down the rates on a 30 yr mortgage with a 740+ credit score are 4.33-4.75
Same thing with 5% down? just about identical rates.
Now, 3% down, you're look at an FHA loan rather than conventional... rates ARE different there (so is the way mortgage insurance works)...
But a large down payment doesn't really help your interest rate significantly between 5-20% on a conventional loan.... the main difference will be that at 20% down you don't need to pay mortgage insurance at all... (which is going to save you 75-125 a month for most typical mortgages UNTIL you reach 20% equity, at which point you can have it removed).
There's also home loans that offer a higher rate in exchange for charging you NO mortage insurance with a less-than-20% downpayment... that might have been what your advisor was showing you.... but those loans only make sense if you don't plan to stay in the loan more than 5-7 years, after that the higher rate ends up costing more than if you'd gone the mortgage insurance route instead (since it drops off after a while, but the higher rate never does)
Really the best way to save money on a home loan, if you can afford it, is a 15yr mortgage rather than a 30 yr one... not only would any applicable mortgage insurance drop off in just a few years the rates will also be .5-1% lower than a 30 year loan and you'll pay a TON (like 100k+ in most cases) less interest over the life of the loan.
And wow, has THIS gone far afield of the topic, so I'll shut up now
Last edited by Kurtz; 07-20-11 at 02:03 PM.
07-20-11, 04:16 PM
#30
That's not really true either...
5% down, as long as your credit score is decent, gets you as good rates as 20% down.
Looking at bankrate.com right now for example on a $200,000 loan- at 20% down the rates on a 30 yr mortgage with a 740+ credit score are 4.33-4.75
Same thing with 5% down? just about identical rates.
Now, 3% down, you're look at an FHA loan rather than conventional... rates ARE different there (so is the way mortgage insurance works)...
But a large down payment doesn't really help your interest rate significantly between 5-20% on a conventional loan.... the main difference will be that at 20% down you don't need to pay mortgage insurance at all... (which is going to save you 75-125 a month for most typical mortgages UNTIL you reach 20% equity, at which point you can have it removed).
There's also home loans that offer a higher rate in exchange for charging you NO mortage insurance with a less-than-20% downpayment... that might have been what your advisor was showing you.... but those loans only make sense if you don't plan to stay in the loan more than 5-7 years, after that the higher rate ends up costing more than if you'd gone the mortgage insurance route instead (since it drops off after a while, but the higher rate never does)
Really the best way to save money on a home loan, if you can afford it, is a 15yr mortgage rather than a 30 yr one... not only would any applicable mortgage insurance drop off in just a few years the rates will also be .5-1% lower than a 30 year loan and you'll pay a TON (like 100k+ in most cases) less interest over the life of the loan.
And wow, has THIS gone far afield of the topic, so I'll shut up now
5% down, as long as your credit score is decent, gets you as good rates as 20% down.
Looking at bankrate.com right now for example on a $200,000 loan- at 20% down the rates on a 30 yr mortgage with a 740+ credit score are 4.33-4.75
Same thing with 5% down? just about identical rates.
Now, 3% down, you're look at an FHA loan rather than conventional... rates ARE different there (so is the way mortgage insurance works)...
But a large down payment doesn't really help your interest rate significantly between 5-20% on a conventional loan.... the main difference will be that at 20% down you don't need to pay mortgage insurance at all... (which is going to save you 75-125 a month for most typical mortgages UNTIL you reach 20% equity, at which point you can have it removed).
There's also home loans that offer a higher rate in exchange for charging you NO mortage insurance with a less-than-20% downpayment... that might have been what your advisor was showing you.... but those loans only make sense if you don't plan to stay in the loan more than 5-7 years, after that the higher rate ends up costing more than if you'd gone the mortgage insurance route instead (since it drops off after a while, but the higher rate never does)
Really the best way to save money on a home loan, if you can afford it, is a 15yr mortgage rather than a 30 yr one... not only would any applicable mortgage insurance drop off in just a few years the rates will also be .5-1% lower than a 30 year loan and you'll pay a TON (like 100k+ in most cases) less interest over the life of the loan.
And wow, has THIS gone far afield of the topic, so I'll shut up now
It was a fixed 5/1 ARM, which offered a lower rate than a fixed 30-year but still afforded me 5 years fixed, which was longer than the time I planned on spending in the house. With a down payment of 20% I was at 4.00% interest. When he put in 40% down, my interest rate dropped to 3.625%, which is the rate I ended up with.
So in my case, going from 20% to 40% down netted me an interest rate lower by .375%, which resulted in a payment lower by about $100 per month. This may sound small, but over the life of a mortgage this interest savings adds up.
Like I said, I can't speak to all cases, but in my case the interest rate was definitely variable relative to down payment percentage.