Stuck between 2 Mortgage options

austinbiker · Joined: 13 May 2008 Posts: 3

Hi all, newbie here.

Can y'all help me decide between two mortgage packages?

Total Borrowed: $325,000

1) BOA no-fee mortgage

30 years at 6.125%
All closing fees paid (except one for $177)
No PMI

2) Wells Fargo 80/10/10

Primary 30yrs at 5.875%
Secondary 15yrs at 8.75% (can pay at a 30yr amortization, but due within 15yrs)
$725 origination fee for the 80/10/10
Additional $1400 in fees

I can't be sure, but it looks like the break-even for the Wells Fargo is some 10 years down the road.

Anything I need to consider here? Does one seem better?

m2c · Joined: 03 Aug 2005 Posts: 743

I’m having difficulty trying to replicate your 10-year payback. Presumably the BofA $325K mortgage is 90% LTV since you’re comparing it with an 80-10-10 but this yields an “odd” sales price. Furthermore, the sale price assumption yields a HIGHER combined P&I with Wells. Pay more per month and have more cash closing costs? Doesn’t make sense. What are the loan amounts of first and second on Wells?

The “no fee” mortgage is more of a marketing ploy than a borrower benefit but it does work if closing costs are within reason. Closing cost is paid by lender via “premium pricing” but above-par cost reimbursement becomes less efficient as closing cost rise. Wells can certainly give you a quote on a “no fee” basis so you would have apples-to-apples.

You might want to dissect the BofA no-fee to see how it might compare with a similar program from Wells. The “no PMI” with the BofA is probably LPMI (lender-paid MI) – again done via premium pricing (i.e., higher interest rate). If so, “no PMI” is a misnomer at best; deceptive at worse. Perhaps the LO said “no monthly MI” and you misinterpreted. On the other hand bank LOs tend to be sloppy. Here’s where a lot of guesswork begins. The mortgage market has twitched around a bit lately but after a small increase yesterday afternoon, the 6.125% rate has about 1.75 point premium over what I’d consider “normal profit”. If you’re over 700 FICO, the LPMI will cost BofA 0.85 points which leaves 90 basis points to cover other closing costs -- $2,925 on a $325K mortgage. Add in the $177 and you get an implied closing cost with BofA of $3,102. Wells is charging you $1,400 + $725. Hmm….that’s indeed interesting. Now your FICO may be lower (LPMI costs more) or quotes could have been on different days but it might be worthwhile to get a “no fee” quote from Wells.

As the figures are presented, the BofA looks superior but I’m certain I’ve misinterpreted something. Since you’re paying cash closing cost with Wells, you’d expect combined payments to be lower. Don’t forget the amortization speed kick you get in the initial months with the lower rate but this is partially offset by the rate on the second.

austinbiker · Joined: 13 May 2008 Posts: 3

Thanks.

Here's some more detial:

The Wells Loans are:
10% at 8.75%, so about $32,500
80% at 5.875, so about $292, 500

The BoA is definitely better in the near years, as you say. It's the out years (3-10, depending on how aggressively you prepay) that make the 80/10/10 better.

I did scenarios where we prepay to get to 20% within a few years and once the secondary lein is paid, the Wells loan looks better pretty quickly.

Does that thinking make sense, or am I missing something.

m2c · Joined: 03 Aug 2005 Posts: 743

OK, I better understand your objectives. Doesn’t make you decision any easier but …..

I’m sure you’re paying for LPMI in the BofA rate. In general it’s more cost-efficient to do the transaction with a combination loan if your intentions are to pay down the debt to 80% LTV in a relatively short period of time. Once you’ve “paid” LPMI, it stays on there until the loan reaches SCHEDULED (not actual) 78% of original “value”. In the case of 6.125% note rate, this is around the 105th month. Why pay for something you “don’t use”? Also I’m bothered by BofA’s implied closing costs/profit relative to Wells. This could be explained as something as over/under estimating title fees by either bank.

Not an easy choice but now I’m leaning towards Wells given your intentions. You’re not making much on savings or money market accounts these days so paying down a second mortgage is very efficient. A lot depends on how rapidly you pay the second mortgage off. Watch out for any prepayment penalty – not typical but could be there.

austinbiker · Joined: 13 May 2008 Posts: 3

Thanks and agree.

The closing cost savings were my math, using the GFE from Wells as comparison. The BoA website has highly inflated estimated closing costs to make their comparison better.

prestonian · Joined: 19 Sep 2006 Posts: 15

This is Marshall the senior loan processor.
I do got your concern however i think you're getting interest rate which is really higher just becuse you are getting you financed for 100%
However if you wish to have a relative lower rate with just one mortgage we can definately try to beat any deal that you have got till date the only thing that you have to consider is that we finance maximum 95%

you can call me on 8662075340 extn :1103