- The Washington Times - Wednesday, February 22, 2006

Q:We are planning on selling our house and moving to a bigger one. We don’t want to

spend more than $1,000,000 for the new house. We should be able to sell our current house for about $550,000. After sales commissions, we should net close to $250,000 after paying off our $265,000 mortgage.

We’re not sure if we want to roll all of our net proceeds into the new house as a down payment. We’re even thinking of putting only 10 percent down and pocketing the difference. We not interested in aggressively paying down principal, and we’re not interested in raising our monthly payments.

Any suggestions as to a strategy and program?

A: Yes, but let me first point out that you have caught the “want-the-cake-and-eat-it-too” syndrome.

Here’s what you’re telling me. You want to purchase a house for a million dollars and put 10 percent down, or $100,000. This will leave you with a $900,000 mortgage to pay. You want to pocket the remaining $150,000 and keep your monthly payment the same while going from a $265,000 mortgage to a $900,000 mortgage.

Sorry. I don’t think it can be done. The best thing to do is run different scenarios and choose the one that most aligns with your objectives. Yours is a classic example of give and take, just like you learned on the playground as a child. You may have to accept a higher monthly mortgage payment and a little less money in the bank, or a less expensive house. We have to determine the compromise that best suits you.

Let’s plug in some hypothetical numbers. I don’t know your current mortgage payment, so let’s assume $2,100 per month, which should be close for a $265,000 mortgage on a house now worth $550,000.

In order for you accomplish your stated objective, the $900,000 mortgage on the new home can’t exceed $2,100. It’s not going to happen. A $900,000 mortgage amortized over 30 years at 6.50 percent requires a principal and interest (P&I) payment of $5,688 per month. Add estimated taxes and insurance of $800 for a total PITI of $6,488.

This is a far cry from $2,100.

Let’s run the numbers using the trendy interest-only loan, where the required payment covers only interest, no principal. At 6.50 percent, the total payment would drop to $5,675, including taxes and insurance.

Now let’s look at an interest-only adjustable rate mortgage (ARM). Since the yield curve is flat, meaning short-term rates and long-term rates are virtually the same, we’re not going to gain much ground. In fact, I see that a 3/1 adjustable, which carries a fixed rate for the first three years, only drops the rate to 5.875 percent. Paying just interest, the total payment would be reduced to $5,206.

Now let’s try a loan that carries negative amortization, which means the minimum required payment doesn’t cover the interest charged, so the unpaid balance is added to the loan amount. A common “payment rate” of 1.50 percent results in an interest payment of $3,106, plus $800 for taxes and insurance, totaling $3,906. Still, it’s $1,806 more than your current payment.

Let me back up and explain a negative amortization loan. Contrary to a lot of misleading advertising that promote “rates as low as 1 percent,” the actual interest rate on such products is closer to 6 percent. As I said before, there’s a big difference between the payment rate and the actual interest rate.

An interest rate of 6 percent on a $900,000 loan would carry an interest charge of $4,500 per month. If the minimum payment is only $3,106, the balance on the loan would increase by $1,394 per month.

A “neg-am” loan is a product that should be considered very carefully and cautiously before jumping in. Make sure you consult a knowledgeable and trusted professional first.

Let’s try to solve your dilemma by working backward. A $2,100 total payment, less $800 for taxes and insurance, leaves you with $1,300 available to service your mortgage debt. With a 30-year amortized loan, such a payment would allow you to borrow only $205,700. An interest-only ARM at 5.875 percent would increase the borrowing power to $265,000.

I don’t see any practical way that you can keep your cash flow the same and purchase a house valued at a million dollars. If you decided to plunk the entire $250,000 proceeds from the sale of your house, you would still need a $750,000 loan. An interest-only payment at 5.875 percent equals $3,672. Add $800 for taxes and insurance for a $4,472 total payment.

A loan with negative amortization with a beginning balance of $750,000 would result in a total payment of $3,388.

My advice would be to sit down with an experienced loan officer and run some more scenarios. He will explain the myriad programs available and advise you of the risks, advantages and disadvantages of each program. He will then take into consideration your income, assets and spending habits and come up with a balanced plan.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail ([email protected]


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