You should be able to see the principle go down on the table. I would think it would be a selling point to disclose that it isn't a neg. amortization.

Do not accept what the sales person says or does not say. Get everything in writing, signed by the broker (not sales person) and have either a bank loan officer or a lawyer review it. Each state has truth in lending laws the brokers must obey. I am assuming when you said the second, you meant the second house not two mortgages on one house which is not good

You are looking at what builders call "spec homes" theres room to negotiate with these, unless your in a really hot area where houses sell within a day or 2,
You need to ask how long the 2.875 is for? is it for the full 5 years?
Also is the 2nd fixed? and for how long will the 2nd be for 5 years,10 years?
Allot is going to depend on the mortgage amount.
Find out what the payment for the 2nd is vs what the PMI payment would be if you didn't do a 80/20
For example
house $300,000.
20 % $60,000 10 years at 9.37% payment would be $772.45
$240,000 30 years 2.88% $996.(not sure how to figure it just for the 5 years but this should be close)
total of both payments $1768
$300,000. 30 years 6.5 fixed $1896.
not sure what the PMI would be.
but one thing you need to look at is if the total interest you pay for the year isn't higher than your personal deduction you will not be able to claim your interest deduction.
also if the 2.88% is for 5 years you will need to refinance and have to figure the closing costs to refinance might run $6k to $7k thats is approx $1300 a year for the 5 years and there is no way to figure out where interest rates will be in 5 years.
It sounds as if they want you to use the builders lender. We are also doing new construction and they said if we use their lender they are giving us $12k in incentives. It was as simple as us saying "with all the new construction going on why should I buy from you" :)
This is one time when knowing your credit score is very helpful The research I have done if your credit score is over 740 you should be eligible for between 5.75 & 6 %.
Again I used this in the negotiating. I told them I have no problem using their lender but with my credit score at 808 I could go anywhere and get the best rates, and if they tried to "play games" with the interest rate I was going elsewhere.
I also echo what others have said, get it in writing and make sure they do not put "your credit score" as a condition.
Too many times I have heard stories where people have been "promised" low rates and they have come back and said "sorry but you only qualify for 7% or more"
good luck
karla

Thanks for all the replies:) I really apppreciate it. We spoke with the sales person today, and the 2.875% is fixed for 5 years, but it's an interest only loan. My bad when I said it's for PITI. The 2nd mortgage (20%) is also fixed for 5 years. We're not planning to stay in this house for over 4 years. So I'm thinking this is a good deal for us.

We have an appointment to see the lender's representative this Tuesday and will get everything in writing. We will ask the rep to run the numbers for different scenarios, like 0 down, with downpayment, PMI's, etc.

I agree with all the other posters....GET IT IN WRITING. Get ALL the specifics in writing, that way there's no loop holes or misunderstandings.

rich
the one negative that jumps out at me is with paying basically interest only, is you are in effect "renting " the house. the payment you make to the 2nd is not really going to lower the balance. So in 4 years you could pretty much owe the original amount. Now lets say worst case scenario,the housing market either gets worse or only slightly increases maybe going up 5% and it is time for you to sell once you have deducted the 6% commission to sell plus your sellers closing costs you could end up either making no money or even losing money.
while comparing the different payments also take the time to find out how the difference in interest will affect your deductions. Call your account or a tax professional and ask them to "run" the numbers.
Another option to look at, you said there was a difference of $1200 per month. You could take that $1200 and put it in a high interest money market account or CD's if you are paying 2.875% but can earn 5 to 6% on the $1200 difference you are looking at $14,400.00 plus interest building in your account. so you will actually make money, in 4 years when you sell you will have $57,600.00 plus interest. So even if the market stayed flat you have made money.
Now the third problem with interest only (not knowing your situation but as a cautionary for others reading this and thinking hmmm)
if the only reason "interest only" is a consideration because it is the only way someone can "get into" a house that is the worst reason. One of the reasons foreclosures are on the rise is people where "charmed" into buying more house than they can afford by "creative" mortgage brokers, then their situations change and they need to get out, they have found themselves unable to.
ask questions, run numbers, and ask more questions :)
karla

Loans like this sometimes have hefty prepayment penalties--make sure you get prepayment info in writing.

Rich69, you came to this board for advicehere's my two cents. Work that lender hard to find out what happens in year 6 on both components of that piggyback loan. I know you plan to move w/in 4 years but the market is unpredictable and you may not be able to sell in your planned time frame. You only need to search this forum to find plenty of people who have been unable to sell their homes in the time they had hoped. The home I bought in 1992 lost 15% by 1994 and stayed flat until 2001. I wanted to sell several years earlier and couldnÂt come up with the extra money and I had a FRM.

The big downside to an 80/20 split mortgage (aka: piggyback) is that at 100% financing with interest-only components, you'll build little, if any, equity. You will need to rely on appreciation to gain enough to pay off the loan and pay sales transaction costs. Your home may not appreciate. It may even depreciate. After all, the developer is offering this deal for a reason. Do you have a back-up plan? Will you be able to bring thousands to the table to complete a sale in four years? A 5-10% down-payment will help hedge that risk a bit. Is the second mortgage component fixed at 9.25? That rate just happens to be Prime plus 1 which is often quoted as a floating rate on a second. Be certain that the second is indeed fixed at 9.25 and not tied to the prime rate which fluctuates.

Plan for that rainy day and find out what happens when the 5/1 ARM expires. Does it have a rate cap? Is that rate cap tied to the original 6.5 rate or the buy down rate? Are there any early payment penalties or refinancing requirements. I can think of dozens more questions IÂd be asking the lender. Yes, lenders do have disclosure requirements but that doesnÂt mean they explain things well to consumers. The burden of knowing all the possibilities is on you.

So do your own research and ask tons of questions. Find a good mortgage calculator and work interest rate scenarios on your own. Ask yourself if youÂll be able to handle the payments in year 6 should you be unable to sell when you want.

Wow! Thanks for the advice. I have a list of questions to ask the lender, but you guys pointed out some things that I have missed. I'm adding those to my list.
Like what I said, we'll run the numbers in different scenarios.
I'm not into IO loans, it's my husband whose kinda sold to this, and I think I'm brainwashed:(
Karla and Novahomesick, good advice. I'll let my husband read this thread.
I was told that there's no pre-payment penalty, but nothing is in writing, so I'll wait till we talk to the lender. Thanks again,everyone.

rich69's wife
lol don't let him read it yet. Now is your chance to "dazzle" him with your new found "mortgage expertise"
also another fun thing is to watch the faces in the sales office as you ask questions that the usual home buyer doesn't

"Work that lender hard"
novahomesick - we think on the same lines. Do youlike to go car shopping also?
I can't wait till we get a close date on our new construction, so I can start the "ok lets play ball" to lock in our rate.

karla

Karla, I do think we share a similar viewpoint.as for new car shopping? Good grief, Id rather stick a hot poker in my eye. But you can bet, when I do bite the bullet and buy a new car, I go preparedhomework done, cell phone in hand complete with a list of my dealers competition. Oh, and I always pay cash but I dont let them know that until the final number is reached.

Rich69, The lending climate of the last decade has changed dramatically. The ability of banks to move loans off their books into the secondary market means you can't necessarily trust the old adage "Well the bank wouldn't lend me the money, if they didn't think I could pay it back." Also, banks will provide you with heaps of disclosure and truth-in-lending statements...at the closing table. You'll want to know the ins and outs of your loan before you sign a purchase contract which is long before you reach settlement.

I am going to copy a post written on this forum last year by a wise head named TriciaE. She has a very balanced and realistic view of the real estate market. I think the subtext is that the old pre-2000 buying rules of thumb are still valid. Its not a bad lens through which to view your loan decision:

Posted by TriciaE Nov 13, 2005 - "I've been lurking around this Forum for a long time to get a feel for what's happening around the country. My hubby is head of lending for a major regional bank and I was both a residential loan officer, a construction loan officer, and a commercial loan officer for the better part of fifteen years (although that's been a while ago now). My hubby and I met when I interviewed for a job with him. So much for basics...we've both made our living with real estate. My hubby is also an attorney.
As to the question whether real estate can go down...that's really, I'm sorry to be so blunt, but it's true...a silly question. Of course, real estate can go down and does so substantially. When you look at it over the long haul, it always rises (same as equities) but in a shorter time-frame prices fluctuate considerably due to any number of factors (employment, interest rates, inflation/deflation in the general economy, war, market saturation, over supply of inventory, etc.).
Are we in a bubble today? SOME areas of the country are showing definite signs of being inflated. But, like politics, ALL real estate markets are LOCAL. Even during the huge downturn in the late 1980's there were some markets unaffected. Second home markets normally tank first (coastal properties may hold out longer than mountain/lake properties but even beach homes can and DO go down in price). In New England, from 1988-1992...home prices dropped, on average, about 35%; home sites dropped 50%; and condos dropped 60-75% in value. There was simply way too much inventory. That's a little different in today's market. Builders's are not putting up the spec homes they did then so inventory of new homes is in much smaller supply. Lenders learned a lesson and don't provide the huge subdivision construction loans with 50-100 specs anymore. The lack of new homes to meet demand has, in part, fueled the inflation of the re-sell market. Also, immigration of high tech workers, medical, and other higher paying workers from countries like India has played a roll. These new immigrants need a home and they have money. Most of these jobs are concentrated on both coasts.
Real estate being purchased as a primary home should not be purchased with the idea of flipping it to make a huge profit...speculative real estate should be reserved for additional properties after one has secured their primary residence. To do otherwise is a good way to end up on the street...if you buy too much home for your income and the market cycles downward you can't sell and get out whole. Just ask thousands of folks who experienced that reality in 1990 around the country. With the change in the BK laws, the potential for disaster in this country is HUGE right now. Many, many people have purchased at the top of their ability to pay, others have refinanced several times taking out equity to purchase non-durable goods, and others have financed on either ARM's or interest-only mortgages. This is a clasic recipe for disaster.
Is it a good time to buy? That depends on your situation. Sometimes, there's simply no choice. It also depends on your location. For example, right now...buying in the Gulf area is probably a good short-term investment...MAYBE? Real estate is always a risk if you are buying for investment. Most people, in the US, buy houses as homes and intend to live there for a while. In that case, it doesn't matter what happens...unless you are forced to sell during a down-turn market. That's when the snowball starts to roll.
So, we are watching closely unemployment numbers, BK filings, retail sales numbers, energy cost increases...everything that will affect a homeowner's ability to make those high mortgage payments. Right now, things don't look too pretty. The numbers point to people reaching their cap on ability to pay. Sooner or later, they will be forced to sell and look for more inexpensive property. Timing this, however, is as difficult as timing a stock market peak or bottom...back to the local issue.
Bottom line is that if you're looking to purchase a home for your family and anticipate living there for 10+ years...you'll most likely be fine although times might be depressing for a few years as prices fluctuate. If you're thinking buying a house will perform better than your 401(k) has the past three years...I'd be rethinking my concepts. My hubby tells me many people, across the country, back in 2001-2003 cashed out their 401(k)'s in disillusionment and bought real estate instead. They are using money they would have put in their 401(k) to make the mortgage payment on these McManions we see all over the place. Those people have taken a large risk...both short-term and in their retirement planning.
When will prices go down? Bottom line is "Yes, but who knows when?" You could wait another five years hoping...Or, by spring we could see drops across the country. There are just too many unknowns to time things that close. I do know lenders are gearing up for a higher volume of defaults...tightening credit standards, eliminating more risky financing options, etc. for their own protection. Credit card defaults are currently at all-time highs and foreclosures are close behind as we are discussing this issue. These are not positive signs for our economy. We also have a new Fed Chairman early next year...many think they know what he'll do but we won't know for sure until he does it...will he continue to tighten, stop, or lower? Also, and this is important...watch the spread of short- term to long-term treasuries. The spread has been narrowing for some time now. You, probably, already know that there's no incentive to buy a long CD 'cause you can get almost the same rate just going out 8-15 months. Historically, when the short and long T-bills converge recession is on the horizon. Again, this is another indicator of what's actually happening in the economy.
There will always be good deals on real estate. Families' circumstances change and, sometimes, people are just forced to sell. If you're in the right place at the right time...well I'd always rather be lucky than good anyday. But, as more and more people are forced to sell because of economic reasons...that increases inventory...which pushes prices down...supply/demand scenario. That's visible in some markets now. Others are still rising...like Dutchess County, NY. That market has not slowed either in DOM or price. Dutchess County is becoming a suburb for NYC as people are forced out of Westcester Co due to prices and/or taxes. So, if you're looking for a home in this market...probably might as well just bite the bullet and buy...prices aren't going down anytime soon.
So we can argue whether prices will drop all day long...and most everybody will be right in one way or another. It just depends on where you are. If you live in an area dependent on one primary employer...and that company folds...well, just ask Seattle in the 70's what can happen. In my area, things looked bleak earlier this summer when the Groton Submarine Base showed up on Rumsfeld's closing list. They are a major contributor to our local economy. Predictions of doom were everywhere. But, the base was removed from the closure list by the Committee and now everybody's pretty upbeat about our local potential. If you live in an area where military facilities are going to be substantially increased due to this reshuffle of assets, prices should continue to rise.
Bottom line...each of us has own our reality depending on where we live. There's no point in arguing since everybody has the potential to be wrong/correct. Watch the national economy but also really learn what's happening locally. Even after 911...some parts of the economy boomed (example: things pertaining to the "nesting" factor like home furniture, gardening, etc. as Americans focused on home and hearth). "

nova I agree i bet we could have some interesting chats. I love doing what my DH calls "credit geek conversations"
:)
karla