First time home buyer loan (ACORN) VS. 30 years fixed mortgage Loan?

Asked by Bunnyin, Oakland, CA Sat Jul 28, 2007

My husband and I are first time home buyer. We can't decide if we should take advantages of the first time home buyer program with high approval loan amount, lower interest rate, yet with a 40 years term loan. The first 10 years of mortgage, we are paying toward interest only and after the 10 years then we will start making payment toward the principle. I don't like that idea. I prefer the 30 years loan and making my mortage payment on P & I. However, the differences are we will get higher amount of the loan approval -$60K more. It will give us more option -townhome, house, etc. Can someone tell me any pro and con of those first time home buyer program?

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Scott Jower, , San Mateo, CA
Sun Jul 29, 2007
ACORN is great for first time buyers, and typically the interest rate is lower. A draw back of this program is the maximum loan amount is considerably less than conventional loans. Lenders also have other programs available if the subject property and income falls within a particular census tract or median income, which may give you a higher loan amount with comparable rates and terms.

P&I versus Interest Only and 10 years versus 30 years. In a spread sheet compare the P&I vs. Interest payments and look at the difference in "cash flow." If the difference is significant, ask yourself how much would the extra cash help every month? or can you use this extra cash to fund your retirement or invest? To yield the true benefit of a 30yr loan you would need to keep the loan for at least 13 years. The average life of a loan is 5-7 years. People either refinance or move. Beacause the interest rates on a 30 year loan are higher than rates on a 5/1 ARM ,7/1ARM or 10/1ARM, the carrying costs are a lot higher.

I'm sure this only raises more questions, feel free to contact me directly (650) 577-5886 and I can give you specific answers based on your finanical situation and concerns.

2 votes
Bridgette Ko…, , Florida
Sun Jul 29, 2007
Thank you for providing Yin C Sui with a valid dissenting opinion. I too, was going to come back to this thread and make the same exact points you did, but was waiting for my colleagues with direct experience with the ACORN program to better state their case. I'm not sure they have; but, I am certainly not a financing expert.

Yin C Sui,
My fellow REALTORs with ACORN experience seem to think this program is a good idea--I defer to their direct experience. But please keep in mind these things:
1. Few people buy their first home with the intent of selling in a few years; but sometimes, due to unforeseen circumstances, this is what happens. What would the repercussions be in two or three or five years if you had to sell?
2. Paying down the principal with "windfall"s or "...a little here and a little there..." —is technically correct and basically great advice. But, do you have the discipline to do this?
3. Your gut is telling you to go with the 30 year conventional loan—unless someone presents a compelling case otherwise, trust your instincts.

Scott gave you some great advice from a mortgage pro, start there. And please discuss you concerns with your loan officer. If he/she is not of sufficient assistance, hire a new one. This is an important decision; you must be comfortable with your final choice no matter what happens in the future. Best of luck!
1 vote
J Lo, Home Buyer, California Glory, Brentwood, CA
Sun Jul 29, 2007
The answers provided are very sage and experienced. What I see is a pattern. If you decide to take the ACORN loan it would behoove you to make additional principal payments; and here is why:

The current state of the housing industry has it's root in the problematic ARM loans. Interest only. If your home doesn't appreciate over time in keeping with your payments your loan could be more than your market value. Not over the long term of course - but for the immediate future - all things as they stand today.

Heaven forbid you should get into a pinch or buy more house than you can afford; or suddenly have to relocate - and find that your home is worth less than what you owe...

Your question provides me with one clue: "I prefer the 30 year loans"

As my colleagues below have stated this is a great program for the first time home buyer. And there are benefits exceeding the obvious of qualifying for more "house" - you however; have to ask yourself these questions before you decide:

Will I be disciplined enough and make additional principal payments to ensure the loan doesn't stay stagnant for the 10 year period?

Am I willing to owe 250k on a 250k loan in 10 years time - if I can't do the above?

You and your husband will ultimately have to decide what is best for your family, what works with your discipline personality. If you decide to go ACORN you must be armed with the necessary mindset of paying the principal down as if it were written into the contract.

Much luck to you and I whichever way you decide - I hope you find a peaceful place to call you own!
1 vote
Bridgette Ko…, , Florida
Sat Jul 28, 2007
Yin C Sui,
in my very humble opinion, I'd go with the conventional loan. Paying interest only is a bad idea. I don't know the exact situation of your current market, but you could end up with a mortgage balance higher than the value of your home! Please speak to a mortgage professional you trust. If you don't have one, get a referral from your REALTOR or friends. He/she will be the best source of information. Best of luck and happy hunting!
1 vote
Jacqueline M.…, , Castro Valley, CA
Sun Nov 18, 2007
The first time home buyer program is usually a better way to go...because the interest rates are lower and the loan is normally with a reputable company....if you can get a FHA loan, you can refi after a couple years, if you wanted, the first few years of most mortgages are interest only anyway! Also, with the lower interest rate you can always add extra money to your principal, whenever you want.
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0 votes
Sylvia Barry,…, Agent, Marin, CA
Thu Aug 9, 2007
Hello Sui Yin:

Today (same as every week) at our office meeting, the mortgage broker affliated with our company came and talked about the current mortgage options, including types of mortgage offered, current interest rates, trends and things; she also reminded us of a first time home owner loan that's still available - \

Her handout (as of 8/9/07) said this is a loan has a rate of 6.25% - 6625% for a 30 years fixed JUMBO loan (VERY LOW for today's rate)

Some of the stipulations are :

- Maximum purchase amount of $652, 257 (In S.F. and Marin)
- Maximum Income of $121,589 (for S.F. and Marin)
- First Time Home-Buyers (or no Home ownership in 3 years)
- Purchase Transaction Only
- No down payment required
- 620 FICO

... etc.

Worth checking into. Give me a call if you will. You can talk to her and find out more. Don't wait before the rate changes .
_ High Debt Ratio allowed
- Low income families - in Marin and San Francisco counties, that's defined as - First Time Home-Buyers intereste rate
0 votes
David duPont, , Mill Valley, CA
Thu Aug 9, 2007
I would caution against any amortized loan. The truth is that most people move within 5-7 years in which case you 30 year loan with a state interest rate of ~7% will in actuality have a realized rate of almost 9% as the interest is "front loaded". I would suggest a 5, 7 or 10 year fixed interest only ARM and to pay a little principal off each month on your own. There are several other benefits to this strategy as well
0 votes
Daniel, , San Diego, CA
Thu Aug 9, 2007
Why give the bank your principal back each month if you are paying the same amount in interest regardless. If you take the difference of the interest only payment and the P/I payment and put that amount into a side account (whether it be a money market or something else), you can at anytime take the side account money and pay down your mortgage. And as a side note, when you do this, your interest only payment decreases. Reason being is that the payment and the interest (on an I/O loan) is based off of the current principal balance from that month. So even if you were paying down principal on your I/O loan every month, you next month's payment will be less...and since your payment is I/O, that means that your interest that you are paying is less. It is a much more advantageous loan for paying off a loan quicker, for creating wealth, and for being liquid for "rough times."
0 votes
The Hagley G…, Agent, Pleasanton, CA
Sun Jul 29, 2007
I am a big fan of the ACORN program. Your lender will most likely allow you to make an additional monthly payment to your principal, which will allow you to pay your loan off before the 40 year term is up. California real estate is a great investment and it's a great time to buy. The bottem line is to make sure you are dealing with a mortgage professional that you can trust - and that you are comfortbale with the monthly payments.
0 votes
Michelle Car…, Agent, Coppertino, AL
Sat Jul 28, 2007
I always advise my clients to pray and do whatever decision gives them peace. If the loan amount is the difference between condo & SFH, that may be personally significant to you--otherwise you may but a condo now, only to wish you'd bought a SFH, and be 5-10 years off from being able to move up.

A great rule of thumb is to always double your principal payment; if it's only $100, double it. If your payment is currently interest only, add $100/month. On a 30-year fixed, paying just one extra monthly payment amount in principal each year pays the loan off in 23 years.
0 votes
Patti Philli…, , Carlsbad, CA
Sat Jul 28, 2007
The advantage to this type of loan, is- as you stated- you are approved for more money, therefore, more home. What I would suggest that you could do is pay a bit each month over and above the interest payment. You would be amazed how quickly a little here, and a little there adds up on paying your interest. There is nothing to stop you from doing this. Got a bonus at work? Put it toward that principle! The up-side is that if there is a tight month, you have that lower payment.

Make sure you have discussed the plus and minus of the loan with a lender you really feel you can trust. If you don't have one, give me a call. I have a number of lenders I feel look at what is best for the client, not their own pocketbook, and will give you an honest opinion. Good luck. You are doing the right thing in "getting in the game" and buying your own home! That is the first step to building your future.

Patti Phillips
Encinitas, CA
0 votes
Dave Rivera…, Agent, Orinda, CA
Sat Jul 28, 2007
I think you should take advantage of this great program; I wish it had existed when I bought my first home.
A 40 year mortgage makes your payments lower, and qualifies you to buy more house than a 30 year loan.
Though it may be "interest only" the first 10 years, if you find yourself with a "windfall", what is to stop you from paying extra toward principal as well? Also, as you said, you will have more options on which type of home you can buy. As far as prices droppping and possibly owing more on your mortgage than the house is worth, here is my opinion: if you are planning to stay in your new home indefinitely (rather than just a few years) you won't have to worry so much about market price fluctuations...prices always rise over the long term. Unless you would be selling in the next few years, you can count on the home value increasing. I know a Bank of American VP who explained the Acorn program to me, and I am very impressed with it.
0 votes
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