Real Estate

Conventional financing verses government financing

By Mike Southwick

After the real estate bubble burst in 2007 we saw a significant shift in the type of loans that most people chose to pursue.

Prior to 2007 there were all sorts of options available — zero down, interest only, adjustable rate mortgages and even negative amortization type loans. After 2007 and going forward the most popular non-conventional loan (especially for first-time buyers) was the government backed FHA loan which only required 3.5 percent down and allowed for marginal credit scores.

These types of loans were probably the go-to loans for most people trying to get into or back into the market for the last six to seven years. It could be argued that this type of loan helped jump-start the home buying wave that has turned into quite a current feeding frenzy. The down side or unintended consequences from this large investment by our U.S. Government is it has created a rather large mortgage portfolio that has huge risks that come with such extreme leverage and this is resulting in the government needing to increase its mortgage insurance premiums.

As of April 1, 2013, the FHA mortgage insurance will increase again, and then after June 3, 2013, the mortgage insurance will remain for the life of the loan as opposed to dropping off at a certain point on loans issued prior to June 3.

What does all of this mean? If you are in the hunt for a home and need a mortgage you should really
evaluate the cost of a FHA loan over a 30-year period especially in relation to the mortgage insurance
question. Currently there are some 5 percent down payment conventional programs where the overall cost
might be less than a FHA backed mortgage, making the conventional route now a little more appealing.
This is not for everyone but you should have a good mortgage advisor/coach along with a good Realtor
who knows their stuff to properly advise you and protect your interests.

Each person’s interests are different and you should use caution before getting caught up in the frenzy of making a bad decision when it comes to obtaining a loan. Some rural areas located in El Dorado County, Amador, Sacramento County, Placer County and others have USDA funds available for 100 percent financing and a good mortgage advisor can help you with that.

As we see conventional financing make a comeback it may be wise to evaluate a 15-year mortgage,
especially in light of the potential changes that may be coming in relation to the Mortgage Interest
Deduction (aka MID) that is currently being discussed in Congress. The old rule of thumb might have
been to carry a high mortgage balance for 30 years that in turn provided a large write off for tax
purposes and, for some, this may still be a good strategy. As the political debate over the MID continues, I
believe that we should have a contingency plan in the event that it is modified or eliminated and this is
something you should discuss with a tax or financial professional.

Mike Southwick is managing broker at Century 21 Select – El Dorado County.

Special to the Democrat

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