Is a 5.35% interest rate worth it?!

[Corderos SMith]

Longtime reader first time poster. So my finace and took the first step towards purchasing a home. We recently got an estimated FHA loan approval for $125,000, our lender said she can use a tsahc (Texas state affordable housing corporation) grant that will put up to 5% towards the downpayment, which is only 3.5% because the FHA loan.

The dilemma is that the tsachc requires a 5.375% interest rate on the loan! Is the interest rate a little ridiculous or does it even out because its basically no money down. I can always refinance right? Should I visit other lenders?

By the time we plan to buy around Mayish of next year I will have about $10,000 saved up. We're located in the DFW area so as you know deals go fast ! Any help is appreciated. 

[Chris Mason]

Hi @Corderos SMith,

The local government down payment assistance programs are mostly a shell game.

If you worsen the interest rate pricing by, say, 600 basis points, of course a lender can afford to give a "grant" for 500 basis points. They can now sell it for 600 basis points more on the secondary market, meaning they can give you 500 bps with change to spare! And because this is a government program, it's excluded from the CFPB/Dodd-Frank "high cost mortgage" anti-usury laws that would otherwise prohibit such an interest rate on an owner occupant mortgage. It's just one of those things where when it's the government doing it to people, poof suddenly it's magically OK and legal.

Is it worth it? That's up to you.

How does it work? I hope that gives you an idea. :)

A question to ask is "how soon can I refinance out of it?" -- the longer that timeframe, the riskier it is. The era of historically low rates is going to end sooner or later.