Is CalPLUS Conventional Loan with ZIP Extra a First-Time Homebuyer Dream?

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California Housing Financing Agency (CalHFA) wants to spread the word out on its new assistance program to help first time homebuyers. I’m compensated for this piece, though the opinions are completely mine.

Living in Southern California, I am under no illusion that the cost of owning a home here is anywhere close to average house prices of our country. My cousin is actually considering his first home purchase, so I’m using this opportunity to evaluate whether the CalPLUS Conventional Loan with ZIP Extra through CalHFA could be a right option for him. With this loan, you get a standard 30 year fixed loan but the kicker is a zero interest loan payment program called ZIP Extra (Zero Interest Program) to help with the downpayment.

What? No Interest?

You heard that right. The ZIP Extra is a junior loan of $6,500 + up to 3% of the original mortgage that can be used towards a downpayment or closing costs. The assistance comes with 0% interests, and you don’t even have to pay any of it back until you retire the loan. That means if you don’t move or refinance, it’s possible to get an interest free loan for 30 years. The caveat though is that the original loan then comes with a higher interest rate. As of writing, this extra cost is 0.375% added to the interest rate. I made some quick calculations and decided that a borrower is actually worst off with the extra interest at first, but then the mortgage interests being tax deductible makes the ZIP Extra a pretty good deal.

Who’s Eligible?

First of all, your household income has to fall into what’s deemed low to moderate. The exact amount depends on where you live and the number of people in your household, but the limits are generous because our family of four living in my county can earn a little over $100k and still be eligible for this assistance.

You also have to be a first time home buyer to qualify for ZIP Extra and use the property as your primary residence. In addition, at least one of the borrowers must complete homebuyer education counseling and obtain a certificate of completion through an eligible homebuyer counseling organization. Finally, the house needs to fall below the sale price limits. To give you a rough idea of the limits, any home that is under roughly $600k or so would qualify.

There are Even More Assistance for Some

Note that some people can get even more assistance through the Extra Credit Teacher Home Purchase Program (ECTP) and California Homebuyer’s Downpayment Assistance Program (CHDAP). The former, which my cousin won’t be eligible for, is available to anyone working in a County/Continuation or High Priority school. But he can definitely get more downpayment assistance through CHDAP. This program offers a lower interest rate loan for up to 3% of the original loan amount. Again, as of writing, the loan amount is 3%. In other words, taking advantage of this assistance has an effect of lowering the total interest rate of the mortgage, because any downpayment you can come up with equals a lower mortgage loan.

What Do You Think?

Obviously, these programs are designed primary for people who can’t seem to save enough for the 20% downpayment to buy a home. I know selling homes to people who can’t save sounds awfully familiar to the disaster that caused the financial crisis, but many responsible first time homebuyer in our neighborhood can benefit because not everybody has figured out how to save $100k for a $400k house.

I looked at my cousin’s situation, as he was planning to rent a 2 bedroom condo for roughly $2,000 a month. For that same amount, he can be paying for a mortgage worth $390,000 through this program without much of a downpayment at all if he so chooses. He still needs to pay property taxes worth about 1% of the property cost on top of the mortgage payments, and PMI if he doesn’t put down a 20% downpayment, but the tax savings on the interest on the mortgage plus the property taxes will make up for these added costs. And plus, 2 bedrooms in that area costs slightly less than $390,000, so he’ll be saving even more.

If he decides on the house purchase, he will be building equity slowly by trading the flexibility of being a renter. After five years, he’ll have about $35,000 in equity, and about $75,000 in ten. In addition, his mortgage payment won’t change, while his rent will increase substantially due to inflation. In fact, a mere 3% increase per year, a percentage lower than the average increase in our area during the past decade, means his rent will jump to more than $3,000 in ten years.

It’s a personal decision, but one that can work out very well for my cousin if he’s willing to stay in one place for a while.

Either way, I asked him to contact a CalHFA preferred loan officer or call CalHFA at 877.9.CALHFA to at least get more info about the CalHFA CalPLUS loan. I also pointed him to this video containing more information on the loan.

What do you think? Would you choose the CalHFA loan if you are my cousin?

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