It’s Mom’s Turn Now

MaryHelen Galvez sacrificed homeownership for 13 years to afford private school for her daughter. Those tuition payments--as much as $3,500 a year--could easily have been saved for a down payment on a home.

“I wanted to send mi hija [my daughter] to Catholic school,” said Galvez, 44, a medical caseworker. “Being a single parent, I needed the extra support private school could provide. I don’t regret it at all. It was an investment in my daughter.”

Now that 20-year-old Vanessa has graduated from parochial school and MaryHelen has married her companion of seven years, homeownership may be a reality for the lifelong renter.

“I’ve come a long way,” she said. With the help of her new husband, Fred, she said, “we can do this.”

But homeownership will first require the Galvezes, married 11 months, to shift how they think about spending and investing their money.

Like many first-time home buyers moving from paying rent to a monthly mortgage, the Galvezes fear payment shock.

They pay $1,100 a month in rent for the three-bedroom house in Whittier they share with Vanessa. They hope to buy a similar-size home in the nearby Michigan Park area without spending much more for a mortgage.

That’s where their thinking must change, said Henry Young, director of residential lending of East West Bank, based in San Marino.

“Compared to paying rent,” Young said, a mortgage payment “looks like a lot more to pay, but it’s not.” What’s important, he said, is that first-time buyers think about a home purchase as a long-term investment with benefits that will be realized later.

“Even though a mortgage payment will be higher than rent,” Young said, “a lot of it will be written off” in taxes. And the Galvezes would be building equity, the value of the property beyond the amount owed on it.

“It’s like putting money into a savings account,” Young said.

Based on the Galvezes’ perfect credit rating and combined gross monthly income, Young was able to approve the couple for a $270,000 loan. But the couple feared that the high monthly payment of $2,340, including taxes and mortgage insurance (required because they could not come up with a 20% down payment), would stretch them beyond their means and not leave savings in reserve for emergencies. The Galvezes felt this way even though the mortgage payment and other monthly housing expenses would represent a 33% income-to-debt ratio, less than the 38% lenders suggest.

“If one of us gets sick in the future, how will we carry that high mortgage?” asked Fred, 39. “We have to think about the future.”

To arrive at a monthly payment that would be comfortable for the Galvezes, Young suggested that the couple consider a loan in the $200,000 range instead; that is the median price in the neighborhood they are considering. To avoid paying mortgage insurance, he suggested a piggyback transaction, a program that allows the borrower to carry two simultaneous loans for the purchase of one property.

For the Galvezes, a piggyback transaction would not only eliminate mortgage insurance, it would also help to keep monthly expenses down and provide thousands of dollars in tax write-offs over the long term.

Here’s how the piggyback transaction works: for a $200,000 purchase price, the Galvezes would take out a first loan for 80% of the value of the house--$160,000--at a 6.75% 30-year fixed interest rate. The Galvezes would also take out a home equity loan for $30,000--15% of the purchase price of the home--at a 9.375% rate for 15 years. This type of dual loan program would leave the Galvezes to come up with 5% of the down payment: $10,000.

“The piggyback transaction is a very good option for those that can’t put 20% down,” said Young, who estimated that 5% of clients seeking home loans with East West Bank use such a plan.

Even though the piggyback plan would save the Galvezes only $35 a month--most of the savings from not having to pay mortgage insurance would be offset by the second loan’s higher interest rate--Young calculated that the couple would still save nearly $7,000 over five years from the lower mortgage payments as well as from bigger tax breaks from writing off the interest on both loans.

Most attractive, Young said, was that the Galvezes’ monthly mortgage payment would be $1,500, including property taxes. That mortgage payment, along with the Galvezes’ monthly expenses, would provide a 26% income-to-debt ratio.

“This would be a very comfortable range for them,” Young said.

To help the Galvezes adjust to a new higher mortgage payment, Young suggested they start to put away an additional $200 or so a month “to get into the habit” of making the new monthly mortgage. “Then it won’t be such a huge payment shock when it comes time to make the commitment,” he said.

Even though homeownership will require the Galvezes to stretch a bit more each month and perhaps cut down on luxuries like occasional weekend trips, the couple is excited to move up to it.

“We have the income, and we need to make it work for us,” said MaryHelen.

The inventory of homes is low in the Michigan Park neighborhood, but real estate agent Debby Kelly of Realty Executive at Cornerstone in Whittier was able to find seven three-bedroom properties in the $250,000 to $282,000 range, a price the Galvezes now know they can afford if they are willing to stretch. Other options would include considering a two-bedroom on the outskirts of Michigan Park or a three-bedroom home in a less expensive area of Whittier.

“We’ve helped borrowers with less income and savings buy homes in a similar range,” Young said. Now the Galvezes need to overcome their fears to make their dream come true, he said.

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This Month’s Make-Over

Home buyers: MaryHelen and Fred Galvez.

Occupations: Licensed vocational nurse and medical case manager, Physicians Associates Medical Group; maintenance worker, Whittier City School District.

Goal: Purchase a single-family residence with three bedrooms in the Michigan Park area of Whittier.

The problem: Insufficient savings for a 20% down payment and reluctance to increase monthly payment.

Recommendations:

* Take out two loans simultaneously--a piggyback transaction--to avoid mortgage insurance.

* Start putting more money into savings now to avoid “payment shock” later, when jumping from a monthly rent to heftier mortgage payment.

* Stretch yourself: Lenders recommend a monthly debt-to-income ratio of 38%. If yours is well below that, you might be able to purchase more house and reap the benefits of tax savings while building more equity.

Meet the Experts

Henry Young has worked in the mortgage banking business for 13 years, the last seven with the residential lending division of East West Bank, a San Marino-based bank founded in 1973 initially to assist immigrants and others experiencing difficulty getting home loans. Young is director of residential lending.

Debby Kelly has been a Realtor for 12 years and was voted Realtor of the Year by her local Board of Realtors in 1995. Kelly works frequently with first-time buyers. She works for the Whittier office of Realty Executive at Cornerstone, one of 38 Realty Executive offices in Southern California.

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Allison B. Cohen is a Los Angeles freelance writer.