Author Topic: PMI with 10%, save for 20%, or piggyback 80/10/10 for personal residence  (Read 442 times)

mqtxc

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Background: Wife and I (late 20's)are looking to move closer to work and into our "forever" home. Currently we live about 15 miles from the town we work in. We are able to car pool 4 days a week and each drive ourselves on Fridays. The move would also put us in the same town as our parents whom will be the primary daycare in a year or so when we start having children. We bought our current house about 5 years ago when the Wife was still in graduate school. The town we are looking to move to has significantly higher housing costs, which is why we didn't buy there 5 years ago.

We will have saved enough by the end of this year to cover 10% down and closings costs on a $275,000-350,000 home. At that point we'd still have about $26,000 in student loans. We are currently setting aside $3,500 a month into our down payment money market account and paying the minimum on the student loans. If we were to purchase a home at $325,000 with 10% down and a PMI rate at .75 with a 30 year interest rate of 4.5%, our monthly P&I payment would be $1,482.06 with $182.81 on top of that for PMI for a total payment of $1,664.87. (Total loan interest would be $241,039.63 with minimum payments)

We are afraid if we wait a year for a bigger down payment, the impending higher interest rates would actual cost us more. If we wait for 20% down and the interest rate rises 1%, we'd have a P&I payment of $1,476.25 (total loan interest would be $274,450.51 with minimum payments. Higher total interest on $32,500 less financed). The price of that same house would definitely be higher in a year or so which would add to the cost.

We hate the idea of PMI but are thinking it might be wise to buy sooner. With the 10% down payment, we could continue to pay the minimum on the student loans and attack the mortgage until PMI can be removed at which point, we could go after the student loans. Moving will also increase our quality of life and drop our transportation costs significantly. Thoughts on any of this? Haven't talk to a bank yet but was planning to look into a piggy back 80/10/10 financing as well.

waltworks

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How much can you sell your current house for? Surely you have enough equity at this point to put down 20% on the new place if you've owned it for 5 years?

Otherwise, sure, not a horrible move to jump in now if you're sure you want to be there long term. The reduced commuting costs/hassle are HUGE, too. 20-30 minutes a day, 5 days a week? That's a lot of wasted time, gas, and wear/tear.

Sell your existing house, though. If you have $35k or so saved up, you only need another $30k or so in net equity to hit your 20% and make this question irrelevant.

-W

August26th

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One other option could be to put 10% down and take on Single Premium Mortgage Insurance. You pay a one-time fee at closing that is roughly 1.3% of your loan amount, but you effectively “buy out” your PMI payments forever. So you would pay this fee but then you would NOT have a monthly PMI payment.

Using your scenario of 325K for a purchase price with a 10% down payment (and assuming that you have great credit scores and a low debt-to-income ratio), then your cost to do the Single Premium MI would be roughly $3802. This is collected as part of your closing costs (and should also be tax deductible if you itemize, depending on your tax bracket and other typical disclaimers.) If you think your PMI payment would be $182, then your “break even” point is 21 months. In other words, it pays off to do the Single Premium over regular monthly PMI.  So if this is truly your forever home, I don’t think the math is good enough to support waiting another year, or paying monthly MI.

The 80/10/10 option is less favorable these days, since the piggyback loan is typically a Home Equity Line of Credit that is tied to the Prime Rate. With prime at 5% right now, the prediction is that it will only go up. So a variable rate may not be what you want.

 

nkt0

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What are the interest rates on your student loans? You might want to pay those off first.

Cubist

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i think that the opportunity cost of saving more for a down payment outweigh the costs. Have you considered what that additional 10% would do in the market versus the cost of the PMI pmt?  I think 32,500 invested generating a 7% return just about ties the PMI pmt of 182/month, so I don’t see the advantage of saving more and risking the potential increase in interest rates.

mqtxc

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Agree with a lot of what was said in the responses. We don't have a lot of equity in our current home. Planning to use it to increase our emergency fund with the higher housing costs with the move.

Talked with a credit union and good news, the PMI estimates I previously had are about double what they offer.

Student loan rates are 4.41% for the small one and 5.06% for the other. Basically around what the mortgage rate will be. We won't have enough to itemize but can deduct the student loan interest bringing the cost of carrying that debt down.

We are leaning towards getting something done sooner with the slow climbing of rates. Our real estate market is very seasonal, as our winters are about 6 months a year, so we are hoping to find something that someone needs to get out of before the dead of winter. The housing prices in the market we are moving into also steadily increases about 5% per year so something that is $300,000 now could be $315,000 or more in the spring when the housing season takes off.

nkt0

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Student loan rates are 4.41% for the small one and 5.06% for the other. Basically around what the mortgage rate will be. We won't have enough to itemize but can deduct the student loan interest bringing the cost of carrying that debt down.

One thing to keep in mind about student loan interest deductions is that there is a cap of $2,500. So if you're paying more than that annually, you get no benefit from the excess interest.