Author Topic: PMI with 10%, save for 20%, or piggyback 80/10/10 for personal residence  (Read 893 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.

thd7t

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Generally, PMI is a terrible deal.  In this case, it's a non-amortizing loan on 10% of the value of your house, added on to the base 4.5% interest.  In your first year, this means that you're paying 10.25% on the top $32,500 of your mortgage.  Each year, this gets worse, because your PMI doesn't get lower as you pay it off.  When you owe

Again, this is looking at PMI as if it were a loan for the top 10% of your mortgage. $270,000 on your house, the PMI portion of the payment will be 21.8% and you'll still have 4.5% in interest.

Even at half the number you had for PMI, these numbers are very bad.

nedwin

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Generally, PMI is a terrible deal.  In this case, it's a non-amortizing loan on 10% of the value of your house, added on to the base 4.5% interest.  In your first year, this means that you're paying 10.25% on the top $32,500 of your mortgage.  Each year, this gets worse, because your PMI doesn't get lower as you pay it off.  When you owe

Again, this is looking at PMI as if it were a loan for the top 10% of your mortgage. $270,000 on your house, the PMI portion of the payment will be 21.8% and you'll still have 4.5% in interest.

Even at half the number you had for PMI, these numbers are very bad.

I see this analysis regarding PMI often here, and it always annoys me.  I won't quibble with your math, thd7t, but this type of analysis misses the forest for a single tree.  Yes, PMI is basically interest on a loan of the last 10% (or whatever) of a home purchase, and viewed in that light it can be an expensive loan.  But what are the total costs of the loan as a whole?  What are the costs/benefits of waiting another year (or more) to purchase?  How and when can the PMI be eliminated?  What, exactly, will the PMI cost?

My wife and I purchased a home with 10% down and paid PMI.  Our PMI cost $44.99 per month on a loan with an initial balance of $215k.  We paid it for a little over two years (maybe 3?  I don't remember), we were able to eliminate it by paying for a new appraisal.  Figuring we paid PMI for three years and $400 for the appraisal, it cost us a little over $2000 to buy when we did.  Viewed as a whole I would not have done it differently.  It would have taken us at least another year to save another 10%.  In that time interest rates rose a little, but the cost of homes where we live went up at least 10%.  So paying $2000 PMI and appraisal saved us several 10s of thousands over waiting at least another year to buy.

Here the OP is saving $3,500/month toward a home purchase.  Depending on how/when OP could eliminate PMI, my advice would be to buy now then continue to save the same amount (or close to it) and pay down the mortgage balance.  With appreciation (which OP estimates at 5%) and principal pay down, the OP should be able to eliminate PMI within a year or two.  This approach would save OP at least $10k of purchase price plus any increase in interest rates.  So long as OP's PMI is not outrageous this seems like a no-brainer.

thd7t

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Generally, PMI is a terrible deal.  In this case, it's a non-amortizing loan on 10% of the value of your house, added on to the base 4.5% interest.  In your first year, this means that you're paying 10.25% on the top $32,500 of your mortgage.  Each year, this gets worse, because your PMI doesn't get lower as you pay it off.  When you owe

Again, this is looking at PMI as if it were a loan for the top 10% of your mortgage. $270,000 on your house, the PMI portion of the payment will be 21.8% and you'll still have 4.5% in interest.

Even at half the number you had for PMI, these numbers are very bad.

I see this analysis regarding PMI often here, and it always annoys me.  I won't quibble with your math, thd7t, but this type of analysis misses the forest for a single tree.  Yes, PMI is basically interest on a loan of the last 10% (or whatever) of a home purchase, and viewed in that light it can be an expensive loan.  But what are the total costs of the loan as a whole?  What are the costs/benefits of waiting another year (or more) to purchase?  How and when can the PMI be eliminated?  What, exactly, will the PMI cost?

My wife and I purchased a home with 10% down and paid PMI.  Our PMI cost $44.99 per month on a loan with an initial balance of $215k.  We paid it for a little over two years (maybe 3?  I don't remember), we were able to eliminate it by paying for a new appraisal.  Figuring we paid PMI for three years and $400 for the appraisal, it cost us a little over $2000 to buy when we did.  Viewed as a whole I would not have done it differently.  It would have taken us at least another year to save another 10%.  In that time interest rates rose a little, but the cost of homes where we live went up at least 10%.  So paying $2000 PMI and appraisal saved us several 10s of thousands over waiting at least another year to buy.

Here the OP is saving $3,500/month toward a home purchase.  Depending on how/when OP could eliminate PMI, my advice would be to buy now then continue to save the same amount (or close to it) and pay down the mortgage balance.  With appreciation (which OP estimates at 5%) and principal pay down, the OP should be able to eliminate PMI within a year or two.  This approach would save OP at least $10k of purchase price plus any increase in interest rates.  So long as OP's PMI is not outrageous this seems like a no-brainer.
I agree that a full analysis needs to be done, but it definitely merits a comparison to the 80-10-10 option.  We're still in a low interest rate environment and the odds are that OP can get better terms this way.
(edit because I accidentally called it 90-10-10)

wageslave23

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Re: PMI with 10%, save for 20%, or piggyback 80/10/10 for personal residence
« Reply #10 on: August 17, 2018, 12:48:44 PM »
Curious as to what the exact rate including PMI is.