Author Topic: Case Study: How much to put for down payment and 15 or 30 year loan  (Read 7258 times)

drtownhouse

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Hello - I would guess most here recommend putting 20% down to avoid the pesky PMI, but my wife and I pulled the trigger to buy our home because the price is significantly reduced as part of an affordable housing program. Our savings combined are enough to cover the 20%, but I recently learned I could contribute to my 403(b) prior to the employer match (stupid for not asking sooner) and I'd like to start that up as well.

Background
-Wife (30), child (1), me (30)
-Her income: $0 (she earns $60,000 when she works and is now in school to bump that up to $80,000 or higher)
-My income: $75,000 Gross Income--I get $4700 per month and had a large tax return of $8,000, so I guess after tax income is around $64,000? (earning potential is$90,000 - $100,000 in high demand field that I left to work at a nonprofit)
-Annual expenses: $36,000
-----Rent $1,656 per month
-----Only debt is my $450 per month of student loans
-----Wife pays cash for graduate school and has $8,000 in tuition due in January and $8,000 more the two terms after that (total of $24,000 in tuition due)
-I intend to start contributing to my 403(b) and possibly IRAs for both of us starting July 1, 2014, after we close on the house

Money
Big fail here because I've only recently learned how to properly invest and that I do have access to my 403(b)
Me: $47,000 in my non-yielding checking account
Her: $36,000 in her non-yielding checking account

House
Townhouse Price: $259,000
Property Tax: $241 per month
House Insurance: $17 per month
Private Mortgage Insurance: $183 per month
Homeowner's Association dues: $ 92 per month
Closing date: 7/1/2014
Closing costs: $7,900

Lender has only run a scenario where we put 5% down on a 30 year loan. I will put the numbers below. I've run the numbers and gotten quotes online for a 10% down payment for a 30 year loan, and a 20% down payment on a 15 and 30 year loan.

5% down 30 year loan
With 5% down we are looking at a monthly payment of $1,832 (including all of the components listed above, but excluding energy) and a mortgage rate of 4.625%

Under this scenario, 5% down with $7,900 in closing costs would cost us around $21,000. We could cover that with our cash and could start loading up my 403(b) and maybe IRAs for both of us safely. We would also have enough to cover my wife's $8,000 in tuition in January and the other $16,000 in the following 6 months.

10% down 30 year loan
I ran the numbers for a 10% down payment on a 30 year loan with a 4.5% interest rate. Monthly payment = $1,712

Under this scenario, 10% down with $7,900 in closing costs would cost us $33,800. We could also handle this with our cash and I would be able to make solid contributions to the 403(b). We should be okay for wife's tuition.

20% down 30 year loan
I ran the numbers for a 20% down payment on a 30 year loan with a 4.5% interest rate. Monthly payment = $1,400

Under this scenario, 20% down with $7,900 in closing costs would cost us $59,700. With 20% down, it would be more challenging to cover my wife's tuition, and fill up tax-advantaged investment accounts. This is still probably more doable than a 20% down 15 year loan, discussed below.

20% down 15 year loan
I ran the numbers for a 20% down payment on a 15 year loan with a 3.3% interest rate. Monthly payment = $1,810.

Closing costs are same as above. The monthly payments are higher, which makes covering investments and wife's tuition more difficult.

Potential Complicating Factors
-Wife could work at $30 per hour, but potential employer cannot guarantee full-time.
-If wife works, we're looking at $2,000 per month day care costs
-Property tax may be 20% lower than I listed--not sure why they can't verify.
-20k of wife's income may need to be used for family issues (long story)
-It is difficult to say how long we will live in the house--maybe 3 or 4 years on the low end, but possibly much longer (a ton of complicating factors)

Discussion
I found the MMM post on whether to invest or pay off the house to be informative. Initially, I was leaning towards being the "young stock investor." However, if I go that route with 5% down, or even 10% down, I'm looking at an interest rate between 4.5 and 4.7. The long-term average 7% returns of the market still beat that, but it seems like a tougher call. If we do a 15 year mortgage with 20% down, we have much less money available to put to work for us, but we get rid of PMI and absurd interest payments.

You'll notice that the interest rates in the simulations I ran were not offered by the lender. For educational purposes, I think it would be helpful to treat those as if they were real. Also, I'm curious how folks' recommendations might change based on whether or not my wife gives $20,000 to her family to deal with "issues." I think it's more likely we will hold onto it--ultimately, it is up to her.

So what do you say:
A) 5% down 30 year loan
B) 10% down 30 year loan
C) 20% down 30 year loan
D) 20% down 15 year loan

Thank you very much in advance!


clarkm04

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Re: Case Study: How much to put for down payment and 15 or 30 year loan
« Reply #1 on: April 01, 2014, 10:00:06 PM »
If I were you, I'd put 20% down and do the 30 yr mortgage.  Make sure there's no prepayment penalty.  That way you get a lower monthly payment with flexibility to pay off the loan sooner if you can/want.

Next, ensure you have an adequate emergency fund of 3-6 months for expenses while hitting the match.

The PMI is a killer and a few months without hitting the match isn't worth it IMHO.


drtownhouse

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Re: Case Study: How much to put for down payment and 15 or 30 year loan
« Reply #2 on: April 01, 2014, 10:32:01 PM »
If I were you, I'd put 20% down and do the 30 yr mortgage.  Make sure there's no prepayment penalty.  That way you get a lower monthly payment with flexibility to pay off the loan sooner if you can/want.

Next, ensure you have an adequate emergency fund of 3-6 months for expenses while hitting the match.

The PMI is a killer and a few months without hitting the match isn't worth it IMHO.

Thank you for your insights. We are really going back and forth on this. I have spoken to the lender and they said there is no prepayment penalty. I actually don't get a 403(b) match until about a year. Apparently, they just contribute an amount equal to 10% of your salary. Sounds fairly generous to me. I expect my salary to increase at some point since I'm a bit below market value. Anyhow, I'm excited to be investing in a tax advantaged account with or without employer contributions.

Argyle

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Re: Case Study: How much to put for down payment and 15 or 30 year loan
« Reply #3 on: April 01, 2014, 10:40:05 PM »
I'd do the 20% down and 15-year loan, because the interest rate for the 15-year loan is significantly less.  The mortgage payment will seem high at first, but if you stay in the place, in ten years inflation will assure that the mortgage payments (which will stay constant) will seem much more affordable.  To invest in the 403(b), I'd see where else expenses might be shaved -- the lack of mortgage insurance will give you some savings right there.

drtownhouse

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Re: Case Study: How much to put for down payment and 15 or 30 year loan
« Reply #4 on: April 01, 2014, 11:03:02 PM »
I'd do the 20% down and 15-year loan, because the interest rate for the 15-year loan is significantly less.  The mortgage payment will seem high at first, but if you stay in the place, in ten years inflation will assure that the mortgage payments (which will stay constant) will seem much more affordable.  To invest in the 403(b), I'd see where else expenses might be shaved -- the lack of mortgage insurance will give you some savings right there.

Thank you. I expected that people would recommend 20% down, at the very least to avoid PMI. I still wonder if there is any argument to be made for the young stock investor approach. If my wife doesn't use 20k for family issues, we'd have just over 20k after buying the house on July 1st or so. Then there is the 8k tuition payment in January to be mindful of. And the ideal goal is to get $17,500 in the 403(b) by Dec 31 while tossing $11,000 in IRA (I believe I can contribute for my wife while she is a stay at home mom and student).

I'd have to put around $2,900 per month in the 403(b) to max it out starting in July. That's a hefty chunk of my $4,700 monthly pay check.  I'll have $1,800 left over per month for 6 months (until the end of the year) in that case. Maybe we could let the 20k fall to 8k to provide an additional $2,000 for monthly expenditures (including the mortgage). That would be $3,800 allowed for spending, which is pretty safe given our history. Working with the school to push back the payment or something to that effect might make it possible to max out the 403(b). And then we could shoot for the IRA 2014 deadline, which I imagine is April 2015. Maybe that's too ambitious...



MDM

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Re: Case Study: How much to put for down payment and 15 or 30 year loan
« Reply #5 on: April 01, 2014, 11:11:05 PM »
Agree w/ Argyle: do the 20% down 15 year for all the reasons given.

To add some details:
20% down/15 year/3.3% = $  55,775 interest; $1461/mo
20% down/30 year/4.5% = $170,747 interest; $1050/mo
20% down/30 year/4.5% but with extra $411/mo = $89,032 interest; $1461/mo

Assuming your $36,000/yr ($3,000/mo) expenses include rent and student loans, that's $1,344/mo for "everything else".  If that is true, it appears you could use the checking accounts to pay the closing costs plus 20% down payment, pay for wife's school out of cash flow, and still have a few hundred $/mo to put into the 403b.

A couple other caveats: $17/mo seems low for home insurance (but great for you if true), and do you have state tax?
See table below, correct any errors, and happy deciding.

Main reason I'd suggest the 20/15 approach is so you get used to living on the smaller take home.  Then, when household income increases you just put the increase to savings and feel no pain.  If you can enforce investment now, you can make a better case for paying less toward the house and putting more into investments.

CategoryMonthly amt.                   CommentsAnnual
Salary/Wages$6,250 $75,000
Pretax Health Ins.$0 $0
Pretax Vision/Dental Ins.$0 $0
Health FSA$0 $0
Daycare FSA$0 $0
HSA$0 $0
Pretax Commuter costs$0 $0
FICA base salary/wages$6,250 $75,000
Trad IRA$0 $0
403(b)$324 $3,885
Income subject to IRS tax$5,926 $71,115
ESPP$0 $0
LTD$0 $0
Paycheck deposit$5,926 $71,115
Other income (int., div., etc.)$0 $0
Federal Adj. Gross Inc.$5,926 $71,115
Federal tax$510 2014 rates, stand. ded., 3 exemptions  $6,122
State/City tax$0 ?$0
Soc. Sec.$388 $4,650
Medicare$91 $1,088
Total taxes$988 $11,860
Add Daycare reimb.$0 $0
Add Health care reimb.$0 $0
Income before other expenses  $4,938 $59,256
Monthly Expenses:
Mortgage$1,461 $17,532
Rent$0 $0
HOA$92 $1,104
Property Tax$241 $2,892
Home/Rent Insurance$17 Low?$204
PMI$0 $0
Miscellaneous$1,344 $16,128
School Tutition/Books/Etc.$1,333 $16,000
Student Loans$450 $5,396
Total Expense$4,938 $59,256
Available to invest$0 $0

drtownhouse

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Re: Case Study: How much to put for down payment and 15 or 30 year loan
« Reply #6 on: April 02, 2014, 05:12:44 AM »
Agree w/ Argyle: do the 20% down 15 year for all the reasons given.

To add some details:
20% down/15 year/3.3% = $  55,775 interest; $1461/mo
20% down/30 year/4.5% = $170,747 interest; $1050/mo
20% down/30 year/4.5% but with extra $411/mo = $89,032 interest; $1461/mo

Assuming your $36,000/yr ($3,000/mo) expenses include rent and student loans, that's $1,344/mo for "everything else".  If that is true, it appears you could use the checking accounts to pay the closing costs plus 20% down payment, pay for wife's school out of cash flow, and still have a few hundred $/mo to put into the 403b.

A couple other caveats: $17/mo seems low for home insurance (but great for you if true), and do you have state tax?
See table below, correct any errors, and happy deciding.

Main reason I'd suggest the 20/15 approach is so you get used to living on the smaller take home.  Then, when household income increases you just put the increase to savings and feel no pain.  If you can enforce investment now, you can make a better case for paying less toward the house and putting more into investments.

CategoryMonthly amt.                   CommentsAnnual
Salary/Wages$6,250 $75,000
Pretax Health Ins.$0 $0
Pretax Vision/Dental Ins.$0 $0
Health FSA$0 $0
Daycare FSA$0 $0
HSA$0 $0
Pretax Commuter costs$0 $0
FICA base salary/wages$6,250 $75,000
Trad IRA$0 $0
403(b)$324 $3,885
Income subject to IRS tax$5,926 $71,115
ESPP$0 $0
LTD$0 $0
Paycheck deposit$5,926 $71,115
Other income (int., div., etc.)$0 $0
Federal Adj. Gross Inc.$5,926 $71,115
Federal tax$510 2014 rates, stand. ded., 3 exemptions  $6,122
State/City tax$0 ?$0
Soc. Sec.$388 $4,650
Medicare$91 $1,088
Total taxes$988 $11,860
Add Daycare reimb.$0 $0
Add Health care reimb.$0 $0
Income before other expenses  $4,938 $59,256
Monthly Expenses:
Mortgage$1,461 $17,532
Rent$0 $0
HOA$92 $1,104
Property Tax$241 $2,892
Home/Rent Insurance$17 Low?$204
PMI$0 $0
Miscellaneous$1,344 $16,128
School Tutition/Books/Etc.$1,333 $16,000
Student Loans$450 $5,396
Total Expense$4,938 $59,256
Available to invest$0 $0

Thank you for your analysis and the table MDM! The home insurance is from an actual quote. It did seem low compared to what many of the calculators have built in. State income tax is 4.75%.

I am confident that we will invest surplus cash, which is why I'm still on the fence. This is very helpful, though. Thank you!

mlipps

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Re: Case Study: How much to put for down payment and 15 or 30 year loan
« Reply #7 on: April 02, 2014, 06:19:03 AM »
I think its short sighted to do anything other than 20% down. Your tuition payments are for this year only. If you can't max out your retirement for one more year, it will not set you back as much as paying that PMI for several years into the future.

clarkm04

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Re: Case Study: How much to put for down payment and 15 or 30 year loan
« Reply #8 on: April 02, 2014, 06:22:17 AM »
Quote
I actually don't get a 403(b) match until about a year. Apparently, they just contribute an amount equal to 10% of your salary. Sounds fairly generous to me. I expect my salary to increase at some point since I'm a bit below market value. Anyhow, I'm excited to be investing in a tax advantaged account with or without employer contributions.

This kicks ass!  My employer used to put in 6% regardless of our contribution, but has since shifted to requiring us to put in 3% to get the 6%.

I certainly can't fault the logic of going with the 15 year loan vs. a 30 from other posters.  In our particular case, we went with the 30 yr since some months we overpay a great deal while in other months our surplus funds go to other things.  I like flexibility and value it over paying .3 - .5 less on my interest rate which is still an insanely low 3.85.

Regardless, our goal is to pay off the house in 15 yrs.

Thegoblinchief

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Re: Case Study: How much to put for down payment and 15 or 30 year loan
« Reply #9 on: April 02, 2014, 07:45:53 AM »
Definitely 20% down. With the interest rate disparity, I'd probably recommend the 15 if you can swing it. Even with the 30, I'd probably pay it as a 15 or 20 year anyways.

When looking at sub-20% down always factor PMI into the effective APR of the loan. Suddenly the low down payment loans look awful. God, I wish I'd understood that back in 2006. Luckily my PMI is only $50.

Also, as I understand it, PMI these days is permanent without a full refi if you are using any of the federal acronym loan programs.

Everything in Moderation

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Re: Case Study: How much to put for down payment and 15 or 30 year loan
« Reply #10 on: April 02, 2014, 07:46:50 AM »
"-It is difficult to say how long we will live in the house--maybe 3 or 4 years on the low end, but possibly much longer (a ton of complicating factors)"

At the low end, you might only stay in the house for 3 or 4 years?!?! 

That seems a bit crazy to buy a house and then move so soon!  If you are not settled in jobs and a community, buying is a terrible idea. 

What am I missing here? 

arebelspy

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Re: Case Study: How much to put for down payment and 15 or 30 year loan
« Reply #11 on: April 02, 2014, 08:07:11 AM »
Agree with the 20% down to avoid PMI, disagree that you should do a 15-year.

Calculate the payment of the 15 year, then get the 30 year and invest the extra difference every month.  You'll end up with more money at the end (such that you very likely could pay it off in year 15 with all of your invested funds, if you wanted), but keeping the money invested and earning more is the better way to go, IMO.
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drtownhouse

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Re: Case Study: How much to put for down payment and 15 or 30 year loan
« Reply #12 on: April 02, 2014, 09:15:55 AM »
Quote
I actually don't get a 403(b) match until about a year. Apparently, they just contribute an amount equal to 10% of your salary. Sounds fairly generous to me. I expect my salary to increase at some point since I'm a bit below market value. Anyhow, I'm excited to be investing in a tax advantaged account with or without employer contributions.

This kicks ass!  My employer used to put in 6% regardless of our contribution, but has since shifted to requiring us to put in 3% to get the 6%.

I certainly can't fault the logic of going with the 15 year loan vs. a 30 from other posters.  In our particular case, we went with the 30 yr since some months we overpay a great deal while in other months our surplus funds go to other things.  I like flexibility and value it over paying .3 - .5 less on my interest rate which is still an insanely low 3.85.

Regardless, our goal is to pay off the house in 15 yrs.

It did seem like a really good deal. I guess I have less reason to complain about them cutting the metro benefit in half!

drtownhouse

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Re: Case Study: How much to put for down payment and 15 or 30 year loan
« Reply #13 on: April 02, 2014, 09:17:47 AM »
Agree with the 20% down to avoid PMI, disagree that you should do a 15-year.

Calculate the payment of the 15 year, then get the 30 year and invest the extra difference every month.  You'll end up with more money at the end (such that you very likely could pay it off in year 15 with all of your invested funds, if you wanted), but keeping the money invested and earning more is the better way to go, IMO.

Thank you for your input. There seems to be consensus around the 20% part. This route seems attractive to me. I wish I could get the 3.3% rate instead of 4.5%, though.

arebelspy

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Re: Case Study: How much to put for down payment and 15 or 30 year loan
« Reply #14 on: April 02, 2014, 09:39:45 AM »
Thank you for your input. There seems to be consensus around the 20% part. This route seems attractive to me. I wish I could get the 3.3% rate instead of 4.5%, though.

Sure, lower is always better, but maybe not at the trade off of the length of term.  I'd rather personally have 4.5% at 30 years than 3.3% at 15, but different people value different things (heck, I'd take 5% at 60-years if I could).
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mlipps

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Re: Case Study: How much to put for down payment and 15 or 30 year loan
« Reply #15 on: April 02, 2014, 12:40:28 PM »
Agree with the 20% down to avoid PMI, disagree that you should do a 15-year.

Calculate the payment of the 15 year, then get the 30 year and invest the extra difference every month.  You'll end up with more money at the end (such that you very likely could pay it off in year 15 with all of your invested funds, if you wanted), but keeping the money invested and earning more is the better way to go, IMO.

Agree. I did the math and something like 80% of the interest savings on a 15 year is just from the larger payment. The lower rate is a much smaller piece of it.

dcheesi

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Re: Case Study: How much to put for down payment and 15 or 30 year loan
« Reply #16 on: April 02, 2014, 01:09:24 PM »
Agree with the 20% down to avoid PMI, disagree that you should do a 15-year.

Calculate the payment of the 15 year, then get the 30 year and invest the extra difference every month.  You'll end up with more money at the end (such that you very likely could pay it off in year 15 with all of your invested funds, if you wanted), but keeping the money invested and earning more is the better way to go, IMO.
Agreed. For one thing, as long as it's invested in liquid assets (post-tax money in mutual fund account, etc.) then that money can be pulled out and used to cover mortgage payments during a financial emergency. Home equity is only useful if you can borrow against it, which may not be possible for some emergencies, e.g. loss of primary income.

« Last Edit: April 02, 2014, 01:12:30 PM by dcheesi »

simonsez

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Re: Case Study: How much to put for down payment and 15 or 30 year loan
« Reply #17 on: April 03, 2014, 06:13:59 AM »
Might be a moot point if you have already perused but I'd shop around lenders to see if any would waive PMI with a down payment of less than 20%.  You need to have an excellent credit rating, no major debts, and assets most likely but it does happen.  Some friends of ours (26-27 years old at the time) put about 10% down on a ~200k house in the St. Louis area at the beginning of 2013 and did not have to pay PMI.  It was their second house and they essentially rolled the equity from the first into the second, had a spotless mortgage payment record, dual incomes that totaled a more than 100k, no student loan or credit card debt, and I assume had good credit (unsure about exact FICO but they are pretty frugal and did zap student loans quickly and I imagine, always on time).  By no means would I count on avoiding PMI with less than 20% down but can't hurt to look around.  They want your business, see if any want it bad enough for less than 20% down.  If not, you didn't lose anything financially.

As for your 403b, I realize it cannot be used as collateral directly when applying for a loan but I'd still mention it.  It shows you are responsible and save money.  It will not be added as an asset but certainly can't hurt your image of a low-risk mortgage purchaser.

drtownhouse

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Re: Case Study: How much to put for down payment and 15 or 30 year loan
« Reply #18 on: April 03, 2014, 12:00:24 PM »
Might be a moot point if you have already perused but I'd shop around lenders to see if any would waive PMI with a down payment of less than 20%.  You need to have an excellent credit rating, no major debts, and assets most likely but it does happen.  Some friends of ours (26-27 years old at the time) put about 10% down on a ~200k house in the St. Louis area at the beginning of 2013 and did not have to pay PMI.  It was their second house and they essentially rolled the equity from the first into the second, had a spotless mortgage payment record, dual incomes that totaled a more than 100k, no student loan or credit card debt, and I assume had good credit (unsure about exact FICO but they are pretty frugal and did zap student loans quickly and I imagine, always on time).  By no means would I count on avoiding PMI with less than 20% down but can't hurt to look around.  They want your business, see if any want it bad enough for less than 20% down.  If not, you didn't lose anything financially.

As for your 403b, I realize it cannot be used as collateral directly when applying for a loan but I'd still mention it.  It shows you are responsible and save money.  It will not be added as an asset but certainly can't hurt your image of a low-risk mortgage purchaser.

Thanks for the suggestion. I will talk to the lender and see if there is anything I can do.

sparklebunny

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Re: Case Study: How much to put for down payment and 15 or 30 year loan
« Reply #19 on: April 03, 2014, 03:24:21 PM »
PMI is basically a stupid tax (since you have the money for 20% down).  Don't do it.  I'm paying PMI on a home I bought in 2007 before the market crashed (go me!) and between that and the nearly suicide-worthy drop in value, it's a nightmare that I can't wake up from.  Don't take chances.  Go for 20% down.  If you can swing a 15 year, fine, but I'm not hard up on that for you.

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Re: Case Study: How much to put for down payment and 15 or 30 year loan
« Reply #20 on: April 03, 2014, 03:33:22 PM »
As almost everyone suggested, I'd go with the 20 % 15 year. Then again, in my time on this earth, I've come to the conclusion that no debt is almost always the best course of action.

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Re: Case Study: How much to put for down payment and 15 or 30 year loan
« Reply #21 on: April 03, 2014, 03:58:18 PM »
Why does everyone think PMI is permanent? It is only permanent on FHA loans. For traditional loans the lender is required to remove PMI when you hit 22% equity.

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Re: Case Study: How much to put for down payment and 15 or 30 year loan
« Reply #22 on: April 03, 2014, 03:59:44 PM »
You already have great insight on your questions.  I'd recommend shopping around a bit on your mortgage rates.  I've used Aimloan.com a number of times and have been happy, but there are a number of other Internet only lenders out there that do a high volume.  The only caveat is you need to pull together the documents and send them electronically (or fax them) and you won't get a ton of hand holding.

arebelspy

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Re: Case Study: How much to put for down payment and 15 or 30 year loan
« Reply #23 on: April 03, 2014, 06:18:15 PM »
Why does everyone think PMI is permanent? It is only permanent on FHA loans. For traditional loans the lender is required to remove PMI when you hit 22% equity.

And if home values drop a bit, so that your principal pay down doesn't get you to 20% in a reasonable amount of time?

OP has the money. Why should they pay PMI and then get it removed later.
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FIPurpose

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    • FI With Purpose
Re: Case Study: How much to put for down payment and 15 or 30 year loan
« Reply #24 on: April 03, 2014, 08:48:25 PM »
Why does everyone think PMI is permanent? It is only permanent on FHA loans. For traditional loans the lender is required to remove PMI when you hit 22% equity.

And if home values drop a bit, so that your principal pay down doesn't get you to 20% in a reasonable amount of time?

OP has the money. Why should they pay PMI and then get it removed later.

Oh I completely agree, but if worse comes to worse, paying 19% down isn't going to curse you with PMI for the rest of the loan.

TomTX

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Re: Case Study: How much to put for down payment and 15 or 30 year loan
« Reply #25 on: April 04, 2014, 05:59:01 AM »
Why does everyone think PMI is permanent? It is only permanent on FHA loans. For traditional loans the lender is required to remove PMI when you hit 22% equity.

Virtually everyone I know who had PMI, had issues getting the lender to remove PMI in a timely manner.

Emg03063

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Re: Case Study: How much to put for down payment and 15 or 30 year loan
« Reply #26 on: April 04, 2014, 09:09:00 AM »
E.  None of the above.  Get yourself a 7/1 ARM (that's a 30 year mortgage with a rate that is fixed for 7 years and then can adjust) for 3% and put 20% down.  Your monthly payment will be $176 lower than the 30 yr fix 4.5% scenario.   Apply that difference towards prepayment of principal.  After 7 years, your balance will be $157,556 vs. $180,318 with the 4.5% rate.  If the rate resets to its 8% max (unlikely, but possible-- make sure your ARM has a rate cap (the max your rate can increase)--5% is typical), your payment would then be $200 above the $1400 payment you had been making.  In the worst case scenario, where the rate resets to its max and stays there for the rest of the life of the loan, you will have to have lived there for a total 13 years before you are money behind vs. the fixed rate mortgage.  If the rate increases by less than that (more likely IMHO, but of course I can't predict the future--the rate will be tied to an index like the LIBOR), your break even point goes further into the future.  If your rate stays under 6% (very possible) your payment will not increase above the $1400 payment you had been making.  If it stays under 6.5%, you will be money ahead until the loan is paid off.  If you move out before the break even point, you win :).

Two side notes:
1.  Your closing costs seem VERY high for some reason.  I've done 8 closings and never had closing costs of more than $3k.  I would challenge those #s.
2.  If you want some short term cash to fund your IRA or pay tuition or whatever after you close, you can open a HELOC for 10% of your home's value.  Good source of "springy debt" as MMM says.
« Last Edit: April 04, 2014, 09:11:42 AM by Emg03063 »