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!