First Home: 80/10/10 or 90 with PMI

[alwayslearning]

We are looking to purchase our first home early next year and have a question about PMI. We will only have 10% to put down on our first home + savings/update buffer + closing costs.

Should we take out an 80/10/10 mortgage to avoid PMI or just have a 90/10?

Do they still do 80/10/10 mortgages? If so, can you pay off the 10% early or do you have to wait for the mortgage company to OK it, like you do with PMI?

(Background info: Low DTI (only truck payment at 1.99%), A+ credit scores and have a 60% savings rate.)

[rocksinmyhead]

if you have a 60% savings rate why not just save up a little longer and put 20% down? or buy a cheaper house?

[JGB]

if you have a 60% savings rate why not just save up a little longer and put 20% down? or buy a cheaper house?

+1

Avoid PMI. If you want to burn money without it providing anything to you, actual fire is more entertaining.

[Another Reader]

80/10/10 is much better than PMI.  I have heard that it is starting to make a comeback.  Before you do anything, start meeting with lenders to see what products they offer and what they will qualify you for.  Shop for the loan before you shop for the house.

However, it's much better to wait until you have the 20 percent down.  You will be a lot less stressed out should the market in your area drop in value.

[Gone Fishing]

I went the PMI route 10 years ago when we bought our first home because I didn't know any better.  As soon as I figured out how expensive it really was I did everything in my power to refi the 15% or so I needed to get rid of it by effectively setting up a back door piggy back loan which I quickly paid off. To make it work I had to pay for an appraisal and modification fees (was still worth it).  After the crash I hear PMI premiums are even higher now and harder to get removed.  I'd do the 80/10/10 or similar, then pay off the high interest 2nd asap.  Just you plan on staying there for a while (5+ years, 10 is better).

[Bank]

I did a variant of this:  75-10 and 15% down.  Got a great rate on the main mortgage and put the 10% second on a HELOC.  I didn't want to wait because this was two years ago and rates were at rock bottom.  Rents were spiraling up at the same time, and we found a perfect house for us and our (then) future family.

Very pleased with the structure I used, but you need to know yourself and your cash flows.  That HELOC is already paid off.  Had I been less confident about my savings ability or the stability of my job, I would not have been so sanguine.  Letting a large chunk of debt ride long-term at a variable rate of interest wouldn't be a strategy I'd be interested in.

[MrFrugalChicago]

Remember - there are also complex financing options. Questions to ask yourself.


1) How long do you plan to stay at this house?
2) Do you see having enough money to pay off PMI later, or do you not want to put extra money into the house.

For example, the house I live in now I bought at a great dip in the market. I did not yet have a lot of cash, and I only planned to stay here a few years. So I used something called "lender paid PMI". I put 5% down, but had no PMI payment. How? I let the lender bump my interest rate from 3.5% up to 3.625% in exchange for my lender paying my PMI.

Had I gotten PMI, I would have owed like $170 per month for it. Instead, I paid something like $40 a month more in interest due to a higher interest rate. Now over a 30 year loan I lose... but I had no intention of staying 30 years. For staying 3-5 years, it was a pretty easy win.

[alwayslearning]

Thank you everyone for your replies!

I did a variant of this:  75-10 and 15% down.  Got a great rate on the main mortgage and put the 10% second on a HELOC.  I didn't want to wait because this was two years ago and rates were at rock bottom.  Rents were spiraling up at the same time, and we found a perfect house for us and our (then) future family.

Thanks, Bank! That is exactly what I am thinking. We could easily pay off the additional 10% in 6 months, while still having a savings cushion.

if you have a 60% savings rate why not just save up a little longer and put 20% down? or buy a cheaper house?

Rocksinmyhead - We were considering this in the beginning. The hardest part is knowing if the interest rates will rise and not wanting to pay our current rent ($1300) for six additional months (talk about burning money!). Our lease is up in Feb, making that the ideal time for us to make a decision. We know a home will be more expensive, but at least the money is going towards a payoff goal. 

80/10/10 is much better than PMI.  I have heard that it is starting to make a comeback.  Before you do anything, start meeting with lenders to see what products they offer and what they will qualify you for.  Shop for the loan before you shop for the house.

Another Reader - Thanks for the advice! We need to make the step towards finding a mortgage broker soon. How far in advance should we shop for loans? (We are currently 6-7 months out).

Remember - there are also complex financing options. Questions to ask yourself.


1) How long do you plan to stay at this house?
2) Do you see having enough money to pay off PMI later, or do you not want to put extra money into the house.

For example, the house I live in now I bought at a great dip in the market. I did not yet have a lot of cash, and I only planned to stay here a few years. So I used something called "lender paid PMI". I put 5% down, but had no PMI payment. How? I let the lender bump my interest rate from 3.5% up to 3.625% in exchange for my lender paying my PMI.

Had I gotten PMI, I would have owed like $170 per month for it. Instead, I paid something like $40 a month more in interest due to a higher interest rate. Now over a 30 year loan I lose... but I had no intention of staying 30 years. For staying 3-5 years, it was a pretty easy win.

MrFrugalChicago - Great input! We would love to stay in the house for a while - probably 10 years. We are looking for a smaller house, with good schools and closer to our jobs. We do want to pay off PMI if we get it and hopefully pay off the house in 15 years (earlier is possible, but from what I've been reading on other posts, the rates are so good right now, it would be better to invest the money.)

[alwayslearning]

I went the PMI route 10 years ago when we bought our first home because I didn't know any better.  As soon as I figured out how expensive it really was I did everything in my power to refi the 15% or so I needed to get rid of it by effectively setting up a back door piggy back loan which I quickly paid off. To make it work I had to pay for an appraisal and modification fees (was still worth it).  After the crash I hear PMI premiums are even higher now and harder to get removed.  I'd do the 80/10/10 or similar, then pay off the high interest 2nd asap.  Just you plan on staying there for a while (5+ years, 10 is better).

Thanks for the input, So Close! The PMI can be a nightmare to get rid of I hear! From what I've read, they sometime deny the consumer the ability to claim 20% equity.

[frugaliknowit]

PMI is a total heist, a wealth sucking rip-off like cable tv, 5 year dealer car financing on 8 year old cars, I mean the worst!!!
Don't freagin use PMI.  I hope I am clear on that, fellow mustachians?

Eleven years ago, I did an 80/15/5.  I paid off the 15% heloc rather quickly (closed it), then refinanced into a 15 year fixed at 4%.  Assuming no extra payments, I will be mortgage free in 11 years.

Of course, 20% down is the best, and you will likely get better terms because lenders (especially nowadays) that allow a heloc/piggyback are probably going to charge a premium on the first mortgage (Gotcha!!  Smoke and mirrors!!).

[nedwin]

I'm not convinced that paying PMI is as bad as some on this forum believe.  I think it can be a useful tool, so long as you are using it with your eyes wide open.

We purchased our home with 10% down and pay PMI, it amounts to $44.99/month, on a loan with an original principal balance of $215,500 and originated a little over one year ago.  Our PMI is scheduled to last for five or six years, until our LTV is at 78%.  It will add a total of $3240 to the cost of our loan (if paid for six years), but for us to wait another year to save for a larger down payment would have cost us more money in the long run because of rising interest rates (ours is 3.25%) and rising home prices in our area.  It can be cancelled early when LTV is at 80%, but you have to request it and pay for an appraisal if it is before the loan is scheduled to be at 80%.  The value of our home has gone up since we purchased it, so I looked into having it cancelled sooner, but to cancel it less than two years after origination we would have had to have done significant improvements to the home or paid down the balance to 80%.  My servicer will charge me $440 for the appraisal.  I'll wait another year and try to cancel then.

I think the amount of PMI depends on several factors such as your credit, purchase price and real estate market you are purchasing in.  You should shop around so you have an understanding of what PMI may cost you in your specific situation before making a decision.

[clarkm04]

I'm also in the save 20% crowd, unless there is something very unique about this house.

For instance, we moved into a house and paid 5% down.  It was everything we were looking for in a house, had a motivated seller who sold under fair market value, and it's 3 blocks from my job, so I walk to work daily.  That made PMI worth it to us. 

Having said that, PMI totally sucks ass.  As others mentioned it's easily the most worthless thing you'll ever pay money towards.  What we did to fix this was we paid 15% of our mortgage over 10 months and then went through the process to get PMI removed, which was an application process and a new appraisal.

Since it sounds like you haven't dialed in on a property, I would just wait the 6 months to have 20% down.  Yes, interest rates might rise a bit, but then you won't have the hassle of PMI.  Even with our aggressive repayment, the PMI and appraisal cost us around $1000 for the 10 months we had it.  Furthermore, every lender is slightly different.  In the mortgage papers, it lists good payment history as a condition to remove PMI.  I know some lenders won't even consider this met until you have the mortgage for at least 2 years!  Ours told us that paying off 7 1/2 years of the mortgage in 10 months was suffice.

[alwayslearning]

I'm also in the save 20% crowd, unless there is something very unique about this house.

For instance, we moved into a house and paid 5% down.  It was everything we were looking for in a house, had a motivated seller who sold under fair market value, and it's 3 blocks from my job, so I walk to work daily.  That made PMI worth it to us. 

Having said that, PMI totally sucks ass.  As others mentioned it's easily the most worthless thing you'll ever pay money towards.  What we did to fix this was we paid 15% of our mortgage over 10 months and then went through the process to get PMI removed, which was an application process and a new appraisal.

Since it sounds like you haven't dialed in on a property, I would just wait the 6 months to have 20% down.  Yes, interest rates might rise a bit, but then you won't have the hassle of PMI.  Even with our aggressive repayment, the PMI and appraisal cost us around $1000 for the 10 months we had it.  Furthermore, every lender is slightly different.  In the mortgage papers, it lists good payment history as a condition to remove PMI.  I know some lenders won't even consider this met until you have the mortgage for at least 2 years!  Ours told us that paying off 7 1/2 years of the mortgage in 10 months was suffice.

Clarkm04 - How soon should we start looking for financing and a home? We are thinking 3 months. Is that at all reasonable?

[davef]

No, you have an unlimited credit pulls within 45 day window for credit checks. That means you want to start looking when you are close to ready to buy. It will only take a week  to find the best rate available that week. Use lending tree and then make them fight for your business. You will want to be essentially ready to buy when you start the process, with a home in mind. Once you lock a rate it is good for 30-90 days depending on the lender, that means you only have that amount of time to pick the house, get and appraisal, and close (about a 20 day process)

[MrFrugalChicago]

Do your free yearly checks 90-120 days out, make sure nothing bogus on your report. Otherwise, 45 or 60 days is plenty for financing.

[alwayslearning]

No, you have an unlimited credit pulls within 45 day window for credit checks. That means you want to start looking when you are close to ready to buy. It will only take a week  to find the best rate available that week. Use lending tree and then make them fight for your business. You will want to be essentially ready to buy when you start the process, with a home in mind. Once you lock a rate it is good for 30-90 days depending on the lender, that means you only have that amount of time to pick the house, get and appraisal, and close (about a 20 day process)

Do your free yearly checks 90-120 days out, make sure nothing bogus on your report. Otherwise, 45 or 60 days is plenty for financing.

Thank you Davef and Mr.FrugalChicago! We will be sure to check out financing options 45-60 days pre-purchase. Should we consult with a Realtor 3 months before our purchase time frame? 

[davef]

You could, If you enter a contract with a realtor It may come back to haunt you if you find a home you like for sale by owner. On by owner sales the seller avoids a 6% commision so is usually much more flexable on the home price. If either you or the seller has a realtor under contract thats not an option.

I did, but part of me regrets it. In some ways they push you into buying a house that may not have everything you want. Its nice for first time buyers who may not know what they want or how the process works, but I wouldnt use one again.

[mak1277]

No, you have an unlimited credit pulls within 45 day window for credit checks. That means you want to start looking when you are close to ready to buy. It will only take a week  to find the best rate available that week. Use lending tree and then make them fight for your business. You will want to be essentially ready to buy when you start the process, with a home in mind. Once you lock a rate it is good for 30-90 days depending on the lender, that means you only have that amount of time to pick the house, get and appraisal, and close (about a 20 day process)

Do your free yearly checks 90-120 days out, make sure nothing bogus on your report. Otherwise, 45 or 60 days is plenty for financing.

Thank you Davef and Mr.FrugalChicago! We will be sure to check out financing options 45-60 days pre-purchase. Should we consult with a Realtor 3 months before our purchase time frame?

How picky are you?  Each time I've purchased a home it has taken me 60-90 days just to find one I liked enough to make an offer.  Add to that the 30 days from offer acceptance to closing and I would definitely start looking ~3 months before your drop dead date. 

Don't let your realtor bully you into a house you don't want or that is above your budget.  Unless you're dealing with someone that you already know and trust, you have (in my experience) about a 50/50 chance of picking a realtor that doesn't care about you at all except for the 3% they see when they look at you. 

[alwayslearning]

No, you have an unlimited credit pulls within 45 day window for credit checks. That means you want to start looking when you are close to ready to buy. It will only take a week  to find the best rate available that week. Use lending tree and then make them fight for your business. You will want to be essentially ready to buy when you start the process, with a home in mind. Once you lock a rate it is good for 30-90 days depending on the lender, that means you only have that amount of time to pick the house, get and appraisal, and close (about a 20 day process)

Do your free yearly checks 90-120 days out, make sure nothing bogus on your report. Otherwise, 45 or 60 days is plenty for financing.

Thank you Davef and Mr.FrugalChicago! We will be sure to check out financing options 45-60 days pre-purchase. Should we consult with a Realtor 3 months before our purchase time frame?

How picky are you?  Each time I've purchased a home it has taken me 60-90 days just to find one I liked enough to make an offer.  Add to that the 30 days from offer acceptance to closing and I would definitely start looking ~3 months before your drop dead date. 

Don't let your realtor bully you into a house you don't want or that is above your budget.  Unless you're dealing with someone that you already know and trust, you have (in my experience) about a 50/50 chance of picking a realtor that doesn't care about you at all except for the 3% they see when they look at you. 

Mak1277 - Thanks for the advice! Since it's our first home, I think it will take longer than normal (estimated 3 months). We know the location (good schools, close to work) will be the biggest factor, but we are still working on the list of must-haves. From what I've heard, most realtors want you to have a pre-approval letter before looking at homes. Should we just browse online before getting the pre-approval letter?

(I apologize for all of the questions! We are very excited and eager to learn all we can before moving forward!)

[cchrissyy]

I did the 90% loan with PMI, then refinanced 16 months into the loan to get rid of it.

Good idea if your situation is like mine was -  mortgage rates fell during that time and meanwhile property value rose to get me the needed equity.