Author Topic: Is it anti-Mustachian to buy a house with 10% down?  (Read 6771 times)

fallstoclimb

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Is it anti-Mustachian to buy a house with 10% down?
« on: May 03, 2012, 10:56:53 AM »
Title of the post pretty much sums it up.  Do you think it is anti-mustachian to buy a house with only 10% down?  Most people I talk with seem pretty comfortable with the idea, but of course most of them are not MMMers! 

arebelspy

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Re: Is it anti-Mustachian to buy a house with 10% down?
« Reply #1 on: May 03, 2012, 11:03:14 AM »
Depends.  Are you buying one you can't afford?

Or does it make good financial sense to do so?

Buying at 0-5% could be a great move; I'd often do so even if you had the 20% to put down (especially since there are ways to avoid PMI on loans like that) as long as you invest that 20% and not blow it.
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arebelspy

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fallstoclimb

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Re: Is it anti-Mustachian to buy a house with 10% down?
« Reply #3 on: May 03, 2012, 11:12:33 AM »
I'm not actually in the position to buy yet, but I was curious about what people on this board would think.  My peers are nearing 30 and a lot of us (most likely including me) plan on buying with 10% and just sucking up the PMI.  With aggressively paying down student loans, no one is in a position to save 20% anytime soon. 

I do of course realize the smartest move is to pay off loans first, but in terms of both housing market timing and family timing I'm beginning to think that might not be an option, so I'm currently knocking mine down to a manageable level before focusing on the down payment.

gecko10x

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Re: Is it anti-Mustachian to buy a house with 10% down?
« Reply #4 on: May 03, 2012, 12:23:22 PM »
We are closing at the end of the month with 5% down. It wasn't necessarily by choice, but I think it will work out fine.

I don't know about other ways to avoid PMI, but we are doing a single-premium PMI- pay a lump sum up front and no monthly payment. The total cost should be significantly lower than if you opt for the monthly premium. Rates vary by insurer, so have your mortgage officer check around if they don't already know which one has the lowest rates. Ours ended up opening a new account with a different insurer because the rates were so much better on the single-premium. I also got the impression that it isn't advertised very much as most people who want to do low down payment wouldn't have the extra cash to do the single-premium anyway- I had to ask our mortgage officer.

velocistar237

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Re: Is it anti-Mustachian to buy a house with 10% down?
« Reply #5 on: May 03, 2012, 12:26:23 PM »
We found a good deal on a house, and we put 10% down and paid PMI. Then, having figured out the effective interest rate for PMI after the purchase, we smacked ourselves in the forehead and put everything we could toward paying the mortgage down to get rid of PMI. We ended up coming out ahead.

Avoid FHA loans, since you can't remove PMI/MI without refinancing.

(especially since there are ways to avoid PMI on loans like that)

How does one do this?

gecko10x

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Re: Is it anti-Mustachian to buy a house with 10% down?
« Reply #6 on: May 03, 2012, 12:33:30 PM »
Avoid FHA loans, since you can't remove PMI/MI without refinancing.


Oh, yes. ++ Maybe USDA as well? I can't remember.

Praxis

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Re: Is it anti-Mustachian to buy a house with 10% down?
« Reply #7 on: May 03, 2012, 03:58:00 PM »
For rentals, as little down as possible actually seems like a great idea.  You have the over leveraging danger, but you can stack up on "cheap" borrowed money with long term low interest mortgages that make enough money to give you a huge ROI even if you ignore equity.

For a personal home, the more money you put in to it, the less money you are losing.  It is debt.  That said, don't tap your emergency fund.  If 10% is all you can afford, then go for it.

gooki

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Re: Is it anti-Mustachian to buy a house with 10% down?
« Reply #8 on: May 03, 2012, 04:40:11 PM »
We found a good deal on a house, and we put 10% down and paid PMI. Then, having figured out the effective interest rate for PMI after the purchase, we smacked ourselves in the forehead and put everything we could toward paying the mortgage down to get rid of PMI. We ended up coming out ahead.

This. If you believe the time to buy is now/very near future do the above. Accept you might have to pay a PMI, but be very aggressive in paying down the debt to get the point where you don't pay PMI ASAP.

Also consider borrowing money from your parents (if they are in a position to lend you a couple of grand) to get you to the 20% down payment point.

poko

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Re: Is it anti-Mustachian to buy a house with 10% down?
« Reply #9 on: May 04, 2012, 09:04:08 AM »
For rentals, as little down as possible actually seems like a great idea.  You have the over leveraging danger, but you can stack up on "cheap" borrowed money with long term low interest mortgages that make enough money to give you a huge ROI even if you ignore equity.

Does this mean that for rentals you do not pay PMI if you don't put 20% down? I'm looking into buying a rental soon-ish (probably next year) and it seems like most people around here favor a lot leverage for rentals. Or are there some other tricks to avoiding PMI for a second property?

Bank

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Re: Is it anti-Mustachian to buy a house with 10% down?
« Reply #10 on: May 04, 2012, 10:28:00 AM »
I'd recommend that you look into two loans rather than paying PMI.  On our recent home purchase, we took out a primary conforming mortgage (75%), a HELOC (10%), and put down 15%.   Thus we skipped the PMI, which would have added substantially to the costs.

We could have put down more and skipped the HELOC, but it didn't make sense for us.  After the mortgage interest tax deduction, which we benefit from (not everyone does),  the HELOC is well under 3%.  The Fed's stance on rates make it seem likely that the rate won't be going up anytime soon, either.

The danger here with the HELOC is that the floating rate can turn around and bite you if interest rates suddenly go up.  But if you have other assets, or a high savings rate and can expect to pay that money back in the next couple of years, it might be something you want to look into.
« Last Edit: May 04, 2012, 10:30:10 AM by Bank(rupt$y) »

grantmeaname

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Re: Is it anti-Mustachian to buy a house with 10% down?
« Reply #11 on: May 04, 2012, 10:34:09 AM »
I thought the consensus around the forum was that you needed at least 20% equity to qualify for a HELOC. Or am I missing something here?

Bank

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Re: Is it anti-Mustachian to buy a house with 10% down?
« Reply #12 on: May 04, 2012, 10:53:44 AM »
I thought the consensus around the forum was that you needed at least 20% equity to qualify for a HELOC. Or am I missing something here?

I can only speak to my experience, but I didn't.  And there are no strings attached, or details I've left out.

arebelspy

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Re: Is it anti-Mustachian to buy a house with 10% down?
« Reply #13 on: May 04, 2012, 06:19:41 PM »
Good info, thanks Bank(rupt$y).  Was the HELOC done with the same lender as the primary?  Was this an investment property or owner occupied?
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Bank

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Re: Is it anti-Mustachian to buy a house with 10% down?
« Reply #14 on: May 05, 2012, 06:02:28 AM »
We will be owner occupiers (financing is in place, but we don't close until May 15).  The whole deal was structured by the Summit Mortgage broker we're working with, but Summit is only originating the conforming loan.  The HELOC is with USAlliance Federal Credit Union. 

Glad to be able to contribute something to the board!

Dicey

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Re: Is it anti-Mustachian to buy a house with 10% down?
« Reply #15 on: May 05, 2012, 07:43:04 AM »
Poko,
Sometimes it's tough to write out an answer that doesn't sound snarky, so please know that's not my intent. Your question indicates that it would be wise to do a bit more research before attempting to buy rental property. "Don't buy what you don't know" is great financial advice and applies to real estate as well as equities.

Generally, lenders want more than 20% down on an investment property, because it's easier to walk away from a property you don't live in. The time-honored work-around is to buy your first property with the intent to make it your primary residence. Live in it (or not), and then turn it into a rental. The first one's always the hardest. If you're careful and buy the right property, you can build a base that leads to FI. But in real estate, the mistakes can be ruinously expensive. There will always be another house on the market, don't be in a hurry to lock something in or that something could easily turn into a ball and chain.

poko

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Re: Is it anti-Mustachian to buy a house with 10% down?
« Reply #16 on: May 06, 2012, 06:32:07 PM »
Diane, not snarky at all!

I am not about to go and buy a rental at any time soon -- I have other financial goals to get to before I can even start saving up for that down payment. I guess I just wanted to get an idea of what kind of number that downpayment would be.  I would definitely do much more research and get informed about renting before I started looking at properties.