Strictly based on net worth, is 5% down better than 20% down?

[rabidshark]

So I'm buying a house right now for 5% down, which obviously includes PMI. The reason I'm doing this is twofold: I get into a house sooner rather than another year or so down the road (when I'd have 20%), and the math for me suggests that 5% down + PMI is better for my net worth than waiting until I get 20% down.

Here's what it costs:

Purchase price: $209k
Down payment: 5%
Mortgage rate: 4.5% fixed 30 yr
Total Loan amount: $198,550
Principal + interest: $1006
PMI costs (monthly): $68

If I treat the PMI costs as "interest", the mortgage rate works out to 4.91% per year until I get rid of the PMI. At that rate, was there any reason to wait? At that low of a rate, I'd be better to throw the difference into a taxable stock index fund than to toss it at the mortgage (which is the plan). Is there any reason tax-wise or otherwise this approach is less favorable to my net worth on average?

[waltworks]

Might post this in the RE forum for more expert takes on the question, but I think the real issue here is that you only have ~$10k saved and want to buy a house, and getting to $40k is going to take you a couple of years?

That makes it sound like you have general financial stress or at the least your expenses are pretty close to your income - and low savings rate means if the house needs major (or lots of minor) repairs right away you can get yourself in trouble pretty quickly. Your PITI is not the whole cost of owning a home, not even close. So setting aside the PMI question entirely - why is it that you have so little saved? If you use all your savings on this house, what will you do in an emergency?

-W

[Rufus.T.Firefly]

I'm a little more financially conservative, so I waited for 20% down payment and to have paid off student loans. This took a few years and I had to practice some patience. Remember that leverage always inherently brings more risk into your financial life. You can lose your job, home values can fall, etc. Just make sure you have enough financial stability overall.

When I bought my house, the bank offered me a 0% down, no PMI loan for 1% additional interest. I almost took it since I could invest the difference. At the end of of the day, I didn't like the risk that added to my finances so I went with a conventional 20% down payment.

[maizefolk]

As others have said. You average outcome might well be better with less money down, but the bottom 20-30% of outcomes are going to be worse.

Essentially you're increasing your leverage, which increases both your expected return, and the amount of unpredictability.

[thd7t]

Your PMI is only interested in 15℅ ($30k) of the loan and doesn't amortize, so the rate is effectively much higher. It's also on top of the initial 4.5℅, so it's always higher than it looks. I can go over the math based on your case, later, if you want, but it tends to average out to over 10℅.

[rabidshark]

Your PMI is only interested in 15℅ ($30k) of the loan and doesn't amortize, so the rate is effectively much higher. It's also on top of the initial 4.5℅, so it's always higher than it looks. I can go over the math based on your case, later, if you want, but it tends to average out to over 10℅.

Thanks for that, it makes a ton more sense all spelled out. I'll start thinking of the PMI more like a $1032 annual fee for a $30k loan until it's paid off. I'll likely target killing that debt after topping off tax advantaged accounts.

Might post this in the RE forum for more expert takes on the question, but I think the real issue here is that you only have ~$10k saved and want to buy a house, and getting to $40k is going to take you a couple of years?

No real expense or income issues, actually. It would've taken about a year from now to save up the money if we had kept our 401k, HSA, and tIRAs maxed out, with an "or two" in case life happened.

In any case, I'll consider this a lifestyle choice moreso than the best financial decision in the world. Compared to another year of shared walls, shared laundry, shared parking, no garden area, no outdoor area, no place to play my musical instruments... I'll take it.

[waltworks]

Yes, 1 year to save $30k more while maxing $50k+ worth of tax advantaged accounts = you are doing great. Buy the damn house, and enjoy it. Kill the PMI (make sure your loan allows you to get rid of it by paying it to 20%, some contracts are written to have the PMI stay for 5 years or some other arbitrary amount of time no matter what) next year.

Basically you are spending $1k to have a much nicer year of your life. No brainer.

-W

[humbleMouse]

I like to look at the situation like a cashflow thing.  Where I live it costs $1k for a shitty 1br apartment. I put 3.5% down on a 3000sqft house and now my living expenses are 2k total per month and split with roomates.  So now I have a lot of cashflow per month, and I own an asset and get to live in a kick ass house.  Pmi is a small part of that equation.

[davef]

One think to consider is that rates look to be on the rise. There is no guarantee you can get a 30 year at 4.5% a year from now. It might be 5%.
If you are sure you can afford the PMI, and you are ready to buy now, buy now. 

[bryan995]

But as interest rates rise, housing prices should decline :)

[maizefolk]

But as interest rates rise, housing prices should decline :)

Yup. So many people decide what to spend on a house based on the monthly payment they're told they can afford, not the sticker price.