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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: EUmustache on December 20, 2013, 05:29:26 AM

Title: What % for home downpayment?
Post by: EUmustache on December 20, 2013, 05:29:26 AM
I'm curious how mustashians feel about home downpayments?

(1) Do we try to put down the traditional 20%?
(2) Do we get a FHA loan with 3.5% down and pay PMI until we reach 20% equity?
(3) Do we fall somewhere between?
(4) Do we put more than 20% down if possible?

I would love to know what you think as well as why you feel that way. I'm really looking forward to this discussion. I couldn't find a MMM post about this topic, so if anyone is aware of one please post!

Thanks!
Title: Re: What % for home downpayment?
Post by: Thegoblinchief on December 20, 2013, 05:46:21 AM
Others will chime in here, but after doing a 5% loan and then getting stuck with ever-increasing PMI rates, if I had to do it again, I'd wait until I had the full 20%.

Keep in mind that even $50 a month, or whatever PMI will be, is the same as raising your interest rate by a considerable percentage.
Title: Re: What % for home downpayment?
Post by: willn on December 20, 2013, 07:18:07 AM
Generally you need 20% equity to not have PMI, so whatever percent gets you that number--the purchase price might not be the appraised value, so if you get it appraised for 100K but pay 90K, your loan amount could be 80K, and you'd have 20% equity even though you put 10K down.

However, if it is a good deal in a neighborhood you like and it isn't the most expensive house on the block, PMI isn't a horrible thing if it gets you home ownership and your payment is something less than 25-28% of your take home pay.  At that percentage you should be able to pay extra quickly to get rid of PMI at a later date.

Good luck and let us know what you decide.
Title: Re: What % for home downpayment?
Post by: arebelspy on December 20, 2013, 07:23:25 AM
It depends on a number of factors, not the least of which is opportunity cost.

What is it costing you to rent instead of own in the meantime?  What will prices do in the meantime?  What will interest rates do in the meantime?

I'd personally lean towards paying the 20% if you have it, otherwise paying the 5% and paying the mortgage down aggressively until you can remove PMI (and only accept a loan that lets you remove it ASAP, some have a fixed time limit for it), depending on your market and other options.
Title: Re: What % for home downpayment?
Post by: SnackDog on December 20, 2013, 07:27:37 AM
It all depends on what you are trying to a achieve.  If you plan to sell for a profit within a short timeframe, put down as little as possible. Developers will tie up as little cash as possible and don't care what the monthly costs are as much.

If you plan to retire in the house, go for 20% to avoid PMI.

If you have any doubt about your ability to make the payments, if, say you lost your job and then your savings to a frivolous lawsuit, consider putting more down, up to 100%.  In many states homes are protected from bankruptcy and can be a safe place to hide cash from lawyers.
Title: Re: What % for home downpayment?
Post by: ljp555 on December 20, 2013, 07:47:08 AM
The current FHA option is an especially bad deal. If your initial LTV % is greater than 90%, you pay PMI for the life of the loan, not just until you have 20% equity. So you have to refinance to get rid of PMI after you've paid down the loan to 80%.

If these are your options, I think saving 20% down payment is better than FHA in most circumstances. Though I just financed my house 100% with a VA loan.

Title: Re: What % for home downpayment?
Post by: gotaholen1 on December 20, 2013, 10:50:58 AM
Also note that some mortgage companies will allow you to have your property assessed and get out of the PMI one you have 20% equity of the appraised value.  It does cost about $400-$500 for an appraisal.  If you buy a fixer upper, it is very important to document all of the improvements you make prior to the approval.  If you give the appraiser a notebook with all improvements you made, it helps to get a higher appraisal. 

Read the fine print to see how a mortgage goes about canceling PMI as well. 
Title: Re: What % for home downpayment?
Post by: ASquared on December 20, 2013, 11:20:42 AM
I think 20% to avoid PMI.  Or 25% if you want an ING mortgage (for rates, lower closing costs etc)
Title: Re: What % for home downpayment?
Post by: Sebastian on December 20, 2013, 12:04:05 PM
I don't know if this is specific to just Wisconsin. I was recently pre approved for something similar to an FHA loan, but the thing you have to realize about PMI is that it is for the life of the mortgage. Not just until you hit the 20% in equity.

Again, that might just be a Wisconsin thing, but I double checked this out going through the documents and decided going with FHA because of this little factor.
Title: Re: What % for home downpayment?
Post by: judgemebymyusername on December 20, 2013, 01:06:49 PM
Everybody here is saying the obvious easy answer: save up the 20% and avoid PMI.

But it's not that simple. If you don't have 20% right now, how long will it take you to save up 20%? If it's going to take you a few years, that's a few years of rent that you're throwing away, a few more years to watch the interest rates go up for mortgages, and a few more years to watch home prices rise. My wife and I bought a home last year with an FHA, and our home value has already gone up 14%. No, you shouldn't count on your home value rising, but we bought at the bottom of the market as far as home prices and interest rates, and I'm pretty confident that our move put us ahead of where we would've been if we had waited to save up a down payment for a few more years. Keep in mind that the FHA rules just changed this year, so they didn't apply to us. We can drop our PMI at 78% LTV. http://themortgagereports.com/12740/new-fha-mortgage-insurance-premium-cancellation-policy-effective-june-3-2013

Don't forget that you can always do an FHA loan until you hit 20% LTV and then refinance to a conventional mortgage. But the interest rates may be higher down the road.

And then there's the intangibles like the peace-of-mind and relaxation of living in your own home vs a rental.
Title: Re: What % for home downpayment?
Post by: EUmustache on December 21, 2013, 03:15:07 AM
Thank you everyone! This is really helpful and informative! My husband and I are still about 12-15 months out from buying a house and I want to use that time to properly prepare. We currently live overseas and would like to buy a house when we move back to the US. The current rental market in the city we plan to move to in the US is out of control. We are talking $1650 for a studio out of control for the more mustachian parts of town. The buying market isn't as good as we would like, but it's better.

We are currently working on some hair on fire student loans, and while I don't think we'd be able to completely knock those out this year I want most of them gone before we take on a mortgage. And yes, I have read MMMs post on not buying a house until the student loans are GONE but the nytimes rent v buy calculator is so strongly in the buy for this city (and more importantly the part of the city we'd want to be in) that I really do feel like it makes the most sense.

We could easily do 10% down in our current situation - 20% is possible but would probably require either (a) paying the loans down less aggressively for the next year or (b) cashing out some (stock) investments. I guess I shouldn't look at it as "cashing out" some investments but rather moving money from one investment vehicle to another? (Yes I know you can't count on the value of your home increasing, but the same could be said of the stock market). And yes we've considered cashing these out to pay down the student loans, but they have constantly out preformed the interest rate on our loans (6-6.55%), so the investments stay put for now.

All that said - who knows what the housing market and rates will look like in 12-15 months, so all this could change. If anyone has additional thoughts / ideas keep them coming!