3.5% Downpayment + Early Payments + Refi out of PMI

[chortitza]

Hi all,

Long story short, DW and I are looking to buy a house in 2-3 years. Currently in grad school and will have what we consider a very high income ($200k+) after graduation. We're saving some until graduation but won't be able to hit 20% for a downpayment for a while, but are all but guaranteed to live in the same place for 10-15 years when we buy.

I've been trying to do the math on whether we're better renting for an additional 1-2 years and putting 20% down versus buying through a first-time home buyer program with ~3.5% down + paying an additional $1,000+ per month until we can refinance out of PMI. Assuming a 5% interest rate (big assumption, given current market volatility), it seems like additional payments on a 30-year mortgage would have an ROI between 9 and 11 percent until we hit 80% LTV on the mortgage, enabling us to refinance at existing rates or back off additional payments to invest the difference until rates come down.

Does anyone have a good calculator to use to check my math? Outside of that, what would you do? Wait an additional year or two to put 20% down or go ahead and buy, planning to make early payments given good job security for a few years? All advice and help is much appreciated!

[tralfamadorian]

What will your estimated PITIA or rent be? This will help us be able to offer suggestions.

[Another Reader]

This is not about math, at least not now.  You don't know yet what jobs you will be offered where.  There is no guarantee today that you will have the same job for 10 or 15 years.  Evaluate job security when you actually have the job.  You don't know what mortgage rates will be when you start working, much less a few years later. 

In your shoes, I would rent the cheapest place near to school that I could tolerate.  Save as much cash as you can so you have options when you get your jobs after finishing school.  Save up the 20 percent down before you buy unless there is an overwhelming reason to buy earlier.  Not an excuse or a rationalization, but a solid reason to buy.

[waltworks]

Yeah, this is something you can worry about when you have your high paying jobs. For the time being, forget about it.

-W

[robartsd]

I agree that you don't need to worry about doing the math until you have the long term jobs, but might as well save as much as you can to keep your options open.

In addition to special first time home buyer programs, you can also consider conventional loans with as little as 5% down (this is what we did). We bought our house in June 2016 for $175k with 5% down. Our 30 year fixed rate is 3.75% and our PMI is about $57/month. We felt the time was right in the real estate market and were fairly certain our income and location were stable enough to commit to buying.

You likely can cancel PMI without refi, saving the transaction costs of a refi and keeping your low rate if rates have increased. On our loan, we can cancel PMI when we reach 80% LTV (75% LTV for appreciated value 2-5 years after origination). Current value must be verified with a Broker's Price Opinion if loan is older that 180 days (currently $105 fee). Based on original price, we are at 90..54% LTV, but based on a relatively conservative Redfin Owner's estimate (choosing 5 lowest comps offered) our LTV would be 75.66%. Likely we will qualify to cancel PMI without a refi this summer after only 3 years of minimum payments. Before ordering, I'll want to check with the lender to find out if we would have the option to make an extra principle payment to get to the required LTV if the BPO comes in short of what we were hoping for.

[Boofinator]

Depends on the specific terms being offered, but when I looked into PMI a while back, my general conclusions were that if you have the 20%, your best financial move is to avoid PMI, but if you have to get PMI, then it generally makes sense to keep it, pay the minimum, and invest your savings.

I ran a scenario assuming a $100k house purchase, 4.125% available interest rate, 1% available PMI for borrowing an additional 10%, $20k cash on hand, and $1000 available every month for mortgage and/or investments. There are some assumptions you'll have to make on investment returns to determine the optimal strategy; I assumed this was a long-term (30-year) investment with constant investment returns. For this scenario, the breakeven point for getting PMI over no PMI is if investment returns are above 10%; otherwise, it is better to put 20% down (if available). If you already have PMI, the breakeven point to pay down the PMI as quickly as possible would be if you don't expect long-term returns to be at least 6%. Paying off the mortgage as quickly as possible in general would only make sense if long-term returns were less than your mortgage rate (4%). Attached is a plot showing 7% investment returns.

(I'm sure someone could come up with a fairly complex algebraic formula for plug and chug, but I'm not currently up for it.)