To PMI or not

[Ocinfo]

My wife and I (both early 30s) are planning to buy a home in the near future. Our credit scores are excellent so PMI rates on a conventional mortgage are very low <.5% when we put 10% down. We have the funds available to put 20% but it would require selling additional appreciated stocks and paying the resulting capital gains (my state treats gains as regular income at 8.5%). By my calculations, on a $450k home with 10% down, I would pay $2k per year or less in PMI. This works out to around 4% interest per year on the extra $45k that I’m essentially being able to keep invested. I’ll of course also be paying the ~3.5% mortgage interest on an extra $45k. We’d likely pay the loan down below 80% LTV in a year or two and/or have a reappraisal. Thoughts?

I want to stress that this isn’t a case of not being able to afford. It’s an optimization question. We have a > $250k HHI, > $600k NW, save $8k+ per month, pay $2,600 in rent (basically same as what mortgage will be), only debt is $20k (@5.49%) on a piece of land valued at $125k, and no kids.


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[ecchastang]

At your savings rate, you will have the 20% down in 3 months.  Statistically winter is a better time to buy anyway.

[Ocinfo]

At your savings rate, you will have the 20% down in 3 months.  Statistically winter is a better time to buy anyway.

Fair point. We’re in the process of switching cities so waiting would involve additional short-term rental costs, etc. I should also add that our actual savings split is:

$5k to retirement and HSA (extremely generous company matches)
$3k to post tax savings
$1k to land loan principal, (which I didn’t count as part of the $8k savings)

So would take more like 12+ months and incur additional rent/moving expenses.


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[Boofinator]

I ran the numbers on PMI a while ago, and my conclusion was for cheap PMI (0.5%) and a low interest rate mortgage, it doesn't make a huge difference in long-term costs whether or not you pay down 20% or use PMI (there's a slight edge for 20% down), but the worst-thing you can do is get PMI and then pay down right away to get rid of PMI. (The exception would be when you are getting close to 80% loan-to-value, then paying down extra makes more sense.) I know this feels counterintuitive, but it essentially comes from the fact that you are paying significantly more per month to shorten the term of the loan.