Author Topic: Help! Home Purchase with various Financing Options ...  (Read 2813 times)

LurkingMustache

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Help! Home Purchase with various Financing Options ...
« on: July 21, 2017, 07:39:13 AM »
Hey Mustachians,

This is the place I go for some wisdom and I am trying to finalize on a home purchase and can't decide on what route to go with financing.  The home I am looking at is 245k, but also has a mother in law suite that is rented at $800/mo in the back yard.

Currently I have approximately 27k in cash (this has been my 6 month security blanket - that I would also need to use partially as a down payment).  Here is where I am struggling.

I have an option of a 5% down payment mortgage, which can also lump in rehab - the property isn't in an unliveable condition but helpful to know that if there were things that needed to be repaired they could lump it in to the mortgage.  Obviously then this would only have my down payment coming out to 12.25k.  The challenge:  This comes with PMI, which at my tax bracket is not tax deductible.  And then it would take another 15% of equity to get to a point where I could remove it. 

Pros: 1)  Keep an additional 12.25k in cash liquid for any issues.  2) Can do repairs financed into the mortgage. 3) Additional reserves help in case there are tenant repairs that need to be done.  Cons: 1) PMI...  Not tax deductible.

I also have an option of a 10% down payment, with NO PMI.  They do not lump in any repair work into the mortgage.  They also have a slightly lower interest rate.  The challenge is that it would take 24.5k of my available 27k in cash.  I have an additional 15k in a Roth IRA, but I am loathe to take any principal out of it because I don't want to "fall behind" on my maximum yearly contributions.  I also have considered a 401k loan (could do up to 50k), but again have found that it isn't ideal either because you miss out on returns.

Pros: 1) Eliminate PMI (~180/mo) 2) 5% more equity 3) Slightly lower interest rate 4) lower closing costs Cons:  Would require either a withdrawal of principal from my Roth IRA, impacting future returns -or- loan from 401k, again impacting future returns.

So I feel like I have two not so great options to choose from. 

Any thoughts would be appreciated.  Thanks!
« Last Edit: July 21, 2017, 08:00:22 AM by LurkingMustache »

Proud Foot

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Re: Help! Home Purchase with various Financing Options ...
« Reply #1 on: July 21, 2017, 12:13:31 PM »
Does the place need rehab or is it just preference items that could be updated at a later date?

I also have an option of a 10% down payment, with NO PMI.  They do not lump in any repair work into the mortgage.  They also have a slightly lower interest rate.  The challenge is that it would take 24.5k of my available 27k in cash.  I have an additional 15k in a Roth IRA, but I am loathe to take any principal out of it because I don't want to "fall behind" on my maximum yearly contributions.  I also have considered a 401k loan (could do up to 50k), but again have found that it isn't ideal either because you miss out on returns.

Pros: 1) Eliminate PMI (~180/mo) 2) 5% more equity 3) Slightly lower interest rate 4) lower closing costs Cons:  Would require either a withdrawal of principal from my Roth IRA, impacting future returns -or- loan from 401k, again impacting future returns.

That seems to me like a good list of pros for option 2 but without an answer to my first question it is hard to tell. For the 401k loan, yes you might miss out on higher returns but you are guaranteeing a return of whatever percentage your interest rate is. The biggest risk there is you separating from your employer (either voluntarily or involuntarily) before fully repaying your loan back and raving to repay the balance immediately. 

LurkingMustache

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Re: Help! Home Purchase with various Financing Options ...
« Reply #2 on: July 21, 2017, 12:45:12 PM »
It isn't unliveable now, it's just rather ugly in a lot of ways (they did a poor job staining the old hardwood floors, paint, some siding is messed up on the mother in law house in the back).  So, realistically, I don't think I would be required to do much to it on day one.  Especially since I am not looking to flip it in the near term. 

But, it has been used as a rent house, and the stuff they did "rehab" I think was done rather sloppily.  It makes me nervous that I could find things as we get in that really do need work, and not going with option 1 could lead to unexpected expenses.  Planning to get it under contract shortly though, so ideally could have a good inspector validate that concern.

jennifers

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Re: Help! Home Purchase with various Financing Options ...
« Reply #3 on: July 21, 2017, 09:08:59 PM »
Wow, I'm buying a house as well and feeling guilty about potentially *only* putting down 20%.

How fast would it take you to get back to a reasonable cash level if you put 10% down?  If things were really bad could you put repairs on a credit card and sell some taxable investments to quickly pay off the cards? I would try to make the 10% down payment work if I were you.  PMI sucks.


SwordGuy

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Re: Help! Home Purchase with various Financing Options ...
« Reply #4 on: July 22, 2017, 03:06:53 PM »
1)  What kind of rates and fees and terms are you talking about for the mortgage options?  Looks like you're looking at a 15 year.   What about a 30 year?

2)  How much positive cash flow do you have per month?

3) What is the likelihood that you will be fired or laid off in the next 5 years?




Sibley

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Re: Help! Home Purchase with various Financing Options ...
« Reply #5 on: July 22, 2017, 08:44:54 PM »
With PMI, there are 2 types. One you pay upfront, the other you pay every month. Generally, the one you pay upfront is cheaper over time. Is that an option?

What's your monthly cash flow like? IE, can you dump $1k a month into the house without breaking a sweat?

I bought a house recently, and I'm finding that I'm really not pulling money from savings (which is allowed in my budget) for house stuff - I'm cash flowing almost all of it. This is helping a lot, because I've got a good chunk of money that I can throw at bigger issues, or just keep it in savings.

dabears847

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Re: Help! Home Purchase with various Financing Options ...
« Reply #6 on: July 23, 2017, 07:20:07 AM »
My vote, based on opportunity of return and opportunity of risk consideration.

1. 401k Loan Yes, Loan to yourself, paying yourself interest at a no cost relatively. You could do $20,000-$50,000, Loan for rainy day. MMM posted an article about the value of the stock market, consider the opportunity of risk, the book could potentially be buying back in at a lower value if there is a correction.

2. 10% down and eliminate PMI, I know there is a 20% down option as well. Usually is around 7% return, Rate 30 year loan 4% and 3% for PMI.




LurkingMustache

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Re: Help! Home Purchase with various Financing Options ...
« Reply #7 on: July 24, 2017, 06:43:55 AM »
Thanks for all the thoughtful replies.  Currently my savings rate is $2,000/mo (after savings pulled from paycheck for maxing 401k, which is about $750 per paycheck). 

My "fixed" housing costs are currently $600/mo in rent.  New home would be financed either at $220k or 232k.  Tenant in back unit pays $800/mo in rent and I'd split the remainder of costs with a roommate. 

It's my first house and I hate to underestimate costs, but I'd assume with that I'd be around ~800/mo in expenses (including CapEx big repairs that come around, and minor stuff).

All that to say that I'd think my monthly cash savings could still stay near $2,000/mo, especially if I pulled in my atrocious food budget.  At that rate it would take 10 months to be back at my preferred safety net.  Longer if I used part of those savings to do repairs, etc.

I need to do research to better understand the 401k loan and its' mechanics.  I would have almost assumed that it would sell off index funds for cash, and that it could possibly be preferable to do it now (market highs), assuming there is an upcoming correction over the course of the loan repayment -- it would be buying lower?  Probably a simple question that I just haven't done enough research on.

 

Kayad

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Re: Help! Home Purchase with various Financing Options ...
« Reply #8 on: July 26, 2017, 08:15:19 AM »
That PMI is a huge downside, so I'd say work on your options for the best way to put down 10%.   To illustrate:  The additional 5% down is $12,2500.  If you had that amount invested instead, and achieved market average returns, that would be $857.50 a year ($12,2500*.07).  Your PMI is going to cost you $2,160 every year ($180*12).  So your real rate of return on that invested money is -$1,302.50, or -10.5%. 

I would probably even say that if you can't swing the 10% now, wait 6 months to buy a house.  With your savings rate, you will save yourself out of this dilemma in no time.

One other note--in my experience (just bought house two)--there are always more expenses that come with a newly acquired home than you expected.  Unless you have plenty of free time and those mustachian carpentry, plumbing, and/or electrical skills dialed in, just be prepared . . .