So here’s the deal: We close on the sale of our place back in Virginia tomorrow morning. I’m clearing a nice chunk of change.
Nice enough to make our downpayment the 20% that avoids Private Mortgage Insurance.
On the other hand it’s enough to
A) Fix up the back porch of the new house and get the wiring redone.
B) Big fancy Disney trip after the new baby’s born.
C) Opal, you should have bought my place when you had a chance
D) Purchase one of those ‘pre-paid’ college things for the new baby
E) As my accountant reccommended (no kidding) loose women and champagne
OK, I really like my accountant.
So if we throw it into the downpayment we’ll be saving $42/month for the first 5 years or so of the mortgage by avoiding PMI.
Should I or shouldn’t I? I’m on the fence and need some opinions.
We chose to avoid it, ourselves. It’s money you’re basically throwing away every month. OTOH, if that means you are leaving yourself with no savings, I wouldn’t do it. I am assuming this would just be ‘extra’ money you would have.
Figure out if the difference means that much to you - you would pay $2520 in insurance over 5 years. Is it worth more to you to have the money now?
If just look at the PMI and you have to put more than that down, it would seem to be a losing proposition. I think the real consideration is how much interest the additional down payment will save over the life of the mortgage.
It always makes sense to put enough down to avoid PMI if you can afford to do so. Not only do you avoid the expense of the PMI but you avoid the interest expense on the additional balance.
You would be better off taking out a home equity loan to cover any additional expenses you may desire to incur. At least in that case you are only paying the interest expense.
Remember that PMI is only beneficial to your lender.
I’ll second/third/fourth/… what the others are saying. If you go the PMI route, that’s money you pay every month until you get the lender to agree that you now have better than 20% equity in the place. It can be a major PITA to get them to agree with that. Might take an updated appraisal (which costs money), might take a full-scale refinance (at heaven-only-knows what interest rate), might take your firstborn child. Might just take until you’ve paid down your loan until it hits 80% of the original purchase price. Also, if housing values drop, you might not be able to get rid of the PMI.
Another alternative: Ask the lender if they wouldn’t just love to establish a home equity line of credit at the same time you establish the new regular mortgage. This way, they get to lend you more money over the years, and make more money from you, but you’re not stuck with PMI. Most lenders are delighted to do this, often they’ll eat all the additional closing costs involved, too (not much, since you’ve already got the current appraisal etc.).
Given the difference in property values between here and there, I’d be surprised if you didn’t put up the 20%.
What the others said. You put down 20% instead of 5%, and you shrink your P&I payments by a decent increment. And then you save the $42/month that’s not buying you a damned thing.
Ask your accountant to figure out the effective interest rate you’re getting on the increase in down payment when both the reduced P&I and the absence of PMI are figured in. It’s gotta be pretty hefty.
Two other factors are whether or not your lender would even lift the PMI after the 20% mark is cleared (I’ve heard some lenders have gotten away with not doing this) and whether or not you’d feel comfortable taking out a second mortgage in lieu of paying the PMI; some lenders will allow this more economical alternative.
If I had the money to make a 20% down payment, though, I’d do it in a heartbeat!
I think your goals for the money seem like good things to do. The wiring and porch especially. Congrats on the new house!
What I did when I bought my place is take out an 80-10-10 loan, where you have a 10% downpayment, a regular mortgage for 80%, and a second mortgage for the remaining 10%. You will pay a higher interest rate (and usually have a shorter term) on the second mortgage, but you will not have to pay PMI, and the interest on the second mortgage is tax deductable. Usually, unless the PMI is very low or property is appreciating very well and your lender will not be a pain about removing the PMI, the 80-10-10 is cheaper. Crunch the numbers and see. (This is just basically like taking out an 80% mortgage and getting a home eq loan right away)
I was looking at second mortgage rates for my refi and can get a 5 year loan at 6% fixed. Or you can get adjustables for even less, but they’re riskier, though if you’ll pay the second mortgage off quick they might be a better deal.
What? You didn’t like the loose women and champagne goals?
This is actually what I decided to do. I’m throwing the cash from our old place (we settled today and it’s not our problem anymore)(Woohoo!) into the new one and paying 20% down. Then immediately setting up a home equity line of credit to the tune of $15 Grand. That gives me no PMI, a line of cash to draw on for the home improvement, but no actual payments until I start using it.
The first note is at 5.625 and the line of credit is at prime+1. A smaller interest hit than I’d feared.
My mortgage with PITI:
Are you ready?
Those in big cities should perhaps avert your eyes.
Are you kidding me Jonathan? $505 a month?!? Check out my location and watch me cry a bloody river…
Quintuple that and you’d be in my goddamn ballpark…
Oh, wait, there was an OP, wasn’t there?
Good move on the 80-10-10, which is what we did on our first house to avoid PMI. The rate on the second was about 4 points higher than the first, and it was only a 15 year instead of a 30, so it was pretty bad and we knew we’d have to either refinance soon or sell the place.
CA real estate market being what it is, we sold in two years and bought something else with a big down payment.
PMI sucks. You aren’t buying anything with that money.
I am an escrow officer… which means that part of my job is to be the person who explains all those exciting documents to you when you have a closing. I also have a Certified Mortgage Lender certificate (no licenses in my state…scary!). Here’s my two cents if you want it (short version, believe it or not):
Avoid the PMI if you can. The lender collects that to cover insurance that will pay back the top 20% of the loan if you were to default (which happens to be the average cost of a foreclosure, BTW). It does YOU no good at all.
Another cute little thing they don’t mention: with most loans, you are able to request that the PMI be dropped when the loan to value ratio reaches 80%… but unless you ASK that it be dropped, they can collect until your loan to value reaches 78% (i.e. you keep paying when you don’t need to). If your property values significantly increase, you can get a new appraisal done and possibly get the PMI dropped sooner (magic LTV ratio again). Or, you can make principal payments to accomplish this sooner as well.
The other poster was correct about an Equity Line/Second mortgage. You can use those funds to avoid PMI, but be careful. Some of those are “interest only” loans, or have prepament penalties that are disclosed, but buried deep in the “legalese” of your paperwork. Would love to say that those things never happen, but they do.
Amen to that last paragraph- our little second was not only a 15 year loan, but at the end of the loan, there was going to be a balloon payment due- of the loan amount! Yep, interest only for 15 years then whammo.
It always pays to know the details and plan ahead.
So I will be applying all of our proceeds from the Virginia house to the new mortgage as a downpayment. This gets us to about 23% of the appraised value in downpayment. So we avoid PMI.
To get some working room in terms of home repairs (and this place needs some) I’ve set up a home equity line-of-credit with the same bank (using the same documentation). This means that I can borrow up to $15K just by writing a check for the repair not that I have to. If I can pay all the repairs out-of-pocket then I won’t need to touch the home equity line at all.
So it’s not really a 80-10-10 or any form of 2nd note…it’s just breathing room should I need it.
