I know, I know,we shouldn't buy a house if we don't have 20% down.. We didn't pay PMI on our first house, and I'm not really interested in paying it now...and I have no clue if we even will, it depends on the equity in our current home (I'm getting a market analysis done next week).....But, I'm trying to figure out if it isn't worth paying PMI for 2 years if we can get a great deal now. I keep seeing some amazing listings, but no matter how I work the numbers, we are a little short.
I'd also like to have some cash on hand for any "problems" that might arise during the first year of ownership..I don't want to put all my cash into a down payment.
Also, my hubby just took on a new job, so there is a chance that his bonus will be ridiculous next year. We could just throw it all down then and be done with PMI......
I don't 'want to miss out on a great house just because we are a little short......It seems reasonable to pay PMI if it will be for a short period of time (less than 3 years, maybe). Also, car and student loan payments are done next summer, so some cash will be freed up then.
I know a lot of you are cash only types, but hubby and I believe in leveraging your money. We always pay off our credit cards, but we do believe in using cheap loans to increase long term net worth. We don't pay off my student loan, for instance, because the rate is so low, we are better off putting the money into retirement. With this type of thinking, if we can get a deal on a house, say, pick up a house 100-150k below market value, doesn't it make sense to pay a few grand in PMI for a few years to access that house equity? It seems like a no-brainer to spend 3k to make 100k.
I just want to add that we will continue to max out our retirement no matter what. That is way more important than a bigger house now....
Houses are so far below value because they are short sales or foreclosures. They need work, but I want a house that I can remodel.
Also, we will be taking out a lot less than the bank will give us. I'm thinking of putting 10-15% down, and doing a 15 year fixed rate.
On my first house, they wouldn't just drop the PMI. I had to refinance the loan. It ended up being worthwhile for me because the interest rates had dropped, and refinancing was a smart option for me. However, that is unlikely to be the case if you get a mortgage now, because the rates are sooo low and are unlikely to go lower.
Just be very very careful about the terms of any mortgage that involves PMI. I know some of the new rules/laws involved extended periods of time before you can get rid of it, and some (maybe it is just refinancing rules?) the new laws say you cannot EVER drop it. Once there always there. Or once there, minimum of 7 years there or 10 years or something.
I haven't followed it that closely... but I do know that even before any new laws were done, in many cases, it isn't JUST when you beat the percentage of equity, but also a certain amount of time must pass---it used to be around 2 years. Anymore, that may be a much longer period of time. Definitely something to verify beforehand.
I'd only do it if you are pretty certain that you'd be able to refinance in a few years, as the less down payment you give, the higher your interest rate will be.
I dont think PMI is that big of a deal, especially if you think it would only be for a few years. I think its better to stretch now and get a home that you will be happy in for a long long time. Depending on your mortgage amount, you might be surprised, the PMI was not as expensive as I thought it would be. Go for it!
You seem to be using your brain, so I will allow it, just this one time. LOL
If you have excellent credit, you can talk to mortgage brokers about options. For example, a 80-15-5 loan or an 80-10-10 loan. You get 80% as a regular 30 yr mortgage. You get 10% (or 15%) as a shorter term, higher interest mortgage, and put the remainder down. You don't pay PMI, buty ou do pay a higher interest rate on the smaller loan - which is ok especially if you think you'll be able to pay off that loan pretty quickly with a bonus that's coming.
The benefit is that you can pay the loan off in full ASAP, whereas oftentimes you are locked into paying the PMI for a longer period of time. A reputable broker can explain it better.
The housing market is starting to rebound so it could be a very good time to stretch if your area isn't a sellers market yet. Same time, the market isn't that inefficient. If you think a house is $100-$150k below market value, so will other people and it will be bid up in price. Or, it's not really that much below market value... Not sure anyone can be so sure an asset will appreciate unless they have inside information. But you seem to want a big house and to stretch so go for it. Or at least try. If you're stretching, the actual loan might be harder to get than you think. I hear of a lot of people with excellent credit who were preapproved who then get held up by the banks. And since sellers know that, they are interested in a really "clean" bids on their houses. In a way, you don't need to decide until you bid on a house and the sellers accept. Otherwise, you can plan and plan but then someone meets the same bid you put in with 40-50% down and the sellers are way more comfortable with that. And remember that leverage can be a great thing but it also bit a lot of people in the a-s the past several years.
If you can afford it and you think the house will go up to 100K and plan on selling it. House value is only of use to you if you plan on moving, otherwise, it doesn't matter, you live in it.
Is PMI so long as you are below 20%? If so and you think you will have more money in the next year to actually put the 20% down, I would go for the house you love now if the market is on the low and then pay into the house so you can get rid of PMI.
But like stocks, it's all a gamble. You may run into life crisis and have to funnel money elsewhere and end up paying PMI for longer. If you can afford it while still putting into retirement and such then go for it, especially if housing is going to increase significantly or the housing market is fast in your area. For instance, in my area, I can wait to buy a house because there's always something to buy. Outside San Francisco, you can't find a house that stays on the market for a week. In that case, I'd suck it up. But for me in my area, I would wait because even if the houses go up, so will my house when I sell. Then you add the fact that next year you will know for sure if you have the "bonus" money or if you have no emergencies.
It comes down to what you are comfortable doing.
A house is only worth what someone is willing to pay for it so to say you are getting it $100,000 below market value is probably not true unless your parent are giving you a deal or something. Why would anyone sell that much below market value?
Go for it.
Talk to the mortgage company about their restrictions on getting rid of PMI. Getting rid of PMI on a conventional loan is much easier than getting rid FHA MIP where there are a lot of ridiculous restrictions. Typically you will have to have it reappraised and they may want to see where the money came from to make sure it wasn't a loan from somewhere/someone. But if you are putting 10-15% down, the PMI will be pretty low anyway.
I agree with you to max out your retirement and use cheap money to finance your home. Also realize getting a house from a foreclosure or short sale is a real pain in the butt and can take quite a while for the bank to approve it.
Good luck
Hi J.,
When we were looking at houses earlier this year, we had the same discussion. One thing our realtor mentioned to us was that the rules regarding PMI either are changing or have changed and you can no longer get rid of PMI as soon as you reach 20% equity in the home you are purchasing. I don't know all of the details, but if you take PMI, it either has to be carried for the life of the loan or for a significant period of time. I would talk to a mortgage professional and get more information before proceeding.
Many banks are offering an 80%-10%-10% loans. Meaning, you get one mortgage at 80%, another at 10% , and you put down 10% and no PMI. I know a few months ago, NASA FCU was running 0 down and no PMI; however, your interest rates were higher than an regular loan, but you didn't need to be a member to take advantage.
Are you going to own two houses at once? If you are going to rent out your house, that's one thing. But buying one house while you own another is a gamble, considering that you have to pay two house payments at the same time. (I know this wasn't part of your question, but it's the first thing I thought of...) Sometimes it surprises us how long it takes to sell a house...
So I guess my question is, would you be able to afford the 20% down payment if you didn't own two houses at the same time? Maybe when you sell your house, you could apply part of the proceeds towards the 20% to get rid of the PMI. That is, if the terms of your contract ALLOW you to drop PMI. That's what I'd be worried about.
