Opportunity cost of putting down only 10% for a home.

[panda]

Question to SGIP,Trojan, or anyone who knows...
If you have the funds to pay 20% down on a house, what is the opportunity cost of just putting 10% and paying PMI insurance? Let's say that the homes costs $400,000USD. If you only put down $40,000 and take a conforming loan of $360,000, what return do i need to get elsewhere with the other $40,000 in order to compensate for the PMI insurance on an annual basis? If you are an FCB and could buy the home with cash, would you still recommend taking out a 90% of home value loan as current rates are so low?

Thanks.

 

[usctrojancpa]

The only loan that you can get to put down 10% is to get an FHA loan.  There is an upfront 2.25% mortgage insurance fee for an FHA loan greater than 80% LTV.  On top of that, your monthly Mortgage Insurance payment will be approx. equal to (loan amount x 0.55%)/12.  With the PMI with an LTV > 80%, your interest is 0.55% higher than the advertised rate due to the PMI.  Both the upfront mortgage insurance fee is tax deductible (as long as you pay it and not roll into the loan) and the PMI is also tax deductible (assuming your income levels do not exceed the itemized deduction phase out limit).  Honestly, if you are going to put less than 20% down, you might as well only put 3.5% down because it won't be much more expensive.  Also, the only way to get rid of PMI is to refi the loan or to wait until you've paid the loan for 15 years (if you get a 30-year FHA loan).  Most of my buyers who thought about getting an FHA loan are scared off by the 2.25% upfront mortgage insurance fee.  It all depends on your financial situation and marginal tax brackets.

 

[Irvine2Irvine]

Personally, I would avoid PMI if I had the funds for 20% down payment.  With all the fees that usctrojancpa listed, you would have to generate a very good return on the $40K to break even.

However, I will take the biggest loan they will give me and keep cash in hand when I finance my house.

 

[irvinehomeowner]

Doesn't the PMI auto stop on FHA loans depending on certain criteria?

I'm all for lowest down possible... especially now. Once housing stabilizes... you should put at least 20% but if interest rates stay low... PMI isn't that much of a hit compared to 7% rates we were getting just a few years ago (or 21% in the 70s... hehe).

 

[sgip]

Do not close FHA if you can obtain a conventional loan.

10% down with PMI is possible in OC, up to standard jumbo conforming loans ($625,000 in this case, NOT $729,750 for the most part). It's best to put 20% down, but if you want to run the math, ask USCT what the tax implications are before marching down this path. The cost of PMI is .6 to .79% of the mortgage, depending on your credit strength.

Depending on circumstances, you can also get 5% down conventional with PMI. The PMI costs run from .8 to 1.0 of the loan amount per year. There are even "Super Single Premiums" that can be paid lump sum to have a "no PMI loan". 

It's possible with loans up to $417,000 to have what is called "Lender Paid PMI" - which is a misnamed product. You, the consumer are paying PMI in the higher rate. If 90% loans are at 5% with a .6% per year PMI cost, an LPMI loan might have a rate of 5.5%. I'd also check with USCT on the benefits or risks from a tax perspective on either of these options.

A smart guy on Redfin posted something about this conundrum last week:
http://forums.redfin.com/t5/Mortgages/Comparing-FHA-95-with-PMI-and-95-with-LPMI/td-p/103421

My .02c

Soylent Green Is People 

 

[panda]

Trojan and Soy Latte,

Thanks for the valuable info about PMI. Five years ago i was inspired by an real estate investor (John Schaub) who wrote a book "Building Wealth One House at a Time." In his book, he has a 10/10/10 rule which is to put no more than 10% down, purchase the home for 10% less than the asking price, and hold the property for 10 years until it doubles. His strategy is buy one house a year for 10 years so you can retire off of your SFR homes. Though he mentions to put only 10% down, he never mentioned anything about PMI fees for 10% down. I wonder why?

So sometime in June 2010, i am going to buying my new construction 2800 sq/ft 4/3 SFR (on a 10k lot) that feeds into better schools than Canyon View Elementary and Northwood High for $279,900.

Ok... now you guys can start laughing at me!!! 


 

 

[fe9000]

Trojan and Soy Latte,

Thanks for the valuable info about PMI. Five years ago i was inspired by an real estate investor (John Schaub) who wrote a book "Building Wealth One House at a Time." In his book, he has a 10/10/10 rule which is to put no more than 10% down, purchase the home for 10% less than the asking price, and hold the property for 10 years until it doubles. His strategy is buy one house a year for 10 years so you can retire off of your SFR homes. Though he mentions to put only 10% down, he never mentioned anything about PMI fees for 10% down. I wonder why?

So sometime in June 2010, i am going to buying my new construction 2800 sq/ft 4/3 SFR (on a 10k lot) that feeds into better schools than Canyon View Elementary and Northwood High for $279,900.

Ok... now you guys can start laughing at me!!! 


 

Laugh at you?  Hardly.  More or so envy. 

Oh well, it is what it is.  It just happens that my life is all around the OC area.

 

[irvinehomeowner]

So sometime in June 2010, i am going to buying my new construction 2800 sq/ft 4/3 SFR (on a 10k lot) that feeds into better schools than Canyon View Elementary and Northwood High for $279,900.

I'm so jealous... but I have one consolation... it's NOT in Irvine (or even SoCal for that matter).

But good luck... maybe you'll be like Irvine East.

 

[panda]

So sometime in June 2010, i am going to buying my new construction 2800 sq/ft 4/3 SFR (on a 10k lot) that feeds into better schools than Canyon View Elementary and Northwood High for $279,900.

I'm so jealous... but I have one consolation... it's NOT in Irvine (or even SoCal for that matter).

But good luck... maybe you'll be like Irvine East.

LOL, Oh yes IHO.. this place truly is the east coast Irvine! I need to buy as much as i can on the cheap before the Louis Vuitton lovin FCB Asians start flooding into the area 5-10 years from now.

 

[Irvine2Irvine]

10K lot :-*
That's 3 SFRs you can put on that lot.  Maybe you can get it rezoned!!!

I have been living in Irvine too long...

 

[waitin4ever]

There was a blog post by IR in IHB a few months where he was discussing possibility of doing
FHA loan even if you had 20% down. His argument was that the FHA loans are assumable
and may help you in selling your property for more premium (if you need to in future) when
interest rates go up. He didn't advocate either option but was just pointing out the option.

Also I never understood people wanting to put minimum down as possible. trying your luck in the market
for better returns is equally dangerous in todays environment. Especially If you intend to view
your house as a place to live. If going in you are certain that you want to do strategic default
if your house fell by say 15% then yes you should put lowest down. But if you intend to stay put
isn't it better to retire your debt the fastest possible time. Shouldn't it be that you calculate the total amount
you paid to the bank by the time you owned your home outright. To minimize this total you borrow
as less as possible and finish paying as soon as possible.

I'm sure there is something wrong in the way I'm thinking. Please educate me. Although my decision on the
amount down, conventional loan option etc is already final. To keep my loan to conforming I had to do about
26% down. But I did a bit more to keep my monthly cash flow situation to a comfortable level.

Do not close FHA if you can obtain a conventional loan.

10% down with PMI is possible in OC, up to standard jumbo conforming loans ($625,000 in this case, NOT $729,750 for the most part). It's best to put 20% down, but if you want to run the math, ask USCT what the tax implications are before marching down this path. The cost of PMI is .6 to .79% of the mortgage, depending on your credit strength.

Depending on circumstances, you can also get 5% down conventional with PMI. The PMI costs run from .8 to 1.0 of the loan amount per year. There are even "Super Single Premiums" that can be paid lump sum to have a "no PMI loan". 

It's possible with loans up to $417,000 to have what is called "Lender Paid PMI" - which is a misnamed product. You, the consumer are paying PMI in the higher rate. If 90% loans are at 5% with a .6% per year PMI cost, an LPMI loan might have a rate of 5.5%. I'd also check with USCT on the benefits or risks from a tax perspective on either of these options.

A smart guy on Redfin posted something about this conundrum last week:
http://forums.redfin.com/t5/Mortgages/Comparing-FHA-95-with-PMI-and-95-with-LPMI/td-p/103421

My .02c

Soylent Green Is People 

 

[irvinehomeowner]

Believe me, I understand the concept of paying down debt... but I'm also concerned about liquidity and quite honestly... no home I buy now will probably be the last home I'll buy.

So if I have a certain figure that I earmark for housing expenses and I can accomplish it without putting my cash at risk... that's the path I'll take. The economy is so volatile right now so why would you sink a large amount (or all) of your savings into something you probably won't be able to extract for quite a while? If you can afford the mortgage without a large initial outlay, then why not? Isn't that one of renting's benefits, to have the housing you want without the large down payment?

It's win-win... if housing tanks again... no big loss... if housing soars... you have more leverage. I understand this is probably not the best financial advice (and I'm nowhere near a financial expert) but at today's housing prices... why put 100s of thousands of dollars into something you won't be able to access, may depreciate and is a much bigger chunk of your income than it was 10 years ago? In 2000, 20% was fine... but 4/3 SFRs were only $300k so that was $60k. Today, 4/3 SFRs are $800k, that's almost triple... did your income triple from 2000 to 2010?

 

[panda]

Believe me, I understand the concept of paying down debt... but I'm also concerned about liquidity and quite honestly... no home I buy now will probably be the last home I'll buy.

So if I have a certain figure that I earmark for housing expenses and I can accomplish it without putting my cash at risk... that's the path I'll take. The economy is so volatile right now so why would you sink a large amount (or all) of your savings into something you probably won't be able to extract for quite a while? If you can afford the mortgage without a large initial outlay, then why not? Isn't that one of renting's benefits, to have the housing you want without the large down payment?

It's win-win... if housing tanks again... no big loss... if housing soars... you have more leverage. I understand this is probably not the best financial advice (and I'm nowhere near a financial expert) but at today's housing prices... why put 100s of thousands of dollars into something you won't be able to access, may depreciate and is a much bigger chunk of your income than it was 10 years ago? In 2000, 20% was fine... but 4/3 SFRs were only $300k so that was $60k. Today, 4/3 SFRs are $800k, that's almost triple... did your income triple from 2000 to 2010?

IHO, I agree with your post above. Home prices have tripled 300% but incomes have only rose 23% since 2000. If you are not bringing in prior equity from your previous home appreciation, be prepared to be raped in Irvine. not literally of course

 

 

[panda]

In 2000, 20% was fine... but 4/3 SFRs were only $300k so that was $60k. Today, 4/3 SFRs are $800k, that's almost triple... did your income triple from 2000 to 2010?

 
Oh yes... the good old days when you could buy a new SFR in Irvine with $60k down.

IHO, It's okay to CRY!  :'(

 

[qwerty]

Believe me, I understand the concept of paying down debt... but I'm also concerned about liquidity and quite honestly... no home I buy now will probably be the last home I'll buy.

So if I have a certain figure that I earmark for housing expenses and I can accomplish it without putting my cash at risk... that's the path I'll take. The economy is so volatile right now so why would you sink a large amount (or all) of your savings into something you probably won't be able to extract for quite a while? If you can afford the mortgage without a large initial outlay, then why not? Isn't that one of renting's benefits, to have the housing you want without the large down payment?

It's win-win... if housing tanks again... no big loss... if housing soars... you have more leverage. I understand this is probably not the best financial advice (and I'm nowhere near a financial expert) but at today's housing prices... why put 100s of thousands of dollars into something you won't be able to access, may depreciate and is a much bigger chunk of your income than it was 10 years ago? In 2000, 20% was fine... but 4/3 SFRs were only $300k so that was $60k. Today, 4/3 SFRs are $800k, that's almost triple... did your income triple from 2000 to 2010?

Why would you even consider buying if you are afraid of losing your down payment? Why would you consider buying after saying what you just said which shows how crazy irvine prices still are? Home prices increase 300% and incomes increase 23%? Renting sounds like a perfect option but you seem obsessed with buying ASAP?

 

[irvinehomeowner]

The only loan that you can get to put down 10% is to get an FHA loan.

Well, actually there is one other product available which still allows for 0% down --- and no PMI.  But you have to have served in the military for that option. 



For Pat Star, it's still 2005.

And you guys deserve it. Heck... I think some military should be *given* a house for their service to our country.

 

[irvinehomeowner]

Why would you even consider buying if you are afraid of losing your down payment? Why would you consider buying after saying what you just said which shows how crazy irvine prices still are? Home prices increase 300% and incomes increase 23%? Renting sounds like a perfect option but you seem obsessed with buying ASAP?

Rent isn't that cheap in Irvine either. When you consider moving costs, the headaches of being stuck with a bad landlord and the fact that even though this won't be our last house, we plan to stay put at least 5 years... renting isn't that great an option.

We rented for almost a year and it's much easier to pay interest to the bank for the property you "own" than it was to give it to Uncle Sam. If it was just me... sure... but there are others in the IHO family that aren't keen on renting after the last go around.

We can rent an SFR in Quail Hill for about $4k depending on how big... or we can own a detached condo in Quail Hill for a bit more than $4k with 5% down. It's a judgement call.

 

[usctrojancpa]

The only loan that you can get to put down 10% is to get an FHA loan.

Well, actually there is one other product available which still allows for 0% down --- and no PMI.  But you have to have served in the military for that option. 



For Pat Star, it's still 2005.

Damn VA loans.  haha

 

[jvna]

Trojan and Soy Latte,

Thanks for the valuable info about PMI. Five years ago i was inspired by an real estate investor (John Schaub) who wrote a book "Building Wealth One House at a Time." In his book, he has a 10/10/10 rule which is to put no more than 10% down, purchase the home for 10% less than the asking price, and hold the property for 10 years until it doubles. His strategy is buy one house a year for 10 years so you can retire off of your SFR homes. Though he mentions to put only 10% down, he never mentioned anything about PMI fees for 10% down. I wonder why?

So sometime in June 2010, i am going to buying my new construction 2800 sq/ft 4/3 SFR (on a 10k lot) that feeds into better schools than Canyon View Elementary and Northwood High for $279,900.

Ok... now you guys can start laughing at me!!! 

Congrats!

 

[freedomcm]

There was a blog post by IR in IHB a few months where he was discussing possibility of doing
FHA loan even if you had 20% down. His argument was that the FHA loans are assumable
and may help you in selling your property for more premium (if you need to in future) when
interest rates go up. He didn't advocate either option but was just pointing out the option.

SGIP, could you comment on this?

Can you still put down 20% and get an assumable FHA loan, with no upfront cost and no PMI?

Thanks