8

I am in the process of making an offer for a house. Wife and I have about 135K saved, with steady jobs, both happen to be an 'essential business' as required for this period during the corona virus.

Initially, I wanted to put 20% down (about 74K) to avoid PMI and have lower monthly payments.

I have since reversed course on this. I think 10% (about 37K) is better, and here is my reasoning. PMI calculators online suggest the PMI will be about 150 a month. 37K invested returns should be more than double the yearly PMI payments during an average year. We plan on being in this house for the foreseeable future, so I am playing the long game with this chunk of investment. We can also have the option to make a chunk payment in the future to bring it to 20% equity and get the PMI taken off if we choose. Also, this gives us access to this cash in a more liquid form during these unsure times.

Does this reasoning make sense? With a long term outlook, would it still be wise to sink the extra 37K into the house and get rid of the PMI?

  • 11
    With the recent market crash you think investments always go up? Put down 20%, keep the rest as an emergency fund, invest with future earnings. – Pete B. Mar 25 at 10:50
  • 4
    "get the PMI taken off if we choose". Check the contract; PMI must be removed when you reach X% equity according to the initial amortization schedule; but if you request it prior to that date (following a large principle payment) you may be required to prove your equity stake (i.e. pay for a re-appraisal of the property and have that re-appraisal indicate that the value has not decreased since purchase.) – user4556274 Mar 25 at 11:22
  • 3
    FYI, discuss with your lender, but the quotes we got when buying a house all had slightly higher interest rates if we put exactly 20% down. If we put slightly less, but had PMI, the rate was lower. If we put a little more (25%) down, then the rate dropped again. For whatever reason, right at 20% made the interest rate higher. You can find articles online that explain why. – mikeazo Mar 25 at 17:48
  • 7
    If you already had a house that was completely paid off, would you take out a mortgage in order to invest the money? – user3067860 Mar 25 at 19:46
  • 1
    Note that many loan underwriters / PMI issuers require a 2-year minimum term, meaning that even if you pay the loan below 80% you cannot get rid of the PMI until the 2 years are up. The only way I know of to eliminate it earlier is to refinance, which has closings costs that exceed the remaining PMI amounts. – brichins Mar 25 at 20:56
18

Short answer: It probably makes sense to avoid the PMI (Private Mortgage Insurance), but it ultimately depends on how probable it is that you are unable to pay the monthly installments with/without the extra savings.

Long answer: While i am not an expert on the specifics of the US mortgage market (I presume the question pertains to US), it seems that a PMI (or an increment of the overall interest rate charged on the loan) varies between 0.5% and 2% p.a. and is charged on the overall loan amount (90% in this case). Your loan amount works out to 333k from the provided information and your annual PMI payment to 1800. This puts it on the lower end with 0.54%.

That means that with the 37k you plan to invest instead of paying down, you have to earn 4.9% p.a. plus the normal mortgage interest rate on those 37k - all this net of tax (assuming you get no tax deduction on your mortgage/PMI payments). This seems like a tall order compared to a "risk-free" savings you realize by having a lower mortgage interest rate on the overall loan amount without the PMI. So based on risk/return considerations alone, you are probably better off avoiding the PMI. Only a very low PMI rate would result a different outcome from that perspective.

Another consideration to make is whether putting the 37k aside instead of using them for a down payment would improve your worst-case scenario and could buy you additional time in case you have difficulties repaying the mortgage. Only you can figure out how much this "option" is worth, considering how secure your and your spouse's incomes are, what are you going to do with the 61k that remain even if you choose to pay down and how much the monthly mortgage repayment is, compared to your income. Based on the information you provided, it seems that the 61k can last you for a significant period of mortgage repayments, so that the value of any additional cushion is probably very small.

| improve this answer | |
  • 18
    Yes the wording here is critical - 4.9% might be less on average than market return, but it's the best risk-free return you'll ever see! – Grade 'Eh' Bacon Mar 25 at 13:51
  • As an update here (didn't want to change main question), lender just told us the PMI would be 0.38%, so ~1200 a year now, instead of 1800 as answered here. Would it still make sense to go the safer route? Also, if we make ~100 dollars more payment per month, this would make the interest payment over the lifetime of the loan on par with mortgage with 20% down, which we can do. How about with this factored in? – d d Mar 25 at 19:50
  • @dd: Your "benchmark" return on your 37k becomes: 0.38%*9+ (mortage rate w/o PMI). So, if you would finance for example at 3%, you have to out-earn 6.42% net of tax over the long term. It is not impossible, esp. if you really have 30-year investment horizon and are invested only in equities for the first 20 or so years, but it is definitely not a "no-brainer" decision. A factor in favor of the decision to invest instead of pay down is the fact that the PMI will eventually go away as you reach 20% equity through normal repayments. – Svetkovski Mar 27 at 1:09
-3

If you can put zero down, then do it. Your loan rate is what 3 to 3.5%. So for 30 years you'll have the lowest loan rate you'll probably ever have and probably get to itemize your deductions. Imagine getting only 8% return for the stock market for 30 years on 135k.... 1.3 Million. AND all stocks are ON SALE!

Year This Year's Return Total Returns Total Money
1    $10800             $10800        $145800

Start with a few Index mutual funds, I love Vanguard Index 500. Buy a few Blue Chips,and get some dividend Dow Dogs. If we hit a 10 year slump, buy as much stock as you can. Stocks right now are like toilet paper. In 30 years hit me back with a Thanks!

| improve this answer | |

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.