First Time Home Buyers - Down Payment, PMI and Points

Question

My wife and I are looking to buy our first home in the next couple months and wanted to get an idea of what we are looking at. Right now we have about 80k saved up and want to put 10% down on a home in our budget of $425k. We want to be able to use the extra money for buffer to fix anything down the road and stay "liquid". We also want to keep our monthly mortgage payment @ $2500 or less since my wife will be working less in the next few years.

We both have 800 FICO scores so I believe we will get a great rate but not sure how closing costs will be and what the PMI will be.

My questions are:

1 - Should we put more down than 10% to get out of PMI or should we keep the extra funds outside of 10% for rainy day, fixing up the house and/or buying furniture.

2 - Also what kind of loan would be looking at if we could only put 10% down and how do Points affect our loan? FHA etc.

3 - Where do the closing costs come from? Would it be rolled into our loan or should we expect to pay it in cash when we close? Also what can I expect them to be in the Northern VA area?

We are looking to meet with a realtor in the next couple weeks so any information would be a GREAT help.

Thanks!

Answer 1

1 - For FHA loans PMI is required for mortages where there is not at least 20% equity. Bank Financed Non-FHA loans may have other standards. If you are getting an FHA loan ,if possible put down 20% so that you do not have to pay PMI. That said your PMI costs should be reduced by the size of your down payment since the PMI covers the difference between your equity value (Based on the appraisal at time of purchase) and 20% equity value of the home. So if you buy a home for 425k(assuming 100% appraisal price) 20% equity would be 85k. So if you put 10% down you would be paying PMI until you accrue an addition 42500 in equity. And you will be paying PMI on that for about 12 years(typical on 30 year mortgage) or until you refinance(having home appraised at higher value than purchase price where you would have 20% equity). There are ways to get out of PMI early but few banks are willing to help you through the hoops unless you refinance(and pay more closing costs).

2 - Different banks offer better rates or other benefits for paying points. We paid $300 for a 1.5% reduction in our interest rate (less than 1%) but it was called a point. We were offered a few other points (.25% for 2500 and an one time on demand interest rate adjustment for ~3k) but declined but they may make more sense on a 425k home than our more modest one. You can talk to a banker about this now, get preapproved(which helps with getting offers accepted sometimes), and find out more details about the mortgage they will offer you. This meeting should be free(I would say will but some bank would charge just to prove me wrong) and help answer your questions more authoritatively than anyone here can.

3 - The costs will come out of your down payment. So if you put down 42.5k down your costs will come out of that. So you will probably end up with 30~35k being applied towards your purchase price with the rest going for costs. You can tell the banker you want to put 10% towards the price and the banker will give you a down payment probably around 50k to cover costs etc. (My figures are hopefully intentionally high better to find out that it will cost less than my guesstimate than get your hopes up just to find out the costs are higher than expected.)

Answer 2

The question Why would refinancing my mortgage increase my PMI, even though rates are lower? contains a decent discussion of PMI. It's based on the total amount you borrow, not just the difference to 80% LTV.

For easy math, Say you put 15% down on a $100K house. Your PMI is 1.1%, not on the 'missing' $5000, but on the $85000 balance. So you are paying $935/yr extra due to the $5000 you didn't have available. In addition to the mortgage itself. Even at 90% LTV, you'd pay $990/yr for the fact that you are short $10,000.

Other than this discussion of PMI calculations, Chad's answer is pretty thorough.