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I am planning to buy a condo in Chicago, IL - USA

  • Let's say that I am buying a condo worth 250,000 and is FHA approved.
  • Let's say that I have 70k in my account.
  • When I pay 20% down, and after closing costs and tax for that year ( say 5k ), let's say I will have paid 50 + 10 = 60k
  • Now, I will have been left with 10k in savings.
  • Let's say that my Credit score is between 750 - 770.

Questions:

  1. Since I have 10k in my account after down-payment, will I get a good interest rate on the loan?
  2. I was planning to put down 15%, but I have been told that I should buy something called PMI to satisfy the rest 5% and if I take that my interest will be more and sometimes, bank will not go for anybody who pays less than 20%. Is that true?
  3. After downpayment + closing costs, how much money in the savings accounts, is the bank looking for to say that I am a good buyer?
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  • Have you contacted a bank yet? you can usually find banks that will pre approve a mortgage at no cost. Since you are in IL I know you can(IL here too). Also you will get a credit from the seller for a prorated amount towards taxes. You can have the taxes and insurance (if you want) built in to your mortgage and paid out of escrow. You should not need to put money down for taxes unless you want to do it that way.
    – user4127
    Jul 17, 2012 at 18:07
  • I just got the preapproval on mortgage for an interest rate of 3.65%, but I have been told that when we are really receiving a loan while closing, then it will be higher. Something like 4.x% depending on the bank.I am looking at the escrow thing you have mentioned that I need not put money down for taxes.
    – Yoo
    Jul 17, 2012 at 20:19
  • @HanaYoo - If there is a change in the rate you will be advised when you sign your initial paperwork not at closing. If they have 3.65 then they already have an underwriter that has agreed to finance you at that rate. So long as it is a fixed rate loan then it will not change. I believe that pre-approval is good for 30 days(it is not going to change)... you can possibly get it extended for 60 if you need but you will need to talk with the bank first. The only way it would change is if you have misrepresented yourself or your assets to the bank.
    – user4127
    Jul 17, 2012 at 20:36
  • When you make your offer, typically they will ask that money be placed into escrow as part of your good faith offer. It is normally a negligible amount and it can be used towards closing costs.
    – Engineer2021
    Jul 18, 2012 at 20:41

2 Answers 2

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Since I have 10k in my account after down-payment, will I get a good interest rate on the loan?

When the bank considers your loan, they will see $70K. Regardless, they will want to see certain amount of savings that would allow you to continue paying your loan in case of an emergency, and $10K might not be enough.

I was planning to put down 15%, but I have been told that I should buy something called PMI to satisfy the rest 5% and if I take that my interest will be more and sometimes, bank will not go for anybody who pays less than 20%. Is that true?

Yes.

After downpayment + closing costs, how much money in the savings accounts, is the bank looking for to say that I am a good buyer?

Depends on the bank, my wild guess would be they're looking for several months' worth of loan payments (you should have ~6 months worth of savings for emergencies, regardless of loans).

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    ... if only the banks had these requirements years ago, we wouldn't be in this mess.
    – Engineer2021
    Jul 18, 2012 at 20:32
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With regard to PMI. You propose to put down 5% less, i.e. 15% instead of 20%. This is $12,500.

How much is the PMI? You will pay interest on the $12,500 extra you are borrowing, but also stuck paying that PMI for a number of years. Say the PMI is $100/mo. That's like paying nearly 10% on top of the interest you are already paying.

If you get a firm quote on what the PMI will cost you, you can make an informed decision. Borrowing at a bit of a premium may make sense, but much about 7-8%, and I'd rather take the risk of needing to raise cash elsewhere. PMI is tough to get rid of until you are at 80% LTV.

Edit -Beautiful link from Chad below. Now for the real math - You borrow 85K (to keep math easy) which is 15% down on a $100K house. 1.1% of $85K is $935/yr. But, you see, you are subject to that because you couldn't raise that last $5000. And $935 is 18.7% of that $5000. The PMI is on the whole mortgage, not on that extra bit you owe. Permit me to say "holy crap! 18.7% is higher than my worst credit card, and more than I'd pay to borrow nearly anywhere else." The percent is the same regardless of the mortgage, this is the math to borrow at an 85% LTV. And why I suggest things like using one's 401(k) as a bridge for such amounts. For the OP, the $12K delta. (Note, the link shows an update to 1.2% which makes the real cost 20.4%)

The numbers are not as crazy when borrowing 95% LTV. "only" about 7.9% on the extra needed. Crazy as it sounds, this is how the math works.

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  • +1 The op has a high enough credit rating that they can probably find a non FHA loan that will waive the PMI with 15% Down. FHA will require PMI with 1% closing and 1.1% annual fees. When I got my mortgage it was minimum 3 years even if you paid off more than 20% I do not know for sure that that is still the case but I do not see any changes that would remove that minimum.
    – user4127
    Jul 18, 2012 at 12:55

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