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My lease is up in 1 month, and I'm looking to buy a home in the next 4 weeks. I have narrowed it down to two that I am interested in.

I'm wondering about the type of mortgage I should get. Which combination of these variables would be best for me? How do I calculate?

  • Down payment: I can do 3.5% (FHA) all the way through 20% (though 20% would be more difficult)

  • Term: 15 year vs. 30 year fixed

  • PMI: If not 20% down payment... pay up front, or over time? Or not at all? Or lender paid?

  • If no PMI, HECL/double mortgage? 10-10-80 loan? 8-12-80?

Thank you for your assistance.

p.s. I have been averaging 19%/year in stocks, but started in 2009 so I have had crazy tail winds helping. I think I'd like to assume 8-10%/year as reasonable for average investing returns. So based on that, it seems like I want the largest mortgage possible, but I don't know how to calculate for PMI, impact on my income taxes, etc. Also assuming house price ~450k-650k and 2-5 years of residence.

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    Its ridiculous to buy a house for less than 5 years. – littleadv Feb 17 '15 at 2:23
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    Why? With rates this low...can upgrade/rent it out after 2.. – ego Feb 17 '15 at 2:43
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    asking the questions is a good start. But it is unrealistic to be able to start from scratch and be able to move into a place you haven't even found yet in only four weeks. Plan on extending the lease or going month-to-month. – mhoran_psprep Feb 17 '15 at 15:06
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    I hope you're aware that 'buy a house in the next 4 weeks' doesn't mean 'own and move into a house in the next 4 weeks'. Closing on a new house is usually a month or more process, even after you've had an offer accepted. – Joe Feb 17 '15 at 15:57
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    @ego - "...rent it out..." sounds perfect in theory -- the renters pay for it so you're at worst cashflow neutral. But what if you don't get renters? Rent on a $450K house is going to significantly limit your potential market, so it's not a guarantee that you'll always have someone in the house paying for it. – Kent A. Mar 13 '15 at 13:49
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There are several factors that you need to consider:

If you have already decided on the house. Did you prequalify for the mortgage loan - If so, did you lock in the rate.

If you have not already done than your research is still valid.

Consider two calculators first - Affordability + Mortgage calculator

  1. http://www.bankrate.com/partners/sem/mortgage-calculator-rates-tl.aspx
  2. http://www.realtor.com/mortgage/tools/affordability-calculator/

Advice :

  1. If you can afford to pay 20% down then please do, Lesser monthly mortgage payment, you can save approx 400 $ per month, the above calculator will give you an exact idea.

  2. If you can afford go for 15 years loan - Lower interest rate over 2-5 years period.

  3. Do not assume the average ROI will + 8-10%. It all depends on market and has variable factors like city, area and demand.

  4. In terms of Income your interest payment is Tax deductible at the end of the year.

  • I am assuming ROI for return on stock investments. Not of the house. Hence why I was saying it might make more sense to put in under 20%. Does that change your advice at all? – ego Feb 17 '15 at 3:03
  • Yes in that case my advice do change, 20% ROI on stocks is very good, but a comparable evaluation, do the maths (20% of X amount > PMI for 1 year). PMI are only valid till you dont pay 20% of your inital loan value or your house gets appraised to the 20% of the remainder of loan for first 2 years. After 2 years its 78%. – rsingla Feb 17 '15 at 3:26
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Go for 15 years loan - Lower interest rate over 2-5 years period. If you can afford to pay 20% down then please do. Do not assume the average ROI will +(8-10%). It all depends on market and has variable factors like city, area and demand.

  • I assume the OP meant 8 to 10% ROI on other investments he or she would make with money not tied up in a mortgage, not the ROI on the house itself. – Eric Sep 17 '15 at 22:15
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Down payment: Emphatically avoid PMI if at all possible; it's pouring money down the drain. Do 20% down if you can, or pay off enough to bring you above 20% and ask for PMI to be removed as soon as you can. Beyond that it's a matter of how much risk you want to accept and how long you'll own the place, and you'll have to run the numbers for the various alternatives -- allowing for uncertainty in your investments -- to guide your decision.

Do not assume you will be able to make a profit when you sell the house; that's the mistake which left many people under water and/or foreclosed on. Do not assume that you will be able to sell it quickly; it can take a year of more. Do not assume immediate or 100% occupancy it you rent it out; see many other answers here for more realistic numbers.... and remember that running a rental is a business and has ongoing costs and hassles. (You can contract those out, but then you lose a good percentage of the rent income.)

Double mortgage is another great way to dig yourself into a financial hole; it can be a bigger cost than the PMI it tries to dodge and is definitely a bigger risk. Don't.

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