Should I worry too much about saving my 20% down before buying my first house?

Question

I am not too sure when exactly am I going to be buying the house. I can safely say that it would be between 2-5 years. However, I have no idea on exactly when. It all depends on market conditions and also on if I am able to move to a better place(I am planning to move from California to Texas or Georgia)

Now, I dont keep a lot of cash at hand(mostly 15-20k). Rest of the money is always invested(401k or personal stock investments) and I would like to keep it that way. Now, a lot of people start saving a lot of cast or hope that they will borrow money against 401k.

I am thinking at it different way

1. Instead of worrying about 20% down, I can put 5% down since I am a first time home owner
2. Once i know that I have a house I can cover those 15% in first few months and now I am just like other people who did put 20% down
3. I did not break my 401k and I did not pull out my investments inadvertently.

Am I missing something? Would NOT putting 20% get me a bad interest rate or put me upside down on my loan? Am I missing any major consideration in my theory?

Answer 1

The only problem that I see is that by not giving the 20% right away, you might need to pay PMI for a few months. In addition, in the case of conventional loans, I heard that banks will not remove the PMI after reaching 80% LTV without doing an appraisal. In order to be removed automatically, you need to reach 78% LTV.

Finally, I think you can get a better interest by giving 20% down, and you can get a conventional loan instead of a FHA loan, which offers the option to avoid the PMI altogether (on FHA, you have two PMIs: one upfront and one monthly, and the monthly one is for the life of the loan if you give less than 10%).