20% down on personal home or keep the cash?

[JJ Buckner]

Hello all,

So I am having trouble deciding on what my wife and I should do once we move back home. As of right now, we are living in Hawaii before we settle down back home in Missouri (Kansas City area). So we have been saving money for when we get back for our first home and to start investing in real estate (buy and holds). Our dilemma is, when we get back to MO should we use our money to put 20% down for our new home and then have enough left over for another down payment on our first investment or not put as much money down on our home and have enough to maybe buy 2 or 3 investments? My problem with not putting 20% down is the PMI we will have to pay which is money being wasted monthly... What is my best option? Thank you all for the help!

[Chris Mason]

Let's run a $500k scenario both extremes, 3.5% down FHA and 20% down conventional.

These are CA numbers for things like prop taxes, but the concept should carry over identically.

Let's pretend yours is a market where sellers do not frown on 3.5% down FHA, and let's pretend closing costs and/or what you can negotiate with the seller are identical and can thus be ignored.

20% down: $100k down, PITI $2600/month.

3.5% down FHA: $17,500 down, PITI $3400/month.

FHA is $800/month more, but you got to keep $82,500 in your pocket.

The FHA scenario where you pay $800/month to keep $82,500 in your pocket is mathematically very close to the following:

3.5% down, first mortgage 80% LTV, 2nd mortgage for 16.5% ($82,500) hard money at a rate of 11.6%, interest only. PITI $3400/month.

So there you go. The cost of keeping that $82,500 in your pocket is the same as an interest only hard money loan at $11.6% for $82,500. 

Let's check: $800*12/$82,500 = 11.6%.

Incidentally, that 16.5% 2nd mortgage need not be hypothetical. If some hard money lender would be willing to do it (post close) in order to put that $82,500 back in your pocket, this would actually be far superior to FHA financing because you can pay it off when you wish, without having to refinance, whereas the only way to get rid of FHA MI is to refinance or sell the property.