20% down on personal home or keep the cash?

Question

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 · Answer

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.

Thomas S. · Answer

If I were in your position I would move home and rent something comfortable. This would allow the maximum amount to invest and in a few years you could rethink buying a home.Home ownership is a life style decision not an investment. Owning as opposed to renting is far more expensive and normally over the life of home ownership it will cost you more than you will ever realise as a benefit. It will cost you more than it will ultimately be worth. Additionally most people never experience the financial value of home ownership until they are too old to enjoy it (when they move to a seniors home). The only true value of home ownership is expensive forced savings but the only value of that is if you pull it out (HELOC) at some point to reinvest.

Jim Shepard · Answer

Here's another way to approach getting into rentals at your age. Buy a smaller house using conventional financing (30 year fixed). I would suggest 10% down to get payments down. Live in the house for 2 years and then rent this house keeping the financing in place. Then buy another and repeat the process 2 years later. You may not get the house you want for now but sacrificing now will make your life go easier later on in life. 10 years from now you can have 5 rentals! Yes, there are faster ways to grow but they require more risk.

Tom V. · Answer

Also, if you put 20% down it's not like that money is just gone. Less liquid sure, but it will be equity that you can still use for leverage if you wish to do so.

Benjamin Haberman · Answer

@JJ Buckner Not sure if anyone mentioned this yet.Your goal should be:Least amount of pocket as possible. (keep your money for other buy and hold down payments)Buy a duplex as your first home. Live for free while renting out other side and continue to save for next buy and hold. I believe you can do FHA 3.5% down on multi family for first home- not sure though. GOOD LUCK BRO

JJ Buckner · Answer

@Chris M. Thanks for the breakdown! Really do appreciate the advice.

Loren Clive · Answer

Consider a HELOC after closing. You could get up to 10% of your down back at 3% which would cost less than the hard money option proposed by Chris Mason. My first house I bought a duplex, lived in part of it, rehabbed, refinanced, tapped the equity via a HELOC then bought and flipped my second house. More than one way to skin a cat!

Justin Young · Answer

I never knew about prepaying PMI. That definitely helps with strategies to avoid having to pay that for the length of the loan. Thanks @Dan Schwartz for the advice.

Eric Delcol · Answer

We have seen unprecedented low interest rates. The cost to borrow is so low right now - take advantage of that as much as you can without overextending yourself.

Dan Schwartz · Answer

Don't forget about the option to prepay MI in full. If you are planning on keeping the loan 4-5+ years, you'd come it ahead vs paying the PMI for 8-9 years. Your math will vary. On our primary, which we planning on keeping for 20 years now (kids), we did a 5% conventional loan and prepaid the PMI. The prepaid PMI was about 2% of the loan value. You'll need a quote from your lender. This, to me, is a far superior way of handling it than FHA. I have never had an FHA loan pencil out better than this, unless of course you absolutely needed to put on 3.5% down. FHA: 3.5% down, 1.75% upfront MI payment, ~1% per annum MI Above: 5% down ~2% upfront/prepaid MI, 0% per annum MI payment. Per $100,000 of loan: FHA: $5,250 upfront, $1,000 per year ongoing Above: $7,000 upfront, $0 per year ongoing Check with your lender. I am NOT looking at my HUD or lender docs right now, but my memory is pretty good.