which rate/terms should I go with?

Question

Rates currently running at 4.125% on a 30 year with 20% down and 4.375% to 4.50% with 15% down.

I am purchasing a SFH for $160k.  Putting less down would save me about 8k in down payment to help build my next down payment.  I realize I would then have PMI by going with less than 20%.

Is PMI something I can write off though to help mitigate the expense?

Thanks

Andy

Chris Mason · Answer

Hi @Andy Krzanowsky.

MATH TIME!

The choice amounts to paying $122 extra each month to keep $8,000 in your checking account today.

You know what we call it when someone charges you an amount of money in exchange for you being allowed to put money in your checking account? We call it a loan, and we can do our math here like it was an $8,000 loan.

$122 * 12 / $8000 = 18.3%!

In your scenario, given those two estimated settlement statements you posted, 20% down and then doing a cash advance from your credit card for $8,000 at 18.3%, is identical to doing 15% down w/ PMI and the higher rate.

So, the question really is: If you keep that $8k in your checking account, are you going to put it to work somewhere guaranteed to earn you greater than 18.3% ROI? If so, awesome, do 15% down. If not, put 20% down and skip the PMI/credit-card-cash-advance.

Christopher Brainard · Answer

I also agree with Charlie and Chris.

The 8k additional down is going to save you quite a bit of money and you still have that 8k in equity (which your posts seems to forget about). In my opinion, any PMI is a waste of your money and should be avoided unless absolutely necessary.

For your next investment, I'm sure you can raise 8k in private funds at a rate lower than you'll pay for the PMI. I wouldn't put so much importance on 8k in funds - most seasoned investors would view 8k as a rounding error.

-Christopher

Charlie Fitzgerald · Answer

Diagnosis = analysis paralysis

Tami DuBose · Answer

All excellent insight. Yes, @Andy Krzanowsky, everything hinges on the magic $8k. Personally, I'd hang on to it for that 'next' house you mentioned. If it's in the near future & that 8k is the difference between you and the house, losing out on that house could cost you more than the saved $120.

Great dialog above for evaluating every penny. The only thing not factored in is "lost opportunity" & how do you put a value on that?

Things that make you go "Hmmm".

Zach Quick · Answer

@Andy Krzanowsky What do your reserves look like without the extra $8k? You've thought it all out, so maybe the 15% down will help you sleep better?

Chris Mason · Answer

Yeah @Andy Krzanowsky at this point.

I have a coin here.

Would you like to toss it?

Chris Mason · Answer

Chill with the fancy math, @Andy Krzanowsky.

I, being the nice fellow that I am, offer to write you a check for $8,000. All I ask in return is that you pay me $122 per month, each month, until you write me an $8,000 check in return. Oh, and if you don't write me that $8,000 check, or pay me my monthly $122, I get to take the house.

Do you want my $8,000?

The way you would (should?) approach this is just to multiply $122 by 12, divide by $8,000, and ask yourself if you can put that $8k to work earning more than that, in which case you'd come out ahead via arbitrage.

Matthew A. · Answer

People always like to say they know math, but I don't think they really understand it or are good enough/smart enough to put things into perspective.

So here goes.

360 monthly payments of $906.98 (no pmi) comes to $326,512.80 on your 20% - 30 year loan.

360 monthly payments of $1,027.95 (pmi) for 3 years and $966.76 (no pmi) for 27 years comes to $350,236.44 for your 15% - 30 year loan.

Effectively paying $23,723.64 more at the end of the 30 years

That means on average, each month by saving $8,000 upfront you will be "Losing" $65.90 a month for 360 months. Which means (obviously) you will have to make an additional $65.90 a month to break even by saving on the down payment OR make more, to have it work in your favor.

HOWEVER, you will not see a single dollar starting to be saved until 121.39 months in or 10.11 years of your loan. Meaning, for the more simple minded people, you could sit with your thumb up your butt for 121 months before you run out of the $8,000.

If you can make more than 0.8% or $65.90 a month on your $8,000 over the course of 30 years, then I would say you would have made the right decision to skimp out on the bigger down payment.

NOW.. my honest opinion, although i'm not a mogul like some of these people are, or pretend to be on this website..I would say keep the $8,000 and find a way to get extremely creative with it in order to make more than .8% a month to make it a good investment. After all.. you don't know where your life will head, what deals will fall in your lap or any outcome really... so.. take that as you will.

Good luck!

Matt

Charlie Fitzgerald · Answer

#1

Ben Leybovich · Answer

The "Total return" you are referring to is the IRR, and yes - the higher the down-payment the more difficult it is to drive the IRR. This is pretty intuitive - value of cash is greater today than at any point in the future. So, since the NPV of future cash flows gets pinalized more the further out you go, making a large DP puts you behind before

I am all for low down. But, it has to make sense

which rate/terms should I go with?

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