Put 3.5% down FHA in a hot market or wait 2 yrs to put down 20%?

Question

Hey I live a hot market of West Philadelphia — not sure if I should wait 2-3 years before putting down 20% for a conventional fixed, or if I buy now I could only put down 3.5% FHA with PMI. Thanks all!

Chris Mason · Answer

Mortgage insurance isn't the end of the world. If you do FHA 3.5% down, the mortgage insurance will be 0.85% per year for 95% of scenarios (less if you have good credit/DTI and go fannie/freddie, but we'll work with 0.85%).

So you're losing 0.85% of the loan amount worth of wealth during that two years you would otherwise be saving up.

Assuming you are buying in a market where real estate values are trending upwards, a very modest appreciation assumption will let you know how much you are gaining.

It doesn't take a lot of appreciation to wipe out a 0.85% loss... if there's also rental income coming in, it's a no brainer.

Russell Brazil · Answer

and to tack on to what @Chris Mason said....we are generally in a rising interest rate environment. So it is entirely possible a loan in 2 years with no PMI gives you the same effective rate or higher as a loan today with PMI, plus you miss out on the 2 years of debt reduction and appreciation.

You can always save up that additional money too over the two years while owning, then do a lump sum down on the mortgage and do a recast to bring your payment down. (with FHA you are still stuck with the PMI, but if its not a multifamily....just do a 3% down Homeready loan instead) Or Chris...that Freddie Multi product you mentioned before.

Alexander Felice · Answer

the time spent waiting will cost far more than PMI, double true if you're in an appreciating market.

Mark Hughes · Answer

@Maxwell Hibbard if you feel good about the intrinsic value of the deal then buy now on fha with little down (live in it for at least one year). Yes you will pay a little in pmi but if the deal is good the savings from alternative of renting will be worth it in the principal you will gain. Plus if you are aggressive in paying down the loan faster with extra principal payments and get back below that LTV threshold they will eventually drop the PMI off. I just did this a few months back with a loan that I had pmi on with 10% down but I paid it down early. Contacted the mortgage company for details when I reached 80 LTV in that particular situation they gave me 2 options to remove pmi (pay for my own appraisal $500ish to confirm 80LTV or have it dropped for free after I reached 78LTV of the original purchase price. Was a no brained to me and I just paid the rest down over a few months and pmi dropped off no problem. (Instead of ‘wasting’ that appraisal $500 I thought it made more sense to put that straight into the principal) but this totally depends on your personal preference and situation.

Gregory H. · Answer

@Maxwell Hibbard If you put down 3.5% on a house now, would you still have a 3-6 month emergency fund if you lose your job, or if the HVAC system craps out, or if you need a new roof, or if you have significant unexpected medical or auto expenses? You should not take general advice from someone who does not know your individual financial circumstances.

Chris Mason · Answer

And now that you have biased answers from both a mortgage person and a real estate agent, you should balance that with other posters who already did exactly what you are trying to do and how it worked out for them. :P

Chris Mason · Answer

For 95% of FHA loan scenarios, the monthly mortgage insurance is just 0.85% * loan amount / 12.

$500k loan times 0.85% / 12 = $354 per month.

It'll actually be a couple dollars off of that because weird gov't math, but close enough.

Maxwell Hibbard · Answer

@Ashish Acharya Thanks Ashish this is VERY helpful. Really appreciate it!

Maxwell Hibbard · Answer

@Gregory Hiban great point, thanks for sharing!

Put 3.5% down FHA in a hot market or wait 2 yrs to put down 20%?

Put 3.5% down FHA in a hot market or wait 2 yrs to put down 20%?

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