First time homebuyer - 20% down vs 3% down

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First time homebuyer - 20% down vs 3% down

Postby rookieboglehead » Tue Dec 11, 2012 12:43 pm

Hello Bogleheads,

My question is simply to get your opinions on putting down the traditional 20% or putting down the least amount possible and getting in as cheap as possible. I have heard opinions on both sides form people I know, but I want to get your Boglehead opinions and why? Basically, my wife and I have the 20% we could put down but my thinking is I could get better return on that money versus the approximate 3.5% the loan would cost me. Also, with the housing market still unstable in my mind, do I really want to put 20% down upfront. My thinking is I could always make a lump sum payment in the future if I wanted to with those funds. The money we have saved for the down payment is in cash, high yield savings account, and not included in any retirement funds.

Now, I do believe you should have some skin in the game with buying a house so I don't want to do any 100% financing option. Personally, I am against FHA because of the unbelievably high PMI monthly rates. I do know there are a lot of first time homebuyer programs or lender paid MI programs that you can get in with as little as 3%-5% down. Would it make a difference to go in the middle and do 10% down?

My wife and I live in Alabama and are looking for a modest starter home in the $120k-$140k range. We are planning to do a 15 year mortgage.

Thanks for all of your help!

- Josh
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Re: First time homebuyer - 20% down vs 3% down

Postby paulsiu » Tue Dec 11, 2012 12:53 pm

Wouldn't the PMI you pay for 3% down erase any gain you are likely to get on alternate investment?

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Re: First time homebuyer - 20% down vs 3% down

Postby Confused » Tue Dec 11, 2012 12:59 pm

If you ask me, if you're putting down less than 20%, you can't afford the house. Loan will be a lot smaller, and no PMI.
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Re: First time homebuyer - 20% down vs 3% down

Postby yeledbed » Tue Dec 11, 2012 1:13 pm

rookieboglehead wrote:We are planning to do a 15 year mortgage


IMO there's a disconnect between wanting a 15-year mortgage and putting only 3% or 5% or 10% down. Wanting a 15 year mortgage signifies that intellectually you know it's best to pay the loan off as quickly as possible; why not start with 20% down? Lender-paid MI is not "free". The lender will offset its cost by passing higher fees or interest rate to you.
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Re: First time homebuyer - 20% down vs 3% down

Postby rookieboglehead » Tue Dec 11, 2012 1:17 pm

paulsiu wrote:Wouldn't the PMI you pay for 3% down erase any gain you are likely to get on alternate investment?

Paul


Paul, I would not be paying any PMI because there is no PMI with certain loan programs. You may pay a premium in the rate, say a.25%-.625% higher rate, but that's about it. And really, on the balance we are looking to borrow I can't see that making much of a difference. With 15 year rates being in the neighborhood of high 2% and low 3% range, with no PMI, that's where I'm struggling with putting 20% down.

Confused wrote:If you ask me, if you're putting down less than 20%, you can't afford the house. Loan will be a lot smaller, and no PMI.


Confused, I see your point and I have always thought along the same lines, putting 20% down, up until recently because mortgage rates are so low and I can get certain first time homebuyer loan programs with still no PMI. Like I said, we have the 20% in cash now so we can afford it, the question is just is that the best use of that money :moneybag ....tie up into a house or invest elsewhere?
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Private Mortgage Insurance?

Postby Taylor Larimore » Tue Dec 11, 2012 1:25 pm

My question is simply to get your opinions on putting down the traditional 20% or putting down the least amount possible and getting in as cheap as possible.

Josh:

I believe it is usually a mistake to pay the extra premium for PMI (Private Mortgage Insurance) if you can avoid it. This Investopedia article explains:

6 Reasons to Avoid PMI

Best wishes
Taylor
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Re: First time homebuyer - 20% down vs 3% down

Postby sdrone » Tue Dec 11, 2012 1:30 pm

"Wanting a 15 year mortgage signifies that intellectually you know it's best to pay the loan off as quickly as possible; why not start with 20% down?"

If you're disciplined with your money, why would you ever commit more than you need to? Get your loan as cheaply as possible. Put down as little as possible. Make your payments as small as possible.

Then pay off extra capital every month.

If 2008 taught me anything, it's to expect the unexpected. The last thing I want is to commit a bunch of money I didn't need to commit to a downpayment, then have an emergency hit - hospitalization, issue with the car, whatever. And if you're committed to a home loan, you've committed yourself to this possibility for 15 or 30 years. To me, this type of action is the same as buying things I don't need.

Granted - it takes discipline to do this.
Granted - I want to avoid PMI
Granted - I am a jerk when it comes to large sums of money, and will walk away from a deal that does not meet my specs, or go off on a loan person whom I believe is making too much off me.
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Re: First time homebuyer - 20% down vs 3% down

Postby Clearly_Irrational » Tue Dec 11, 2012 1:31 pm

It depends. Which type of investor are you:

1) Believe mortgages should be paid off as quickly as possible so that you can be debt free

2) Believe that you should always have a mortgage so that you can take advantage of the cheap credit and invest your money elsewhere for a higher return

If #1 then you should put the 20% or more down and make aggressive extra payments. If #2 then you should put down as little as possible (keeping an eye on the math) so that you have the most capital available. Personally I recommend #1 for your primary residence and #2 for investment properties but that's just me.
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Re: First time homebuyer - 20% down vs 3% down

Postby ruralavalon » Tue Dec 11, 2012 1:39 pm

Do the 20% down payment.

Become debt free as rapidly as is practical given your other obligations.
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Re: First time homebuyer - 20% down vs 3% down

Postby Jerilynn » Tue Dec 11, 2012 1:40 pm

I'd do the 30% down.

I don't yet know anyone that wishes they put less down (after the fact). I do know a few people that decided to put the money into the market instead that were not pleased with their decision.

Of course, if you pay off/down the mortgage the market will soar and if you put the extra money into the market it will crash.


EDIT: ZOMG, I have no idea why on earth I read that 3% as 30%. NOW some of these posts make alot more sense. :oops:
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Re: First time homebuyer - 20% down vs 3% down

Postby soaring » Tue Dec 11, 2012 1:44 pm

I may have missed the answer to this question but have you found a source that will accept 3% down? I didn't know in this age that such a low down would be accepted.
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Re: First time homebuyer - 20% down vs 3% down

Postby Clearly_Irrational » Tue Dec 11, 2012 1:44 pm

Jerilynn wrote:I don't yet know anyone that wishes they put less down (after the fact).


At these interest rates I'll take zero down if I can get it.
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Re: First time homebuyer - 20% down vs 3% down

Postby Valuethinker » Tue Dec 11, 2012 1:45 pm

rookieboglehead wrote: but my thinking is I could get better return on that money versus the approximate 3.5% the loan would cost me. Also, with the housing market still unstable in my mind, do I really want to put 20% down upfront. My thinking is I could always make a lump sum payment in the future if I wanted to with those funds. The money we have saved for the down payment is in cash, high yield savings account, and not included in any retirement funds.
- Josh


1. your outlook on the housing market is IRRELEVANT to how much you put down (exception below). Entirely separate. Your investment in housing is the gross price of the house, how you finance that (see 3) is a separate question

2. exception is the more uncertain the higher the downpayment because you do not want to be in negative equity (makes it difficult to sell).

3. is that 3.5% after tax return? Because stocks are likely to return 6-8% *before tax* at best in say the next 30 years. Easy to see with higher dividend and capital gains tax rates how that falls below say 5%. And stocks are *risky*.

Other *risk free* investments (paying off your mortgage is risk free) pay sub 2% right now.

The only way you really lose is if inflation shoots up-- a mortgage, long termed fixed rate, is an inflation hedge.

I would put down 20% to avoid PMI

EXCEPTION if there are significant tax deferred or tax exempt savings opportunities you would lose (forever) by not having cash. And of course the usual 6 months of liquidity you should have in all circumstances (more if in an unstable job or profession).
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Re: First time homebuyer - 20% down vs 3% down

Postby Clearly_Irrational » Tue Dec 11, 2012 1:49 pm

soaring wrote:I may have missed the answer to this question but have you found a source that will accept 3% down? I didn't know in this age that such a low down would be accepted.


VA loans are 0% (must be a veteran), USDA loans are 0% (can't exceed income cap), Fannie Mae Homepath loans are 3%, FHA loans are 3.5%.
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Re: First time homebuyer - 20% down vs 3% down

Postby Jerilynn » Tue Dec 11, 2012 1:49 pm

rookieboglehead wrote: Like I said, we have the 20% in cash now so we can afford it, the question is just is that the best use of that money :moneybag ....tie up into a house or invest elsewhere?



Look at it this way. Say you owned the house free and clear. Would you re-finance in order to take out a mortgage and then 'tie up the money elsewhere'?

This all boils down to a personal psychological decision. There is no way to tell, mathematically, ahead of time what is the optimal option will be going forward. My good friend was buying a house, he sold his existing home and decided to put the cash into the market since it was 'doing great'. It was only supposed to be in the market for a few months until he used the money to buy his new house. Well, the day he decided to go all in, was about a week before the Oct. 1987 crash.

I guess the market has been too good this year, we are getting several posts that imply the person doesn't think his investment can LOSE money.
Last edited by Jerilynn on Tue Dec 11, 2012 1:55 pm, edited 1 time in total.
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Re: First time homebuyer - 20% down vs 3% down

Postby Confused » Tue Dec 11, 2012 1:51 pm

Valuethinker wrote:
rookieboglehead wrote: but my thinking is I could get better return on that money versus the approximate 3.5% the loan would cost me. Also, with the housing market still unstable in my mind, do I really want to put 20% down upfront. My thinking is I could always make a lump sum payment in the future if I wanted to with those funds. The money we have saved for the down payment is in cash, high yield savings account, and not included in any retirement funds.
- Josh


1. your outlook on the housing market is IRRELEVANT to how much you put down (exception below). Entirely separate. Your investment in housing is the gross price of the house, how you finance that (see 3) is a separate question

2. exception is the more uncertain the higher the downpayment because you do not want to be in negative equity (makes it difficult to sell).

3. is that 3.5% after tax return? Because stocks are likely to return 6-8% *before tax* at best in say the next 30 years. Easy to see with higher dividend and capital gains tax rates how that falls below say 5%. And stocks are *risky*.

Other *risk free* investments (paying off your mortgage is risk free) pay sub 2% right now.

The only way you really lose is if inflation shoots up-- a mortgage, long termed fixed rate, is an inflation hedge.

I would put down 20% to avoid PMI

EXCEPTION if there are significant tax deferred or tax exempt savings opportunities you would lose (forever) by not having cash. And of course the usual 6 months of liquidity you should have in all circumstances (more if in an unstable job or profession).


Valuethinker, your use of asterisks to denote emphasis makes me think you've been on Reddit lately.
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Re: First time homebuyer - 20% down vs 3% down

Postby Jerilynn » Tue Dec 11, 2012 1:56 pm

Clearly_Irrational wrote:
Jerilynn wrote:I don't yet know anyone that wishes they put less down (after the fact).


At these interest rates I'll take zero down if I can get it.



And what, specifically, would you invest in?
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Re: First time homebuyer - 20% down vs 3% down

Postby NorCalDad » Tue Dec 11, 2012 1:57 pm

rookieboglehead wrote:Paul, I would not be paying any PMI because there is no PMI with certain loan programs. You may pay a premium in the rate, say a.25%-.625% higher rate, but that's about it. And really, on the balance we are looking to borrow I can't see that making much of a difference. With 15 year rates being in the neighborhood of high 2% and low 3% range, with no PMI, that's where I'm struggling with putting 20% down.

This premium is PMI, regardless of how you look at it. Call it whatever you want, but any premium you pay to mitigate risk of the lender for taking out a risker loan is essentially mortgage insurance.
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Re: First time homebuyer - 20% down vs 3% down

Postby nisiprius » Tue Dec 11, 2012 1:58 pm

Image

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Re: First time homebuyer - 20% down vs 3% down

Postby Jerilynn » Tue Dec 11, 2012 2:00 pm

Confused wrote:Valuethinker, your use of asterisks to denote emphasis makes me think you've been on Reddit lately.



I've been using asterisks to denote emphasis on-line since *1983*. Reddit just recycled the idea. Also been using double colons to denote actions.
Like...

I can't believe that the ER on that DFA fund is *so* high. ::groan::
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Re: First time homebuyer - 20% down vs 3% down

Postby Jerilynn » Tue Dec 11, 2012 2:04 pm

nisiprius wrote:
Show me the boulder that says "Leverage."


I think there is one outside of (what used to be) Lehman Brothers.
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Re: First time homebuyer - 20% down vs 3% down

Postby Clearly_Irrational » Tue Dec 11, 2012 2:07 pm

Jerilynn wrote:And what, specifically, would you invest in?


More real estate of course. The limit on my real estate holdings is the amount of capital I have to invest. Buying an investment property costs more than just the down payment so the more you can finance the more you can buy. Since unlike stocks & bonds, smaller properties (1-4 units) are an inefficient market, it's possible for me to add significant alpha by way of careful analysis.
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Re: First time homebuyer - 20% down vs 3% down

Postby CokeSlurpee711 » Tue Dec 11, 2012 2:10 pm

Agree with others about there being no right or wrong here. I share the same the sentiment in the idea of a 15 year mortgage & going el cheapo on the down payment. I’ll offer some other considerations:

Modest starter house? So you don’t want to own it long term? Or do you & want to rent it in the future? I don’t know. I would consider a 30 YR & make minimum payments, the fact that you’re having this discussion lends me to believe in 4-10 years you’ll want a bigger & better house. Don’t see a ton of 5-10 upside in a modest starter house in AL vs Boglehead investing.
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Re: First time homebuyer - 20% down vs 3% down

Postby rookieboglehead » Tue Dec 11, 2012 2:15 pm

First off, thank you to everyone who has taken the time to reply to this post and provide some valuable input. I really appreciate the points being made on both sides of the fence here and a lot of wisdom being shared. I am so glad I found the Bogleheads and have a place such as this to come for advice and wisdom far greater that my own.

Clearly_Irrational wrote:
soaring wrote:I may have missed the answer to this question but have you found a source that will accept 3% down? I didn't know in this age that such a low down would be accepted.


VA loans are 0% (must be a veteran), USDA loans are 0% (can't exceed income cap), Fannie Mae Homepath loans are 3%, FHA loans are 3.5%.


As I said, I definitely don't want to do 100% because there are always large upfront funding fees with each of these programs, VA and USDA RD, which cause you to basically be underwater from day one. In my opinion, FHA robs people with their upfront and monthly PMI rate, and they keep raising the monthly every few months. What is crazy, and possibly a sign of the times, there are Conventional loan programs available now with just 3% down and no PMI, it is just a lender-paid PMI type deal where you pay a higher rate but have no PMI.

ruralavalon wrote:Do the 20% down payment.

Become debt free as rapidly as is practical given your other obligations.


Typically my wife and I do try to live a debt-free lifestyle if at all possible. We are very fortunate and blessed right now to have no debt at all and of course this would be the largest financial decison either of us have made at this point. Regardless of what down payment we end up going with, with the 15 yr loan we would still like to make an extra payment a year to try and cut off another year or two.

Valuethinker wrote:
rookieboglehead wrote: but my thinking is I could get better return on that money versus the approximate 3.5% the loan would cost me. Also, with the housing market still unstable in my mind, do I really want to put 20% down upfront. My thinking is I could always make a lump sum payment in the future if I wanted to with those funds. The money we have saved for the down payment is in cash, high yield savings account, and not included in any retirement funds.
- Josh


1. your outlook on the housing market is IRRELEVANT to how much you put down (exception below). Entirely separate. Your investment in housing is the gross price of the house, how you finance that (see 3) is a separate question

2. exception is the more uncertain the higher the downpayment because you do not want to be in negative equity (makes it difficult to sell).

3. is that 3.5% after tax return? Because stocks are likely to return 6-8% *before tax* at best in say the next 30 years. Easy to see with higher dividend and capital gains tax rates how that falls below say 5%. And stocks are *risky*.

Other *risk free* investments (paying off your mortgage is risk free) pay sub 2% right now.

The only way you really lose is if inflation shoots up-- a mortgage, long termed fixed rate, is an inflation hedge.

I would put down 20% to avoid PMI

EXCEPTION if there are significant tax deferred or tax exempt savings opportunities you would lose (forever) by not having cash. And of course the usual 6 months of liquidity you should have in all circumstances (more if in an unstable job or profession).


ValueThinker, thank you for putting your spin on this topic offering some numbers to quantify if you will the tax and "other investment" side of things.
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Re: First time homebuyer - 20% down vs 3% down

Postby zebrafish » Tue Dec 11, 2012 2:16 pm

Clearly_Irrational wrote:It depends. Which type of investor are you:

1) Believe mortgages should be paid off as quickly as possible so that you can be debt free
2) Believe that you should always have a mortgage so that you can take advantage of the cheap credit and invest your money elsewhere for a higher return

If #1 then you should put the 20% or more down and make aggressive extra payments. If #2 then you should put down as little as possible (keeping an eye on the math) so that you have the most capital available. Personally I recommend #1 for your primary residence and #2 for investment properties but that's just me.


Agree with this post. Only addition is that your choice of #1 vs. #2 involves your risk tolerance. #2 can get you in a whole lot of trouble if the market (stock and/or real estate) tanks and you need access to your money or need to move. A lot of people got greedy and burned who chose #2 in the past few years.

Me-- I choose #1
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Re: First time homebuyer - 20% down vs 3% down

Postby Clearly_Irrational » Tue Dec 11, 2012 2:18 pm

nisiprius wrote:Show me the boulder that says "Leverage."


How's this?

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Re: First time homebuyer - 20% down vs 3% down

Postby Easy Rhino » Tue Dec 11, 2012 2:27 pm

There's the obvious advantage of a small down payment where if the market tanks in the near future, you can walk away and get foreclosed on with relatively little money lost via the down payment.

Besides investment property, that's the sort of "option" you get from the small down payment.
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Re: First time homebuyer - 20% down vs 3% down

Postby rookieboglehead » Tue Dec 11, 2012 2:33 pm

CokeSlurpee711 wrote:Agree with others about there being no right or wrong here. I share the same the sentiment in the idea of a 15 year mortgage & going el cheapo on the down payment. I’ll offer some other considerations:

Modest starter house? So you don’t want to own it long term? Or do you & want to rent it in the future? I don’t know. I would consider a 30 YR & make minimum payments, the fact that you’re having this discussion lends me to believe in 4-10 years you’ll want a bigger & better house. Don’t see a ton of 5-10 upside in a modest starter house in AL vs Boglehead investing.


My wife and I are newly married, no kids now but would like to start a family in the future God willing. I use the term "starter" home to say it will not be our dream home, but our first home. Typical 3 bed, 2 bath, 1,500 sq ft home that is more than enough for us now but will also satisfy our need if and when we do have children. Could we live in the first home forever, sure but I'm guessing down the road we will want to upgrade to something more like our dream home. Baby steps for us, something to work towards. Our plan is with the first house to have the mentality that we will stay in it for 10 years. Of course life happens and plans change, I understand that. However, if we stay there 10+ years at that point we would most likely have it paid for and be mortgage free. If and when we did want to upgrade we could keep the first property as a rental and generate positive cash flow monthly or decide to sell it outright and use the money made from the sale to put down on the next home, and repeat.

As far as the real estate market where I live in Madison, AL it is doing very well and a somewhat hot market. We have a huge DOD and military presence here, 2nd largest research park in the USA, local school system recently ranked top in nation (our HS was ranked 20th in country), and Huntsville/Madison consistently ranking as one of best places to live due to employment, schools, local economy, etc. It's not all John Deere tractors, barefoot in overalls, double-wide's, missing teeth in Alabama stereotype that most people think of here, ha ha.
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Re: First time homebuyer - 20% down vs 3% down

Postby NorCalDad » Tue Dec 11, 2012 2:34 pm

I'm curious; if your main concern is freeing up cash to invest because you think you can get a better return, why even do a 15-year loan? Wouldn't you also prefer to free up as much future cash flow as possible to invest?

I was always a believer in 20% down, and the bubble made me even more of a believer. It's the main thing that kept us above water while others remain under or walked away as values plummeted 30% to 40%. Granted, a different time and different dynamics, but the lesson was a valuable one.

You don't really have skin in the game with 3.5% down. When you sell, closing costs/commissions will eat up 7%, though maybe that's less a concern if you plan to live there a long time and have cash in the bank.
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Re: First time homebuyer - 20% down vs 3% down

Postby bottlecap » Tue Dec 11, 2012 2:51 pm

You won't net any money on the money you don't put down unless you risk it. If you risk it an lose it, you could be stuck in your home. Perhaps a small risk, but a risk just the same.

Good luck,

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Re: First time homebuyer - 20% down vs 3% down

Postby Khanmots » Tue Dec 11, 2012 3:45 pm

Not sure if it's been mentioned (didn't see it at a quick glance), but you're not looking at rates right.

If you have 2 options, 1) 80% down at 3% or 2) 97% down at 3.525% (makes math nice) and investing the 17% not put down here's the math...

With option 2) you'll be putting 17% to work and paying 0.5% of 97% of your purchase price for the privilege. So you'll need to earn a multiple of 97/17 of that 0.525% delta in rate in order to recoup the rate-difference alone. Then you'll need to earn an additional 3% to cancel out the base rate of 3%.

Resulting in needing an investment return that will need to return 6% to merely break even.
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Re: First time homebuyer - 20% down vs 3% down

Postby Jerilynn » Tue Dec 11, 2012 4:32 pm

Clearly_Irrational wrote:
Jerilynn wrote:And what, specifically, would you invest in?


More real estate of course. The limit on my real estate holdings is the amount of capital I have to invest. Buying an investment property costs more than just the down payment so the more you can finance the more you can buy. Since unlike stocks & bonds, smaller properties (1-4 units) are an inefficient market, it's possible for me to add significant alpha by way of careful analysis.


I hope it works out for you. Just too risky for my tastes and I'm almost 100% equities. Different strokes.
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Re: First time homebuyer - 20% down vs 3% down

Postby Clearly_Irrational » Tue Dec 11, 2012 4:45 pm

Jerilynn wrote:I hope it works out for you. Just too risky for my tastes and I'm almost 100% equities. Different strokes.


Well, I don't do that in isolation. No more than a third of my wealth goes into real estate. I try to maintain a roughly even balance between real estate, financial assets and small business ownership.

100% equities is far to risky for my blood, but I suppose everyone views risks a bit differently. For me, I like cash flow diversification, it makes me worry less about any one particular kind of crisis. Of course, if there were no risks there wouldn't be much in the way of returns either.
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Re: First time homebuyer - 20% down vs 3% down

Postby Jerilynn » Tue Dec 11, 2012 5:41 pm

Clearly_Irrational wrote:
Jerilynn wrote:I hope it works out for you. Just too risky for my tastes and I'm almost 100% equities. Different strokes.


Well, I don't do that in isolation. No more than a third of my wealth goes into real estate. I try to maintain a roughly even balance between real estate, financial assets and small business ownership.

100% equities is far to risky for my blood, but I suppose everyone views risks a bit differently. For me, I like cash flow diversification, it makes me worry less about any one particular kind of crisis. Of course, if there were no risks there wouldn't be much in the way of returns either.


Ok, fair enough. Let's say that you already had your real estate balance at it's optimal position. THEN where would you invest the additional money?
Cordially, Jeri . . . 100% all natural asset allocation. (no supernatural methods used)
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Re: First time homebuyer - 20% down vs 3% down

Postby Clearly_Irrational » Tue Dec 11, 2012 5:59 pm

Jerilynn wrote:Ok, fair enough. Let's say that you already had your real estate balance at it's optimal position. THEN where would you invest the additional money?


That depends on a lot of factors. Rough guess I'd plow it into financial assets or small business, whichever was lagging more. If all three were even then more real estate to start the next cycle of aquisitions. If I had reached my magic number (investments sufficient to create 3 separate cash flows equivalent to my annual expenses, not income) then I'd start paying down debt to reduce risk.
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Re: First time homebuyer - 20% down vs 3% down

Postby Watty » Tue Dec 11, 2012 6:03 pm

You may pay a premium in the rate, say a.25%-.625% higher rate,


You need to make a spreadsheet with the actual numbers.

Very roughly you are looking at a $100,000 loan or a $125,000 loan.

If you invest the $25,000 and your investments beat the mortgage interest rate by 2% then you would end up with an extra $500.

The problem is that $100,000 of the $125,000 mortgage would be at a higher interest rate, say 0.5% higher and that would cost you an extra $500.

Unfortunately that does not mean that you break even because your monthly mortgage payment each month would be 25% higher, maybe $125 month($1,500 a year) or more, with the $125,000 mortgage so that would cost you more too.

This is just a back of the envelope calculation but the point is that there is not a lot of upside potential and there are lots of ways that it can go wrong.

There are some reasons that you might want to go with the lower down payment, but making a lot of money by investing the difference probably is not one of them.
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Re: First time homebuyer - 20% down vs 3% down

Postby tfb » Tue Dec 11, 2012 6:20 pm

rookieboglehead wrote:Paul, I would not be paying any PMI because there is no PMI with certain loan programs. You may pay a premium in the rate, say a.25%-.625% higher rate, but that's about it. And really, on the balance we are looking to borrow I can't see that making much of a difference. With 15 year rates being in the neighborhood of high 2% and low 3% range, with no PMI, that's where I'm struggling with putting 20% down.

Do the math again. The 0.25% - 0.625% higher rate is on 100% of the mortgage. You will have to multiply that by 6x for the missing 16.5% difference in down payment. The cost of not putting that down payment becomes 1.5% - 3.75% + mortgage rate. Your cost of funding investments is more like 6% now. Also PMI goes away after a few years when your equity builds up to 20%. The higher rate stays on for the entire life of the loan (assuming this is the bottom for rates and no more refinancing opportunities down the road). 6% for sure versus investing? I would take 6% for sure.
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Re: First time homebuyer - 20% down vs 3% down

Postby JCom » Tue Dec 11, 2012 10:14 pm

I was in a similar situation last year. I chose the 3% down. Now I have an extra $30,000 of liquidity and it feels nice. Will the $30,000 earn more interest than the PMI costs? It'll be close.

Debt can be your friend if you're smart about it. I have a mortgage at 3.5% and student loans at 3.13% and I sleep very well at night.
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Re: First time homebuyer - 20% down vs 3% down

Postby DVMResident » Wed Dec 12, 2012 12:35 am

I'm not sure what the right answer is, but I'll comment all the analysis thus far has not factored inflation or the chance for rising interest rates.

High inflation is the friend of people in debt. If inflation rises and income, nominal equity returns, and fixed income keeps pace, the real cost of the mortgage interest will fall.

If the low-risk fix income (CDs, MMs, iBonds, T-notes, etc.) hits 4% again, the bank is paying you.
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Re: First time homebuyer - 20% down vs 3% down

Postby wander » Wed Dec 12, 2012 12:36 am

I would put maximum you could afford for the down payment.
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Re: First time homebuyer - 20% down vs 3% down

Postby Outer Marker » Wed Dec 12, 2012 8:48 am

There are many delimas in investing -- but avoiding PMI when you have the cash availble to do so is as close to a no brainer as it gets. Remember, its the difference between a conforming loan and the PMI that is causing you to pay the premium, so, between the cost of the underlying mortgage, plus the PMI on the overage amount, your return on investment in paying down the loan is likely in the 6-7% range -- which is about equal to the expected return on stocks -- but is guaranteed.

Personally I'd go with 20% down on a 15 year conforming to get the best possible rate; but, if you really want to play the leverage game, if you put down 10% on a 15 year FHA loan, PMI does not apply.
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Re: First time homebuyer - 20% down vs 3% down

Postby rookieboglehead » Wed Dec 12, 2012 2:11 pm

Outer Marker wrote:Personally I'd go with 20% down on a 15 year conforming to get the best possible rate; but, if you really want to play the leverage game, if you put down 10% on a 15 year FHA loan, PMI does not apply.


Thanks for the info, I was not aware of the no PMI on a 15 yr FHA loan with 10% down. I assume they would still charge the upfront MI fee though which my understanding is up to 2.25% of the loan amount now. The difference would be though, that a 15 yr FHA rate is going to be lower than a 15 yr conforming loan. So then the question would be what would be my overall savings of the lower interest rate over the 15 years with the one-time up-front premium versus no fee and higher rate.
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Re: First time homebuyer - 20% down vs 3% down

Postby bogglehead » Wed Dec 12, 2012 3:04 pm

Can you point to which banks are offering 3% down with no PMI (even with a small rate bump)? I've come across 3% down conventionals recently, but they had PMI (and pretty high PMI at that).

To answer your question -- I have no idea, I'm trying to figure out a very similar situation right now.

In case anyone would like to chime in on my situation, the question is largely the same, except that I have student loans with an interest rate of ~7% and make too much to deduct the interest. I'm leaning towards a lower down payment and then concentrating on paying off my student loans (I don't have any other debt), before trying to pay down the mortgage. Thoughts?
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Re: First time homebuyer - 20% down vs 3% down

Postby rookieboglehead » Fri Dec 14, 2012 4:01 pm

bogglehead wrote:Can you point to which banks are offering 3% down with no PMI (even with a small rate bump)? I've come across 3% down conventionals recently, but they had PMI (and pretty high PMI at that).

To answer your question -- I have no idea, I'm trying to figure out a very similar situation right now.

In case anyone would like to chime in on my situation, the question is largely the same, except that I have student loans with an interest rate of ~7% and make too much to deduct the interest. I'm leaning towards a lower down payment and then concentrating on paying off my student loans (I don't have any other debt), before trying to pay down the mortgage. Thoughts?


Bogglehead, I have looked at a couple of banks in my area and pretty much getting similar quotes....15 year conventional with 3% down running between 3.375%-3.625. Now there is PMI involved, it's just lender paid PMI, hence the uptick in the rate. To give some comparison, I am seeing traditional conventional loans on a 15 yr term with 20% down at 2.75%-2.875%.


*Thanks to all the Bogleheads that have contributed your thoughts, wisdom, and advice to this post.
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