Purchasing home with less than 20% downpayment experiences?

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MMLC3
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Joined: Sat Jul 08, 2017 6:49 pm

Re: Purchasing home with less than 20% downpayment experiences?

Post by MMLC3 »

TomCat96 wrote: Wed Jun 12, 2019 6:06 pm I was wondering, for those of you who purchased a home with less than a 20% downpayment, what was your experience like?

Did the costs end up being higher than you anticipated? Were there hidden issues that you did not foresee??
Were your rates higher as a result? And would you recommend it?

I am considering purchasing a home for less than a 20% downpayment, but I want to know people's thoughts on it before further considering it.
Bought with 5% down FHA loan with PMI in 2010.
Tried to aggressively pay down extra Principal only payments via savings. House value also appreciated (got lucky).
Once around 80% LTV, refinanced and got rid of PMI.
Changed jobs and moved to a Megacorp that gave some RSUs.
Continued paying down mortgage with extra principal payments via RSU sale last 4 years.
House value has 2.4x now. And I have only 5% mortgage left.
My wife and I are happy we went for the house with 5% down in 2010. In many ways, we would not be able to afford the house today at current price. Or even if we did, it would be a sizeable mortgage to take at this point.
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Wiggums
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Re: Purchasing home with less than 20% downpayment experiences?

Post by Wiggums »

dm200 wrote: Thu Jun 13, 2019 1:00 pm Goes back 40 years, but shortly after getting married, bought a house with only about 1-2% down. Got a VA mortgage. Still in the same house - paid about $74,000 and it is now "worth" between $650,000 and $700,000. Not bad :)
Well done...
veindoc
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Re: Purchasing home with less than 20% downpayment experiences?

Post by veindoc »

We qualified based on first time home buyer status to put 15% down and not pay PMI. This was through third federal. We opted to do this. Yes the mortgage balance was higher but it was hard to fork over so much cash that we had diligently been putting away every month for 5 years and leave just a little bit left. 15% left us with a nice cash cushion. We also planned to pay off mortgage early with cash flow in 15 years or less so that helped decision making.
2tall4economy
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Re: Purchasing home with less than 20% downpayment experiences?

Post by 2tall4economy »

TL;DR:
1) you should have the money for the downpayment, even if you don't use it for that.
2) You should make sure you're comparing rent to PITIMR, not just PI or PITI.
3) Servicing amortizing loans is a losers game

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I've been a landlord for ~15 years (and still am) and I currently rent my personal residence. My last personal residence I did an interest only 10% down. The decade or so prior to that I either rented or my company rented it for me when I was overseas for them.

I am probably going to move again in the near future and when I do I'm pretty sure I'll do an IO loan, minimal down, with the "down" coming from a securities backed loan of indefinite length and paid with dividends (that last part was a new idea from a fellow poster on this board - thank you!).

The only exception to this if I knew for certain I would never move house again. Which I find very hard to believe until I'm completely retired; after all, you've got a 30% chance of moving in any given year in your late 20s/early 30s, 20% chance in middle age, and even ~13% after you're past retirement age.

And, anyone who works for a global company and has ambitions of climbing the corporate ladder should expect to have to move at least a handful of times in their life (hopefully not as much as me though!)

I've done a healthy share of all types of mortgages in my life, including normal 20% down. When I've done 20% down, it's been because I want to avoid something: An escrow, more paperwork, a financial covenant, etc... The incremental interest has never been given much thought because it's relatively small in the grand scheme, net of returns on the retained capital.

If you are relocated by your company at any point in your life and they pay closing costs on both sides, then an interest only, 0% downpayment loan (if it were possible) + taxes + insurance + repairs/maintenance (what I call PITIMR, but in this case there is no P) = rent. It is darn near identical (and should be).

I believe what many people miss is they consider rent vs P+I only and see how much more they get "for the same money". This is where people fall into the trap. T, I, M, and R are also critical to the equation. The first step is to look at PITIMR vs Rent in your market to see which option is the better buy (spoiler -- it's probably better to rent on the coasts) and how to proceed. Do that analysis, and then unless it's a real estate bubble then if the answer is "Buy" then do an IO with minimal down.

Having equity in a house means it's not working for you toward retirement. When you're ready to retire - great, cash out your savings and pay off the house... otherwise it's just emotional security that will cost you dearly... if for no other reason than equity can't buy food but cash can.

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Data points:

When you compare renting vs IO vs 15 yr vs 30 yr mortgage, over holding periods of 1, 2, 5, 10, 15, 20, 25, 30, 40, and 50 years, assuming eventually you will sell it (which is the proper comparison, even if you decide someday you want to live there paid off).

When PITIMR = Rent, renting wins through 1-40 years because of lack of transaction costs (by far the biggest drag) and the money you make in the market on your downpayment instead of sitting as equity in the house (a much smaller part). At 50 years, the 15 year mortgage being paid off and investing the mortgage payment you didn't make for *35 YEARS* finally makes up the difference of years of rent savings. Of course, if you live in a home for 50 years: 1) god bless you and 2) you likely aren't heavily invested in the stock market anymore. So renting wins anyway.

If you must buy, due to limited rental selection or because you don't live on the coasts and renting is the worse deal, IO is better than 15yr note through 25 years, and better than 30yr note until 40 years.

15 year loan is always the worst idea until you hit 25 years, at which point the 30 year note is the worst.
You can do anything you want in life. The rub is that there are consequences.
phxjcc
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Re: Purchasing home with less than 20% downpayment experiences?

Post by phxjcc »

I did.
Within 2 years the house appreciated and LTV was raised to greater than 80%, called lender and they eliminated PMI.
fishnhunt
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Re: Purchasing home with less than 20% downpayment experiences?

Post by fishnhunt »

I just put 5% down on our first house. 2.875% for 30 year without paying anything extra for points. PMI is $60/ month. DW and I are both public employees so the risk of either of us losing our job and needing to sell is minimal. Besides the PMI, there didn't seem to be any difference if we had put down 20%.
fishnhunt
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Re: Purchasing home with less than 20% downpayment experiences?

Post by fishnhunt »

phxjcc wrote: Wed Sep 16, 2020 12:20 am I did.
Within 2 years the house appreciated and LTV was raised to greater than 80%, called lender and they eliminated PMI.
Did you need to pay for a new appraisal to do this? I am hoping within a couple years we will be in the same position as you were.
AC1984
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Re: Purchasing home with less than 20% downpayment experiences?

Post by AC1984 »

Van Down By Da River wrote: Thu Jun 13, 2019 12:43 pm Just do it. Now.

We bought our first house with 5% down and had to pay PMI... (then getting an appraisal to get rid of the PMI after year 3)

Then we bought our current house with 10% down and 10% HELOC (which we are finally paying off after 2 1/2 years)

I know conventional wisdom says to wait until you have 20% down, the old adage 'time in the market' applies. 6 years of home ownership, we now have over 100k in home equity thru appreciation, good ol' elbow grease DIY home improvements and aggressive pay down of the HELOC. That is all money that I would not have had I waited 5+ years until I had saved enough for a 20% down payment.
+1 We put 5% down and had the house reappraised three years later. We went from 11% equity to 26.5%. Got rid of PMI, totally worth the $400.
AC1984
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Re: Purchasing home with less than 20% downpayment experiences?

Post by AC1984 »

fishnhunt wrote: Wed Sep 16, 2020 7:37 am I just put 5% down on our first house. 2.875% for 30 year without paying anything extra for points. PMI is $60/ month. DW and I are both public employees so the risk of either of us losing our job and needing to sell is minimal. Besides the PMI, there didn't seem to be any difference if we had put down 20%.
There isn't a difference other than that unless it's a FHA loan. Then I believe the PMI is for the life of the loan, but in that case with a reappraisal you could get a new conventional mortgage.
ef11
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Re: Purchasing home with less than 20% downpayment experiences?

Post by ef11 »

I did 5% down on a $304,000 purchase that appraised at $316,000 (new build).

Lower % down did not increase my rate at all (3.25%) but cost about $60/mo in PMI.

I was able to keep an extra $45,000 to invest and calculated if I just made 1.6% on that money (to cover the PMI expense) I would come out ahead.

This was in May, so I have made much more than 1.6% on that money and I have more liquidity if need be.

Go for it.
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