U.S. CitiesCity-Data Forum Index
Go Back   City-Data Forum > General Forums > Real Estate > Mortgages
 [Register]
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
View detailed profile (Advanced) or search
site with Google Custom Search

Search Forums  (Advanced)
 
Old 04-12-2015, 09:54 AM
 
14 posts, read 16,641 times
Reputation: 21

Advertisements

I'm looking at two fairly attractive options for financing the purchase of a house, and I can't quite figure out how to determine which is ultimately a better deal financially. Purchase price is approximately $200k. I have about $11k in my checking account. Seller will pay $5k in closing costs. I'm going to do a 30 year mortgage.

I could do a conventional Fannie-Mae-backed loan with a leading private mortgage company, with 5% down, a nominal interest rate of 3.75%, and APR of a little under 4.1%, with PMI of about $100/month.

Or I could do a loan with a local credit union, with 0% down, a nominal interest rate of 4.25%, an APR of a little under 4.6%, with PMI of about $115/month.

PMI in both cases would be cancellable as soon as LTV>80%. The credit union also offers an option with lender-paid PMI with an APR of about 4.8 for the life of the loan, but I don't want that, because I want to eventually cancel the PMI.



There's also a 3% down option for first-time buyers with no PMI that I could use if I applied jointly with my wife (since her name is not on the deed to my current house), but for some unknown reason, it has an APR over 5%, which significantly higher interest than the 0% option, so I don't know why anyone would ever choose it (and by the way, you can't do the 0% option and actually put 3% down; you have to actually put no money down; it's all quite peculiar to me).

Obviously, I would save money on mortgage interest if I put 5% down, in that the principal balance would be slightly smaller, my rate would be a bit lower, more of my payments would go toward equity, and I would start out with almost enough equity to pay a realtor's commission if I needed to sell on short notice for any reason.

On the other hand, 5% of the purchase price is almost all my cash on hand, so I'd have to borrow in the event of an emergency. Plus, the difference in monthly payments isn't very much (less than $100/mo. difference). Mortgage interest is tax deductible, and I could put a portion of my cash into my 401(k), and get instant returns. Also, if I keep my current money in a cash-convertible form, I could use it to write a check at the closing table if I needed to unload the house for some unforeseen reason.

I'm actually leaning to doing a 0% down deal, because I like having money in the bank. But the risk-averse ghosts of my anti-debt grandparents are tugging at my conscience and telling me that more mortgage is always bad, no matter what. I'm not financially savvy enough to run an expected future value and net present value computations over various time frames to figure out which deal is ultimately a better use of my money. Anyone want to take a shot at that for me?
Reply With Quote Quick reply to this message

 
Old 04-12-2015, 10:49 AM
 
2,600 posts, read 5,449,178 times
Reputation: 2387
Low- And No-Downpayment Mortgage Options For 2015 Housing
Reply With Quote Quick reply to this message
 
Old 04-12-2015, 10:58 AM
 
14 posts, read 16,641 times
Reputation: 21
Quote:
Originally Posted by need4speed2012 View Post
Thanks. I'm aware of the options but am having a harder time determining whether they're actually a better deal than a conventional 5% from an NPV perspective.
Reply With Quote Quick reply to this message
 
Old 04-12-2015, 01:53 PM
 
2,682 posts, read 4,214,998 times
Reputation: 2264
You would have to do some calculation to figure out which is a better option for you.

Grossly it goes like this......

First, you need to define (only you can tell) how long you would hold the loan (5 year, 10 years, or 30 years?) Very difficult to tell in advance but without some assumption how long you plan to live in the house, there no way to make a apple to apple comparison.

Then using the APR, find the present values of each of the options including the mortgage insurance.

If you want to make it a bit more complicated you could include the 401K return as well as tax write off (based on you family income) into it. But I would ignore that as you said you are not inclined to do those calculations.

Good luck!
Reply With Quote Quick reply to this message
 
Old 04-12-2015, 04:16 PM
 
Location: Phoenix, AZ > Raleigh, NC
14,301 posts, read 17,505,128 times
Reputation: 22132
Quote:
Originally Posted by newlawyer2010 View Post

Obviously, I would save money on mortgage interest if I put 5% down, in that the principal balance would be slightly smaller, my rate would be a bit lower, more of my payments would go toward equity, and I would start out with almost enough equity to pay a realtor's commission if I needed to sell on short notice for any reason.
I don't mean to be Debbie Downer, but if the risk of needing to sell on short notice in less than 5 years is part of your concern, I would say don't buy a house at all. In the long run, you'd be better off renting and putting money into another more liquid investment.
Reply With Quote Quick reply to this message
 
Old 04-12-2015, 05:03 PM
 
3,182 posts, read 2,812,313 times
Reputation: 1855
If putting the 5% down gets you an APR ~0.5% lower you are essentially making a tax-free, risk-free 10% return on that money by putting it into the mortgage. You shouldn't even have to think about this.

edit: Like the person above stated, if there is a material chance of having to move in 5 years you should be asking whether or not you should be buying in the first place, but if you are buying you'd be a fool to take the 0% option.
Reply With Quote Quick reply to this message
 
Old 04-12-2015, 05:50 PM
 
14 posts, read 16,641 times
Reputation: 21
Quote:
Originally Posted by ALackOfCreativity View Post
If putting the 5% down gets you an APR ~0.5% lower you are essentially making a tax-free, risk-free 10% return on that money by putting it into the mortgage.
What's the math behind this?
Reply With Quote Quick reply to this message
 
Old 04-12-2015, 05:55 PM
 
14 posts, read 16,641 times
Reputation: 21
Quote:
Originally Posted by Jkgourmet View Post
I don't mean to be Debbie Downer, but if the risk of needing to sell on short notice in less than 5 years is part of your concern, I would say don't buy a house at all. In the long run, you'd be better off renting and putting money into another more liquid investment.
There's no particular likelihood of having to sell in less than five years; I just like to consider all risks as material.
Reply With Quote Quick reply to this message
 
Old 04-12-2015, 06:27 PM
 
3,182 posts, read 2,812,313 times
Reputation: 1855
Quote:
Originally Posted by newlawyer2010 View Post
What's the math behind this?
Back of the envelope, you are getting 0.5% APR off the whole loan, at a cost of not getting any return off of the 5% that could be invested in the market. So 0.5% / .05 = 10%. Thinking about it more, you could conceptualize it as 95% of the loan, which would make it worth a little less, but you also wouldn't be paying interest on the paid off principal so the ROI would really be closer to 14%. with both of those things added in about 13.5%.

That all said, you could do all the back of the envelope math you want to try to get at the precise value of doing this, but it's just an unnecessary intellectual exercise. This is an absolute slam dunk relative to the 0% option.
Reply With Quote Quick reply to this message
 
Old 04-12-2015, 08:22 PM
 
12,404 posts, read 9,203,248 times
Reputation: 8863
Where is your emergency fund?

If you can't put down enough to at least cover selling costs should you need to sell, AND have a 6-month emergency fund, you are going to lose the house if Murphy moves in.
Reply With Quote Quick reply to this message
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.

Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.


Reply
Please update this thread with any new information or opinions. This open thread is still read by thousands of people, so we encourage all additional points of view.

Quick Reply
Message:

Over $104,000 in prizes was already given out to active posters on our forum and additional giveaways are planned!

Go Back   City-Data Forum > General Forums > Real Estate > Mortgages
Follow City-Data.com founder on our Forum or

All times are GMT -6.

2005-2018, Advameg, Inc.

City-Data.com - Archive 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35 - Top