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Old 12-05-2008, 03:38 PM
M_M M_M started this thread
 
32 posts, read 42,652 times
Reputation: 15
Default How much to pay down if you can't make 20% - math question

I thought conventional wisdom was to put down as much down payment as you safely can afford. However, Iím having trouble getting the math to come out to support that idea and am starting to question that.

Consider these two situations:

Scenario A (more down payment)
Purchase price: $170,000
Down payment: $10,000
Mortgage amount: $160,000
Interest rate: 5.5%
Loan term: 30 years

Scenario B (less down payment)
Purchase price: $170,000
Down payment: $5,000
Mortgage amount: $165,000
Interest rate: 5.5%
Loan term: 30 years

Say you sell the house in five years for $180,000. Then, using amortization tables I found online for the total principal and total interest:

Scenario A
Equity: $180,000- $147,937.10 = $32,062.90
P&I Total: $54,507.60

Scenario B
Equity: $180,000-$152,560.15 = $27,439.85
P&I Total: $56,211.00

In other words, you make $4,623.05 more in equity and saved $1,703.40 on P&I payments, a total of $6,326.45 saved by paying $5,000 more down.

But, letís say in Scenario B you invested the $5,000 you didnít add to your down payment in some kind of investment like a money market. It would take about a 6% annual return over 5 years on your initial $5,000 to roughly equal the $6,300 you would save by paying more money down, ignoring taxes. However, even if your return on the investment was low, around 2.5% annually, you would only be short of that $6,300 mark by about $800. That makes it seem like a small gain for having to get
$10,000 worth of cash at closing rather than $5,000.

Am I thinking about this the right way or not? I know I didnít include some other factors like PMI rising as down payment goes down, but Iím not sure how to estimate those costs. What else am I missing?

Iíve heard something about equity rolled into a down payment for a new house is not taxed, so that seems like a nice benefit to have if that is correct. How else can I evaluate which scenario is better? Assume there is no chance of a 20% down payment to avoid PMI.
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Old 12-05-2008, 03:48 PM
 
Location: Martinsville, NJ
5,881 posts, read 6,694,915 times
Reputation: 3467
Quote:
Originally Posted by M_M View Post
I thought conventional wisdom was to put down as much down payment as you safely can afford. However, Iím having trouble getting the math to come out to support that idea and am starting to question that.

Consider these two situations:

Scenario A (more down payment)
Purchase price: $170,000
Down payment: $10,000
Mortgage amount: $160,000
Interest rate: 5.5%
Loan term: 30 years

Scenario B (less down payment)
Purchase price: $170,000
Down payment: $5,000
Mortgage amount: $165,000
Interest rate: 5.5%
Loan term: 30 years

Say you sell the house in five years for $180,000. Then, using amortization tables I found online for the total principal and total interest:

Scenario A
Equity: $180,000- $147,937.10 = $32,062.90
P&I Total: $54,507.60

Scenario B
Equity: $180,000-$152,560.15 = $27,439.85
P&I Total: $56,211.00

In other words, you make $4,623.05 more in equity and saved $1,703.40 on P&I payments, a total of $6,326.45 saved by paying $5,000 more down.

But, letís say in Scenario B you invested the $5,000 you didnít add to your down payment in some kind of investment like a money market. It would take about a 6% annual return over 5 years on your initial $5,000 to roughly equal the $6,300 you would save by paying more money down, ignoring taxes. However, even if your return on the investment was low, around 2.5% annually, you would only be short of that $6,300 mark by about $800. That makes it seem like a small gain for having to get
$10,000 worth of cash at closing rather than $5,000.

Am I thinking about this the right way or not? I know I didnít include some other factors like PMI rising as down payment goes down, but Iím not sure how to estimate those costs. What else am I missing?

Iíve heard something about equity rolled into a down payment for a new house is not taxed, so that seems like a nice benefit to have if that is correct. How else can I evaluate which scenario is better? Assume there is no chance of a 20% down payment to avoid PMI.
I'm running off to a meeting, but a quck thought is that you need to evaluate those interes rates. In most cases, the less equity you put in, the higher your interest rate will be. If you can qualify these days for a 5% down loan in the first place, that is.
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Old 12-05-2008, 05:00 PM
 
21,477 posts, read 35,351,953 times
Reputation: 10511
The premise is not correct -- PMI is the buster. That is why the acceptance of 80/20 purchasing was so fiendishly clever. By putting NO money into the purchase and NOT getting slapped with the PMI spanking you'd be guaranteed to get MAXIMUM appreciate from MAXIMUM leverage.

That also give people little incentive to stick around and make payment on a house that they had negative equity in as prices dipped down, then DOVE down, as bubble priced assets inevitably do.

AND THAT has led to the current mess!

Which is why you are not going to find a loan situation like you want...

BUT it is generally true that THE LESS out of pocket you put into a property the GREATER the effect appreciation is going to have on your asset. Of course that assume that you DO GET positive on BOTH the house and the CASH that you invest, neither of which has been happening lately.

WHICH further deepens this ugly situation...

If you need a place to live and can get a loan that you can afford and come up with the downpayment that the lender requires, and have discipline / wisdom to put extra cash where it will grow -- GO FOR IT! Far too many people would BLOW that extra cash on useless big screen TVs, fancy sheets and SS appliances for their "new crib", which, is not a bad thing for the people at Tweeter, Linens n' Things, or Sears, but as two out of three are already liquidated...
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Old 12-05-2008, 05:10 PM
 
Location: Central Maryland
100 posts, read 256,187 times
Reputation: 48
What a wonderful question. Thank you so much.
I wanted to put more down on our house than was called for, but it didn't get written into the contract.. fortunately with an FHA loan all extra payment gets rolled into the principle.

It's fun to play with the calculators at dinkytown.net in terms of what to pay where, and when, to cheat your lender as much as possible.

If I send in a 10K payment, they have to pay into the principle. The faster we get 20% equity (they were making noises about property values going up, but that's a bridge I won't buy) the faster PMI goes away.

I'd like to hear from people who found other, sneakier ways to cut down their PMI.

Keep talkin' people!
:-)

Emily D-G
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Old 12-05-2008, 05:16 PM
 
Location: Central Maryland
100 posts, read 256,187 times
Reputation: 48
How do you not get slapped with PMI?

Talk to me..

Edge
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Old 12-05-2008, 06:00 PM
M_M M_M started this thread
 
32 posts, read 42,652 times
Reputation: 15
To address the questions/comments about this situation...

We have actually have already been preapproved for the loan amount by several companies and have been offered anything from 5% to 5.625% on a conventional 30 year loan. We were quoted the same rate as long as we met the minimum down payment qualification (5-10% depending on the company - these include Bank of America, Wells Fargo, Sunbelt Lending, and Chase). We are fortunate enough to both have excellent credit and a lot of disposable income, so there are still good loan terms out there if you are in a situation like ours.

As a first time homebuyer, we have a lot of savings and investments for our age but not equal to a 20% down payment, so the PMI seems to be unavoidable.

That brings me back to the original question, which is how you determine what percent down payment to decide on given that it must be at least, say, 5% and that 20% can't be afforded.

Thanks for the responses and suggestions so far. It seems like a difficult conclusion to reach.
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Old 12-07-2008, 02:46 PM
 
Location: Mountain Ranch, CA The heart of Calaveras County
6,047 posts, read 11,145,009 times
Reputation: 4762
Get an FHA loan. No PMI.
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Old 12-08-2008, 10:00 AM
M_M M_M started this thread
 
32 posts, read 42,652 times
Reputation: 15
But doesn't FHA have MIP in place of PMI?
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Old 12-08-2008, 02:49 PM
 
Location: A little suburb of Houston
3,700 posts, read 11,095,033 times
Reputation: 1886
Quote:
Originally Posted by M_M View Post
To address the questions/comments about this situation...

We have actually have already been preapproved for the loan amount by several companies and have been offered anything from 5% to 5.625% on a conventional 30 year loan. We were quoted the same rate as long as we met the minimum down payment qualification (5-10% depending on the company - these include Bank of America, Wells Fargo, Sunbelt Lending, and Chase). We are fortunate enough to both have excellent credit and a lot of disposable income, so there are still good loan terms out there if you are in a situation like ours.

As a first time homebuyer, we have a lot of savings and investments for our age but not equal to a 20% down payment, so the PMI seems to be unavoidable.

That brings me back to the original question, which is how you determine what percent down payment to decide on given that it must be at least, say, 5% and that 20% can't be afforded.

Thanks for the responses and suggestions so far. It seems like a difficult conclusion to reach.
You put down more so that you can hit that 20% equity sooner and get rid of the PMI. PMI is money basically thrown away and depending on the cost of the house can add up to more that what you can make by investing the money (especially lately).
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Old 12-09-2008, 09:31 AM
 
878 posts, read 1,286,221 times
Reputation: 444
Quote:
Originally Posted by M_M View Post
I thought conventional wisdom was to put down as much down payment as you safely can afford. However, Iím having trouble getting the math to come out to support that idea and am starting to question that.

Consider these two situations:

Scenario A (more down payment)
Purchase price: $170,000
Down payment: $10,000
Mortgage amount: $160,000
Interest rate: 5.5%
Loan term: 30 years

Scenario B (less down payment)
Purchase price: $170,000
Down payment: $5,000
Mortgage amount: $165,000
Interest rate: 5.5%
Loan term: 30 years

Say you sell the house in five years for $180,000. Then, using amortization tables I found online for the total principal and total interest:

Scenario A
Equity: $180,000- $147,937.10 = $32,062.90
P&I Total: $54,507.60

Scenario B
Equity: $180,000-$152,560.15 = $27,439.85
P&I Total: $56,211.00

In other words, you make $4,623.05 more in equity and saved $1,703.40 on P&I payments, a total of $6,326.45 saved by paying $5,000 more down.

But, letís say in Scenario B you invested the $5,000 you didnít add to your down payment in some kind of investment like a money market. It would take about a 6% annual return over 5 years on your initial $5,000 to roughly equal the $6,300 you would save by paying more money down, ignoring taxes. However, even if your return on the investment was low, around 2.5% annually, you would only be short of that $6,300 mark by about $800. That makes it seem like a small gain for having to get
$10,000 worth of cash at closing rather than $5,000.

Am I thinking about this the right way or not? I know I didnít include some other factors like PMI rising as down payment goes down, but Iím not sure how to estimate those costs. What else am I missing?

Iíve heard something about equity rolled into a down payment for a new house is not taxed, so that seems like a nice benefit to have if that is correct. How else can I evaluate which scenario is better? Assume there is no chance of a 20% down payment to avoid PMI.
This website has a calculator for estimating PMI:

PMI Calculator

With 5% down, you would pay $143/mo. With 10% down, $104/mo. Over 5 years, that is an extra $2,340. Using your above numbers, your $5,000 investment would have to reach $8,600. For that, you would need to receive 12% annual interest.

Given today's market, a 70% return over 5 years is certainly possible.
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