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.
I was hoping I could present our situation and listen to feedback from individuals that know much more than I do. So, first off, I appreciate any replies I may get from posting this.
So my wife and I currently live in a very small home with our two young children (8 years, and 1.5 years). The house was sold to us as a foreclosure and there is approximately 100k left on the loan. The home is appraised at 123k.
We are looking to move into a new home which we plan to be our final, permanent home. We are looking at houses in Durham, NC in the 275-300k range.
We are at a cross roads and are beginning to have arguments over what we should do. My wife believes that we should move right now because interest rates are so low, and does not want to put down a 20% down payment. She argues that even if we do save up enough to put down a 20% down payment, she wants it to be liquid, or invested in something else, and not put into the house. She wants to secure a 30 year mortgage, with a low interest rate, and strive to pay extra each month to quickly get away from paying PMI, and then the best we can, pay towards our mortgage as if we had a 15 year mortgage.
I believe we should definitely put down 20%, secure a 15 year fixed rate mortgage, and ensure that our mortgage debt to income ratio is under 25% - ideally 20%.
Her argument is that by the time we save enough to put 20% down, the national interest rates will have went back up, and we'll ultimately lose more money. She also doesn't want to put that much money into a mortgage, she'd rather keep it, or find another way to invest it, because she says if something really happened to us, we'd never get it back. She believes we can get a 30 year mortgage, for a very low rate, and pay extra each month, and then we'll ultimately pay the least in interest.
My argument is that by the time we pay all the associated fees with having little or no down payment, such as PMI, and that because we won't be strict enough in paying extra each month towards the mortgage, even if the interest rate is slightly higher by the time we have 20% down - the fact that we won't pay PMI, our down payment will help us get a lower rate, and if we are strict and do it in 15 years, we will ultimately pay the least amount. I'm also extremely risk adverse and I shutter at the thought of being stressed and house poor. What happens if one of us loses our jobs?
The problem is that she does know more than me, she is a real estate paralegal. I know absolutely nothing about mortgages and interest rates and best options. I also understand that this is the time to buy because of the low interest rates, but I don't know when they become SO good, that it becomes a better idea not to put down a large payment. Where is the line?
Just a little bit about our situation to help posters to share their opinions/insight:
1. I am 26, my wife is 28
2. Our total income is 135k/yr. I make 80k, she makes 55k
3. We have a 30k emergency fund
4. We have approximately 12k in retirement accounts
5. We have 0 debt, aside from our current mortgage
6. We have no other money saved aside from what is mentioned above
7. We want a 275-300k home in Durham, NC
Again, I really appreciate anyone who takes the time to read about this situation and provide an earnest opinion. This is not a subject I know alot about, it would really help put my mind at ease to here unbiased opinions. Thanks so much.
But here's why: You've got two Little Ones. If you put that $$ down, the full 20%, that's a lot of emergency funds gone. And you can NOT tap that equity and cash out beyond 80% of the value. Ever again.
Mortgage interest, and Mortgage Insurance, are tax write offs.
Rates WILL be going up, they just can't stay where they are.
MORTGAGE INSURANCE: If you max out the price, at $300k, with 5% down, your monthly MI payment is about $141.
OR you could go with a "split-edge" plan (1% of the loan amount up front, the rest monthly), and negotiate that the seller pay, among other things, taxes, insurance, closing costs, and 1% of the loan amount toward an up-front Mortgage Insurance component, and this would drop the monthly MI to $95. (this might be TMI right now)
And, because you are looking down the barrel at surprise costs of having kids (which might stress the nest-egg), you are going to be accruing debt. School loans, co-signing, the passing away of one of y'all's parents (sorry, it happens suddenly and you want to be able to Handle It), you name it. Or not, I could be wrong.
But a 30-year mortgage would protect your debt ratio. The minimum payment would be the thing that future lenders, on future loans, will hold against you in the monthly calculation of your expenses.
Just so you know, right now, a 15 year FIXED mortgage on a $285,000 loan (95% of $300k), would be at about 2.85% = $1951 (+M.I.+taxes+Insurance + HOA)
30 year right now is about 3.5% = $1280 (+ all that stuff)
So, TERM looks like a new lovely conversation for you and the wife.
Anyway, my opinion:
5% down is it, for me. If I had kiddos and a wife (who you KNOW is going to conveniently bring up this conversation FOR THE REST OF YOUR LIFE), I would want the Latitude of Liquidity.
I'd sell the current house, put 5% down on the new place, make the seller pay everything in sight on the new home purchase, optimize my cash on hand, make that work for me in interest-bearing (yet liquidate-able) accounts, write off what I can from the mortgage on my taxes, be less cash-poor, and living in the place I want to be forever, sooner.
Because life is short, you know?
All of this is my opinion, and there are great, smart, experienced people on this board who might be diametrically opposed to my opinion. But this is my take.
P.S.: Time is the enemy. Play with this calculator, it shows how bi-weekly, and "how much extra per payment" affects your payoff time. You can cut that 30 year note by ten years, without really feeling it, and without having a bigger required payment on your credit report. www.mortgagesaver.com
THEN, when you have paid off the house in full before you are 50 years old, you keep making that same $$ payment - - into your retirement fund. And you are sitting on a paid-off house worth close to a half a million dollars that you can monetize in several ways. Or just live. And breathe.
I don't know enough to have an opinion, but just wanted to mention that there is such a thing as setting up automatic additional payments on your mortgage. So you don't "forget".
If you're going to do it, it might be best to do it now, before the FHA PMI rule changes in June, so you're not stuck paying PMI for the life of the loan. Hopefully someone more knowledgable can address this.
If you are disciplined enough, I like the 30 year mortgage and pay it off like it's a 15. It gives you a little more peace of mind in case the serious s*** hits the fan, you can drop the payment back to the regular amount. But like I say, you've got to decide in advance what your definition of "serious s***" is and stick to it.
Congratulations for your no-debt lifestyle and having that nice emergency fund at age 26.
I'm inclined to agree with your wife. With a relatively small mortgage and your combined income, paying down the balance quickly should be very doable. Definitely get rid of the PMI as soon a possible. That's wasted money and I doubt it provides any tax benefit either for a married couple.
If you know how to crunch the numbers, you could easily figure this out using the mortgage calculators and take the risk you feel comfortable
What is puzzling me is that you have 135K income and no debt except a 100K mortgage and you are not able to save more for down payment. I am not trying to be judgmental but rather to suggest, if you could, save a little and go for 10% down rather than the 5% at a higher PMI. The risk in interest rate increase are way less than the PMI you pay at 5%.
I did a quick run of the numbers and if you were to wait to put down 10%, rather than 5% conventional, the interest has to shoot from now 3.5% or less in your area now to 4.5%-sh in order for you to jump in now, you see where I am going? How long is going to take you to save the extra 5%? (15K), extra 15%? From what you are describing above, not too long. So, I would just run the numbers and see what could be a worst case scenario. My calculation also assumes that housing price stay flat. If they are going up, then that's another thing to consider. I am with you on this!
I was hoping I could present our situation and listen to feedback from individuals that know much more than I do. So, first off, I appreciate any replies I may get from posting this.
So my wife and I currently live in a very small home with our two young children (8 years, and 1.5 years). The house was sold to us as a foreclosure and there is approximately 100k left on the loan. The home is appraised at 123k.
We are looking to move into a new home which we plan to be our final, permanent home. We are looking at houses in Durham, NC in the 275-300k range.
We are at a cross roads and are beginning to have arguments over what we should do. My wife believes that we should move right now because interest rates are so low, and does not want to put down a 20% down payment. She argues that even if we do save up enough to put down a 20% down payment, she wants it to be liquid, or invested in something else, and not put into the house. She wants to secure a 30 year mortgage, with a low interest rate, and strive to pay extra each month to quickly get away from paying PMI, and then the best we can, pay towards our mortgage as if we had a 15 year mortgage.
I believe we should definitely put down 20%, secure a 15 year fixed rate mortgage, and ensure that our mortgage debt to income ratio is under 25% - ideally 20%.
Her argument is that by the time we save enough to put 20% down, the national interest rates will have went back up, and we'll ultimately lose more money. She also doesn't want to put that much money into a mortgage, she'd rather keep it, or find another way to invest it, because she says if something really happened to us, we'd never get it back. She believes we can get a 30 year mortgage, for a very low rate, and pay extra each month, and then we'll ultimately pay the least in interest.
My argument is that by the time we pay all the associated fees with having little or no down payment, such as PMI, and that because we won't be strict enough in paying extra each month towards the mortgage, even if the interest rate is slightly higher by the time we have 20% down - the fact that we won't pay PMI, our down payment will help us get a lower rate, and if we are strict and do it in 15 years, we will ultimately pay the least amount. I'm also extremely risk adverse and I shutter at the thought of being stressed and house poor. What happens if one of us loses our jobs?
The problem is that she does know more than me, she is a real estate paralegal. I know absolutely nothing about mortgages and interest rates and best options. I also understand that this is the time to buy because of the low interest rates, but I don't know when they become SO good, that it becomes a better idea not to put down a large payment. Where is the line?
Just a little bit about our situation to help posters to share their opinions/insight:
1. I am 26, my wife is 28
2. Our total income is 135k/yr. I make 80k, she makes 55k
3. We have a 30k emergency fund
4. We have approximately 12k in retirement accounts
5. We have 0 debt, aside from our current mortgage
6. We have no other money saved aside from what is mentioned above
7. We want a 275-300k home in Durham, NC
Again, I really appreciate anyone who takes the time to read about this situation and provide an earnest opinion. This is not a subject I know alot about, it would really help put my mind at ease to here unbiased opinions. Thanks so much.
The wife has sense listen to her she sounds like a keeper!
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.
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.
