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As cheap as money is currently, I'd make as small of down as the lender would allow. Then invest in crypto with a few thousand. In 6 months, write a check for the balance of the loan, and be done with the mortgage. Then, live mortgage free for the 7-9 years you plan on living there. Simple.
Oh, this is only a longshot, btw. Chances are you'd lose money on anything I'd recommend!
I'll tell you my story about prepaid PMI and see if it's relevant to you. In 2012, we decided to move across town but not sell our existing property because real estate values were down. I got a 90/10 loan with prepaid PMI. We did it because I had a good amount of cash but I wanted to keep my monthly payments as low as possible since we were going to be carrying two mortgages until I rented the other house.
Fast forward several years - real estate prices have gone up considerably. My new house is now worth 150% of what we paid. I called my lender, Wells Fargo, to see if I could get rid of escrow. They said in order to do that, I had to meet the PMI threshold of 78% LTV. They had an option to pay for a "comp" instead of a full appraisal which saved a couple hundred dollars so I did it. Once they determined that we now only owed 55% of the value, not only was I able to get rid of escrow, but surprisingly I got a large refund of the prepaid PMI. I thought once I paid it that it was gone, but apparently they amortized it over some period of the loan.
So - two things to consider are 1) which is more important to you right now - paying the PMI upfront with available cash and reducing your monthly payment or making saving the money and paying monthly and 2) find out what the terms are and if a refund of some of that prepaid PMI is f your house value goes up considerably after a few years. Hope this helps.
Besides the different PMI companies, each have different payment plans, and there are "refundable" premiums and "non-refundable" premiums. They've picked it out for you and told you this is it. PMI is never a one size fits all. Have a home to sell, but do not want to wait on the cash from the sale for the down payment? Consider a refundable premium (read the fine print, first). Do you really need the tax deduction? In a rapidly appreciating community? Is this your real forever home? (Hint: every first time buyer thinks their purchase is forever, but it's not. The ones that I believe are the ones in their 50's, getting positioned for retirement).
Most loan officers don't even touch on these variables, so you need to ask, and need to ask for the variables on paper. One MI company has money down on the PMI, complemented with a sliding scale, so you can determine the monthly payment. The more you put down, the lower the monthly payment.
If your loan officer won't review your options, walk away.
Lets just use some "back of the napkin" math to figure out some basic facts on this....
$4,500 invested now / $85 monthly payments means you will break even around 53 months.
53 months / 12 months a year = almost 4.5 years.
Do you think you can rid yourself of PMI before then? Typically the amortization wouldn't reach 20% Loan to Value within 4.5 years so if you stay for that long it's worth just paying it off in advance. However, this also assumes you have the cash to burn now and don't want a monthly payment.
Obviously the answer to your question gets a whole lot more complicated if you decide to calculate what investing $4,500 could do for you in that time, or if your property appraises for higher than you paid which happened to me on my house.
You can get your house reappraised when you reach less than loan to value. A mortgage person could speak on this better, but I believe that when you only owe 78% of its value, you can ask that the PMI be dropped. If you get a windfall that you would be willing to put toward your principal and the market continues to increase, you will reach that point sooner than you think. Otherwise it is just money down the drain.
If I am not mistaken, it no longer works that way on FHA mortgages. I had one and I did have the PMI dropped after I was able to start making extra payments and got to that 78%, but I think now PMI is for the life of the loan on FHA. I hated paying that every month.
I eventually refi'd to a 15-year conventional ten years in.
Huh? I'm all in favor of mortgages in most cases. It's PMI I object to and believe it can often be avoided.
After we retired, we bought a house and took a mortgage. We could have pulled investments and paid cash, but chose not to.
How much equity did you have?
OP is a 1st time buyer. Sounds like home prices in their area are quite steep, nearing three quarters of a million dollars. OP would need over a quarter million dollars to put down 20% on these homes.
I don't know about the paying PMI up front, but we bought the house with less than 20% down, paid PMI for the first couple years, just refinanced to a lower rate and removed PMI. Yes, I realize this was not the optimal financing decision, but average home values are over half a million dollars where we live and it's the only way to get in when you don't have a whole lot of equity or cash saved up in your earlier life. The PMI is gone now, our rate is below 3%, we break even in a couple years, and we cash out big time in the next 5-10. So, at least to me, it's a wash. I can't sit around stressing about how I could have used the money otherwise, because life doesn't work out like a business needs to.
Last edited by modest; 01-07-2022 at 09:57 AM..
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