That’s good for your son, but most people don’t get PMI at such a low rate, particularly most younger persons. FICO is more of sliding scale than one group pays a premium and others do not. 760+ likely get the best rate, 700 rate is a little worse, 650 (typically FICO score for younger persons) rate is worse still, and 600 is likely to have trouble qualifying for this type of loan. LTV is also highly influential, which depends on appraisal, as well as % down. How appraisal compares to market value varies with specific real estate market. There are a lot of varied financial situations and buyer personalities, so one cannot apply a simple rule for all situations.
@BunsenBurner, we also did the 80/10/10. The equity line was about 4.5% at the time, and we paid it off in less than five years, at which point we refinanced to a 15 year fixed. We could have put up another 10%, but we didn’t want to tie up all our cash.
OP, we had no regrets about buying less house than we otherwise could afford. Four years later, I was diagnosed with a life-changing illness that affected my ability to work, and we were really glad we didn’t stretch the budget. Also gave us flexibility to pay for college.
Besides, you may want some $$ to have fun!
For the average person with decent credit, paying PMI to buy a house with 10% down rather than wait to accumulate 20% has the math working in their favor
Think of this scenario:
Assume two people live in an area where rent is in the ballpark of a PITI mortgage payment. (There’s actually a good chance the mortgage will be less than they are paying in rent.) A person buying a house with 10% down vs another person who currently has 10%, but is advised to take another 5 years to save the other 10%. (Current savings would have to be in very low or no risk investment)
$335000 home
10% down =33,500
Loan amount: 301,500
PMI rates are between 0.3% and 1%, Assume 0.6%==1800/year premium x 5 years = $9000 total
After 5 years at 3.5% appreciation/year (per predictions on housing appreciation over the next 5 years, this is VERY conservative assumption in this economy)
PMI total payments: $9000
Current home value: 398,000
Principal Owed: $275000
Equity in home: $123000
Appreciation: $63000
If you think of PMI as an investment enabling buyer to leverage the down payment NOW vs in 5 years, there is a $54000 return on the $9000 investment. You’re not gonna get that kind of return in any other reasonably safe investment.
This 10% down/pmi buyer has built (conservatively) $123000 in wealth, while the buyer who was trying to save up 65000 now needs $80000 AND has a reasonable chance that the interest rates are also going to be significantly higher than they are now. The 20% buyer would now have a $320000 loan. If interest rates go up to 5.5% in 5 years, his/her payment will be nearly $300/month more, which over 5 years adds up an additional 18,000.
PMI rates can go quite a bit higher than that, but average is under 1%.
Historically home appreciation averages ~0.7% above inflation – less than the amount a new buyer would pay in property tax rates in most states and less than expected home repair and maintenance expenses. However, individual markets and even more so sale prices in individual neighborhoods and on individual houses often are far more volatile than the national average. Some people make a net gain on their primary home after all expenses including mortgage interest, but most do not. It’s by no means a safe $54k return on a $9k investment. I also wouldn’t assume that you’ll get the same loan interest rate with 10% down as a higher % down.
I’ve hired several handymen with home repair experience to do minor work on my home. Everyone of them I spoke with mentioned a similar background in home investing. They bought fixer upper homes as highly leveraged investments, repaired them, then had the realtor partner resell them. It was quite profitable and they did extremely well financially for years. Until the housing market changed, then their highly leveraged investments did poorly and they either went bankrupt or nearly went bankrupt. Now they don’t invest and instead work as handymen. As you might expect, I live in an area that’s had a real estate bubble. It’s difficult to know what will happen 5 years in the future – in terms of home value, the economy, and personal financial situation.
^Then my 3.5% appreciation rate was too low.
Remember 2008? You know what dropped in value more than housing? Pretty much every other investment. You know what skyrocketed? Rents. Everywhere.
We’re not talking about investment properties or flipping houses. It is difficult if not impossible to finance those with less than 20% down.
Of couse economic situations change, but we are in an economy where, short term, interest rates and housing prices are both predicted to increase significantly.
In my neighborhood, sellers and agents will not even work with you until you have loan preapproval. That is STEP ONE
A good agent will help you through the pre approval process, although they are going to connect you with a mortgage broker who gets a commission from the lenders, so the broker will steer you to the lenders they work with.
The average 3 month change for rent is listed below according to the Beruau of Labor and Statistics.:There was a small decrease in 2008 from the rate of the preceding years and a larger decrease in 2009 and 2010.
2006: +1.0
2007: +1.0
2008: +0.9
2009: +0.3
2010: +0.1
There are also quite a few common investments that did well near the time of the 2008 housing crisis. For example, 10 year bonds returned over 20%, which was the highest annual rate they’ve had in more than 25 years.
Are those changes every 3 months? Where I live (west coast), there were so many more renters than buyers, rents went up a lot.
The low in the housing market was 2011. Buying a house then would have yielded great returns too.
There have definitely been several periods where investors would have been better off investing down payment funds in the market instead of buying a home. But we’re talking about someone who is planning to buy and who, presumably has decent employment and credit.
FWIW, our tenants pay for taxes, insurance, and house repairs along with the mortgage we have on the properties they live in - not out of pocket, of course, but they’re factored into their rent. None of that comes out of our budget. Their taxes are even higher because they’re renters. They’d get a break on those if they owned the house - plus they’d be building their own equity instead of ours.
It makes sense to rent if you’re not going to stay in an area/residence for long or if houses are depreciating in the area. It rarely makes sense otherwise.
Own a home (residence), have owned several rentals and commercial RE. For over 20 yrs in several economic cycles. When everything is going well, leverage is great. When it turns south, which it will at some point for some period of time, being over leveraged is painful. Like those 5 houses my buddy owns with no tenants. His carry cost is several thousand per month without rent to offset. He bought all of them with virtually nothing down. His partner declared bankruptcy so there’s that.
All I’m saying is, big picture, stay within your budget, don’t get over leveraged. When you think you’ll be there for 5 yrs soyou take out an ARM and then you stay for 10 and your 4.0 has adjusted to 6.5 but your house is only appreciating 3% per yr…that’s called life. Hopefully the numbers don’t get worse than that.