PMI vs. 2nd Mortgage...what's smarter in homebuying?
for months my DH and I have been convinced PMI is our only option when buying a home. We do not have 20% to put down, but we have 15%...However, we only want to put down 10% (we want to hold onto reserves).
I have been reading about 2nd mortgage or 80/10/10 loans, were we would take a loan for 80% of the LTV price, 10% loan to help supplement our full 20% down deficit and our personal cash for 10% down.
PMI would be at least 600 a year; possibly upto $1k. From what I understand, PMI continues on and on depending on appreciation...but I don't know how and in what direction...
Our current rate for a 1st mortgage is 4%, but on the 2nd mortgage, that may go up.
I don't know what's worse:
Paying PMI (which does not lower our principle at all) or paying a higher interest rate to put 20% down.
I'd love input from you all; especially Lys, AG, floggy...
The only "help" I can give you is a suggestion to check out Clark Howard's website/forums. He has his on TV/radio show on these sorts of things.
Might be worth your time to check it out.
I'm not an expert in this area but if you can get relatively favorable rates on the split loans, you may want to take a longer look at doing an 80/20 or 80/10/10 rather than paying PMI. When I bought, I put 10% down and did a straight mortgage with PMI because I knew I was going to pay extra on principal each month and I was pretty certain that I could get to 20% equity within a few years to get rid of it quickly. That plan worked great until I learned that it's not as easy to get PMI removed from your loan as you might think, even if you do hit the magical 20% equity number. Some mortgage companies won't agree to remove it until you hit closer to 25-30% if it is already part of your loan. In my case, I had to refinance to remove it, which, due to the rates, was a good idea anyway.
That said, with the rates as low as they are now, refinancing should be a last resort, so I would try to avoid anything that might force you down that path. And you can always pay additional principal on the split loans to get rid of the higher interest rates quickly.
Original Post by maelwys:
I'm not an expert in this area but if you can get relatively favorable rates on the split loans, you may want to take a longer look at doing an 80/20 or 80/10/10 rather than paying PMI. When I bought, I put 10% down and did a straight mortgage with PMI because I knew I was going to pay extra on principal each month and I was pretty certain that I could get to 20% equity within a few years to get rid of it quickly. That plan worked great until I learned that it's not as easy to get PMI removed from your loan as you might think, even if you do hit the magical 20% equity number. Some mortgage companies won't agree to remove it until you hit closer to 25-30% if it is already part of your loan. In my case, I had to refinance to remove it, which, due to the rates, was a good idea anyway.
That said, with the rates as low as they are now, refinancing should be a last resort, so I would try to avoid anything that might force you down that path. And you can always pay additional principal on the split loans to get rid of the higher interest rates quickly.
That's what I'm thinking. With rates so low, wouldn't it be a better option for us to get a 2nd mortgage, where some of our principle would be paid, instead of risking PMI dragging on for years? I do not foresee us paying the loan earlier, either...which I think is an important factor.
Over 10 years, our PMI cost could be 10K+ (if it took 10 years to get 22% equity; which it could since mostly interest is paid in the first several years on a mortgage).
While, if we paid 5% for 15 years on a $25k 2nd mortgage, we'd still pay $10K+/-, but it's a better tax deduction then PMI, right?
ETA: armandounc, I never heard of him, but I'll check him out...thanks!
*shameless bump*
I don't know. However you've given me something to think about as I want to buy a house in a year or two.
Sorry, no clue - zero experience in home-buying. Hopefully that will change in the not-too-distant future, but until then...
Original Post by mjsophia:
That's what I'm thinking. With rates so low, wouldn't it be a better option for us to get a 2nd mortgage, where some of our principle would be paid, instead of risking PMI dragging on for years? I do not foresee us paying the loan earlier, either...which I think is an important factor.Over 10 years, our PMI cost could be 10K+ (if it took 10 years to get 22% equity; which it could since mostly interest is paid in the first several years on a mortgage).
While, if we paid 5% for 15 years on a $25k 2nd mortgage, we'd still pay $10K+/-, but it's a better tax deduction then PMI, right?
ETA: armandounc, I never heard of him, but I'll check him out...thanks!
Yeah, a lot will depend on your ability to pay additional principal into the loan. Moving from a 15 to 10 year plan will increase payments by $50-70 per month and bring your total interest to somewhere in the $6500 range @ 5%. That would be a lot better than having to pay ~$10K in PMI.
Also, I would check the terms on the second loan. I believe they are usually put together as HELOCs, which do provide a tax benefit but are also ARM mortgages with no fixed term, so if interest rates start moving in the next few years, it could get messy.
AG, too bad! i know once you buy you'll be so savvy...I'll feel that I missed out :)
Thanks mae. I will certainly research all risks. I'm waiting to hear back from our consultant. I hope we get good news.
We put an offer on a house last night...
Fingers Crossed
Original Post by mjsophia:
AG, too bad! i know once you buy you'll be so savvy...I'll feel that I missed out :)
Thanks mae. I will certainly all risks. I'm waiting to hear back from our consultant. I hope we get good news.
We put an offer on a house last night...
Fingers Crossed
Good Luck MJ.
Best of luck!
Thank Kev (PS: why do they call you buck?) and AG.
We're expecting them not to accept our first offer (the seller doesn't seem to realize it's a crap market), but we're hoping for a fantastic deal. I'll keep you posted!
Definitely keep the thread up to date! It's a great feeling to buy your first house! Good luck!
Well this is disappointing (from our consultant):
"The 80-10-10 program requires credit scores of at least 740. We have to use your middle credit score of 714. We did piggy back loans all the time until 2008 when most of the banks offering them stopped. Now there or only a couple sources. They are a completely separate loan with interest rates in the 7 – 8% range."
Looks like I'm going to have to convince my DH to borrow the difference from my family (he has too much pride to do it). The more I learn about PMI, the more I HATE it.
Are either of you Veterans? VA loans don't require PMI if you don't have the 20% down. You can put zero down and still have no PMI requirement.
^nope, but I'm glad the vets get assistance in home buying.
Ugh, that sucks about credit scores and rates. When I bought they were giving away mortgages to anyone who would sign on the dotted line - the landscape has definitely changed in that regard.
Sadly, PMI is a necessary evil for most new home buyers. Definitely borrow the money if you have the source available. Paying back your family at 5% interest is much more preferable to paying back a bank who is going to be a PITA and charge you 7-8%.
One caveat to getting loans from family - don't tell anyone that it is a loan. It's a gift, regardless of what terms you've worked out with family. If you say it's a loan, they'll factor that into your mortgage application and then banks start to get real nervous. Also, if you're going to get money from family, do it now so it becomes part of your cash reserve. Don't do it when you need it when it will look suspicious. You can always get it and then give it back if you end up not using it.
Original Post by maelwys:
Ugh, that sucks about credit scores and rates. When I bought they were giving away mortgages to anyone who would sign on the dotted line - the landscape has definitely changed in that regard.
Sadly, PMI is a necessary evil for most new home buyers. Definitely borrow the money if you have the source available. Paying back your family at 5% interest is much more preferable to paying back a bank who is going to be a PITA and charge you 7-8%.
One caveat to getting loans from family - don't tell anyone that it is a loan. It's a gift, regardless of what terms you've worked out with family. If you say it's a loan, they'll factor that into your mortgage application and then banks start to get real nervous. Also, if you're going to get money from family, do it now so it becomes part of your cash reserve. Don't do it when you need it when it will look suspicious. You can always get it and then give it back if you end up not using it.
Good point. I remember when I bought the condo they asked if my money was my own, a gift, loan...the works. After I talk to C, and IF he is on board (anyone know how I can convince him that this is okay to try???), we'll talk to our folks.
We may even be able to begin paying them back before we move in. I just don't want to put all of our money into a down payment. We have a fence to put in (if it gets approved of), a riding mower to by (1.1 acres) and some appliances to change out. Let alone the fact that we want to keep saving/investing.
Original Post by mjsophia:
Good point. I remember when I bought the condo they asked if my money was my own, a gift, loan...the works. After I talk to C, and IF he is on board (anyone know how I can convince him that this is okay to try???), we'll talk to our folks.We may even be able to begin paying them back before we move in. I just don't want to put all of our money into a down payment. We have a fence to put in (if it gets approved of), a riding mower to by (1.1 acres) and some appliances to change out. Let alone the fact that we want to keep saving/investing.
I agree with the second paragraph - you don't want to end up house poor with no money ever in the bank because it all goes towards your home. Still have to enjoy life, right? And, as you mention, there are just a lot more things to spend money on when you have a house!
For the first part, doing it as a loan is one way to make the idea more palatable. The other is to simply look at it in terms of value. Take the emotion out (if you can). Value to you is the cost of PMI, about $1200 per year. Value to your parents of having that money, assuming they have it in a liquid form, is the interest they would earn on it, which likely comes out to $30 per year at most. Put yourself in their shoes - would C hesitate to lend money to his best friend assuming that a) you wouldn't miss it and b) he knew the friend would be good for it (which he knows he will be). After that, it's the simple present value equation above.
PMI sucks. You already caught the point I was going to make, which is that the 2nd mortgage is probably a variable rate and so looks like a good deal now, but could easily not stay that way. Borrowing from the family is effectively a second mortgage, but safer and probably cheaper. Beg, steal or borrow to get to that 20% down, in my opinion anyway. Good luck with your offer!
Original Post by mjsophia:
Thank Kev (PS: why do they call you buck?) and AG.
We're expecting them not to accept our first offer (the seller doesn't seem to realize it's a crap market), but we're hoping for a fantastic deal. I'll keep you posted!
My real name is Buckimus C. Nekid, folks call me Buck for short;)
