Mortgages

Along the lines of the other real estate topic, my wife and I are shopping mortgages right now. It looks like we're going to be able to put 10% down at closing easily, but 20% down is really pushing things. We are first time buyers, so FHA is also an option, but for some reason our mortgage officers have all pushed us towards the 10% option.

FHA has a little higher interest rate, the mortgage insurance is a little higher, and the initial appraisal is about $100 more. From my calculations, it would take about 5-6 years to make up the $7500 difference in the down payments for a conventional 10% mortgage to be worthwhile, and that's all we see ourselves staying at this location as it is.

So are we being irrational for thinking of taking the FHA 3.5% mortgage over the conventional 10% down approach?

Do you have enough cash over and above the 10% downpayment to cover all the E36 M3 the home inspector will miss?

If not, you've probably just talked yourself into an FHA mortgage.

Yeah, we have enough beyond the 10% down to cover eventualities, that's why the 20% down is really not an option - we'd be out of cash at that point.

OK...

What are you planning to do with the house once the 5-6 years are over? Sell? Rent out?

i had a similar situation and asked my dad what to do. buying down the rate a bit would have saved money in the long run if i stay longer than 5 years. my dad (who is a bank president and has been a loan officer and bank examiner in the past) told me to always take the long run saving solution because assuming you don't lose the house you'll be in the house at least as long as you planned, but more likely you'll be there longer than you told yourself you would. of course, ymmv

BoxheadTim wrote: OK... What are you planning to do with the house once the 5-6 years are over? Sell? Rent out?

That all depends on where the market is. If we can sell and break even or make a profit, we'll sell. If we can't sell unless we take a big loss, we would rent.

In that case I'd mirror Strizzo's advice and go for the long-term-cheaper option if you can afford it.

Where are you located and what's the market like there?

And if you can put 10% down you can get a 10% 2nd lien plus do an 80% first lien and not pay mortgage insurance if you do a conventional loan. You always have MI regardless of your downpayment on an FHA loan.

Loan size is another factor in the comparison process. The smaller the loan the higher the interest rate. FHA and Conventional loans have different upcharges depending upon loan size which can make certain price points swing the advantage one way or the other.

We're in Detroit Metro-area Michigan. Purchase price is going to be anywhere from $60 to $100k most likely. That 1st and 2nd lien that you were mentioning doesn't ring any bells for me.

The other option that some family members have mentioned is going the 10% down approach, doing a few small improvements, then getting a reappraisal next year in hopes of getting rid of the PMI.

The 1st/2nd mortgage approach that carguy123 is referring to is a common way to avoid PMI - you take out the first mortgage for 80% of the property value, then take out a second mortgage or HELOC for the remaining 10%. That approach requires very careful calculation to see if you're not only sending the PMI money into the HELOC because of its higher interest rate.

FHA, my wife and I did it when we went from our 20% down condo (which we lost money on) to our 3.5% down house, I'd rather keep my money this time around...

I'll also mention that for my FHA loan, they didn't want more than 5% down, and I was told theyd rather just do the 3.5. That could have been my mortgage broker screwing me though

I'm sure some will poo-poo this, but we did the FHA thing with 96.5/3.5% loans, seller paid all closing costs.

Our "downpayment loan" or the 3.5% loan, is only $38 a month for 5 years. We decided that was worth being able to leave ALL our money in savings. So we only ended up out of pocket about $300-400 each.

This was on a home with a $98k purchase price.

Strizzo wrote: I'll also mention that for my FHA loan, they didn't want more than 5% down, and I was told theyd rather just do the 3.5. That could have been my mortgage broker screwing me though

How would putting less down let anyone screw you?