Mortgages: How Much? (1 Viewer)

[Angelo.M]

I have yet to hear a good argument that paying PMI makes good sense. If you want to throw the PMI/'rent'/no-tax-advantage money out the window each month, that's your business. If you want to pay PMI and put your 'savings' in the bank at 1-2%, more power to you. Otherwise, buy a less expensive home or do a split mortgage.

PMI was 'created' for folks who don't have the necessary down payment. If you don't have enough for your down payment, ask yoursef: can I truly afford this home, or am I making myself house-poor

 

[MikeAlletto]

All I was saying was when I ran the numbers for my circumstance I am paying (i just looked it up) $55 more a month for PMI. If I were to go with the 2nd mortgage I would have ended up paying $250 a month more. (remember the PMI is insurance, its not payments to help to get to 20% unlike the 2nd mortgage, so PMI will, in most cases, be less than the 2nd mortgage monthly payment). With PMI and the area I'm in I'll be up to 20% owned in about 2.5-3 years with a new appraisal as opposed to paying with interest the 15 year 2nd mortgage. In the end without any extra payments I would have paid 6 grand more if I went with the 2nd mortgage as opposed to PMI. Yeah the interest is tax deductable but would you rather pay $250 more a month and have the 2nd mortgage paid off in 15 years or would you pay between $50 and $80 and be out of PMI in 2-3 years?

I'm not going to go back to my notes and put everything here. The only point I'm trying to make is that for whatever your circumstance is you MUST run the numbers and look at the options. Just dismissing PMI or just dismissing 2nd mortgage just because of what it is without taking into effect ones circumstances is poor advice. It sounds like the house prices you all are talking about is a lot larger than what I'm talking about which in those cases the 2nd mortgage would probably make much more sense, but in my case it did not.

 

[Patrick Larkin]

If you don't have enough for your down payment, ask yoursef: can I truly afford this home, or am I making myself house-poor

That's absolutely not true. You can make $150,000 a year and not have $70,000 as a downpayment.

 

[Patrick Larkin]

ken -- you are talking a home Equity line. In the case of an 80-15-5 scenario, you have no equity so how could you get a line?

And yes, I too have a Home Equity line on my current house. In fact, I have no credit cards except for one tied into that line at the prime rate.

 

[ken thompson]

Patrick, You wouldn't go the 80-15-5 route. You would simultaneously close on a conventional 80% first mortage and a fully drawn home equity line for the difference. You can choose to pay the interest only each month or you can pay the line down as you like. The key is that you always have access to your downpayment money if you need it for something else.

 

[Angelo.M]

PMI was created to make insurance companies money and to make it easier for a mortgage holder to foreclose.

PMI does both of these things, yes, but that's not why it was created. The cost of homes has risen very much out of proportion to the cost of other durable goods--and, more importantly, out of proportion to the rate of increase in minimum wage and salaries--over the past 30 years or so. It is proportionately more difficult to purchase a home, and more difficult to achieve a down payment. PMI can get you into the home without the 20%. "Private mortgage insurance" it is most certainly not as it doesn't protect the prospective homeowner at all--it protects the lender. In that sense, I think we agree.

 

[Patrick Larkin]

i suppose the rub there is that if the rates skyrocket, you are stuck with a big credit debt at a high interest rate when it could have been lower.

 

[Patrick Larkin]

Right. And if you don't have $70,000 for a down payment, perhaps you shouldn't be buying a $350,000 home.

Why? A person that makes $150K can easily pay a $2500 mortgage. What does down money have to do with it? In my case, I have the down money but would rather not liquidate my savings. So then I presume you'd say if I didn't have $100,000 in the bank, I shouldn't buy a $350K house?

 

[Angelo.M]

Did you miss the word "perhaps" in my post?

I think it depends on where you benefit most. If you'd rather keep your 20% invested in a savings or other account or vehicle, then that's reasonable if the interest you'd earn is not offset by a potential tax advantage you'd realize by not paying PMI. However, if you wanted the $350,000 home, and you didn't have a 20% down payment, I would recommend, for most situations, a 90-10% or 80-20% split mortgage, where you can take advantage of the tax deductability that is lost with PMI.

I believe that the $350k home is very much in reach with $150k salary--but doing it with PMI is, in my opinion, a tax-break opportunity wasted. In fact, in this economic climate, I believe in buying all the home you can afford and then some, as most other investment opportunities are not looking as solid. But I think the PMI deal is a raw one, for the home-buyer, and I don't pay it.

These are generalities, and obviously not applicable to all potential vagarities and situations. Your mileage will vary, considerably.

 

[ken thompson]

There is always interest rate risk when going with a floating rate. But keep in mind, you can always refinance to a fixed rate later. It is a bit of a gamble but I believe it to be a reasonably safe one in our current economic environment. I don't believe rates will go up signifcantly for at least a few years. But that's just me. Who knows, after a few years you may have reached that 80% LTV with appreciation and you can refinance then if you dont like taking the rate risk. I work in comercial banking and everyone is flipping their fixed rates to floaters right now.

 

[Patrick Larkin]

So, if a lender is willing to give you an 80-20 mortgage and eliminates PMI, isn't the lender taking on the same risk with no insurance?

 

[ken thompson]

No. They can sell the first mortgage at any time. Their risk is only the second mortage. And the PMI is not really a risk thing as far as the bank goes. It's all about keeping the first mortage marketable.

 

[Angelo.M]

Ken is absolutely correct. The bank can, and often will, sell the mortgage (something to inquire about; if it does get sold, you want to make certain that you are informed ASAP). We were lucky in that we got our mortgage with a bank that services all of its own mortgages and doesn't sell them--it was an arrangement we felt very comfortable with.

"It's all about keeping the first mortgage marketable"--absolutely. The bank/lender wants to give you the mortgage, get their origination and other fees, and then sell the mortgage so they no longer incur the cost of servicing the loan. The PMI helps them do that because they can market big mortgages for big homes to people who, in the pre-PMI days, would not have been able to get into their homes. It doesn't protect you at all. Do not confuse PMI with true mortgage insurance, which you obtain from an insurance company, and which will satisfy your mortgage in the case of your death. They are NOT the same animal.

 

[Patrick Larkin]

From this thread, I believe I will put the full 20% down but I'd have to do it in the 80-15-5 method. Since most of my cash is tied up in my current house, I'd have to wait for its sale to pay off the other 15%. So, I should only hold the 2nd mortgage for a few months.

Is there some mistake in my logic here? I avoid the PMI and still pay off the 2nd mortgage in the first 6 months.

 

[Angelo.M]

If there's a mistake in your logic, I don't see it. Good luck with your home purchase.

 

[TonyTone]

Patrick L.--seems like you've already decided on a course of action (which makes sense to me, BTW), but I'll give you my limited understanding on how a tax-advantage loan works. Basically, if you don't have enough down to reach the 80% LTV ratio and don't want to deal with second and/or third mortgages or PMI, you can request a tax-advantage loan. This loan is more or less the same as a typical conventional loan, except your loan is at a rate slightly higher than what you could have qualified for if you had put down 20%. The reason it's called a tax-advantage loan is that you can deduct the extra interest (compared to the amount of interest you pay on a lower rate) on your tax return. This may be a smart move for someone who's looking for another way to reduce his/her taxable income even further--you'd be surprised at how an extra thousand dollars (give or take a few hundred) of mortgage interest you'd wind up paying due to the higher rate can make a difference on your tax liability. Of course, YMMV as to how much of a benefit you'll get out of doing so.

It goes without saying that the tax-advantage loan isn't necessarily the best solution for someone trying to avoid PMI--from what I understand, getting such a loan is probably ideal for someone who doesn't want or can't afford to put a lot of money down, wants to avoid PMI, needs the additional tax write-off, and probably intends to hold onto the property for no more than about five years--or else plans to refinance at that time when his LTV ratio is below 80% and rates are lower than what he's currently getting on his tax-advantage loan. I went with a tax-advantage loan, and am currently in the process of refinancing a little over a year into my mortgage (going from mid-7 to low-6 rate--couldn't qualify for even lower rates 'cuz my salary was cut 10% and my wife isn't currently working); my LTV now is such that I won't need to bother with having to get another tax-advantage loan.

 

[Michael Silla]

Tonytone,

Agreed. I did a similar loan with my Credit Union. The tax advantages of doing so have been good and (unfortunately for me) I won't be able to refinance for another year and a half. Simply put, there is probably no way rates are going to stay this low for that long :frowning:

Michael.

 

[ken thompson]

Keep in mind that paying a higher rate on these "so called" tax advantage loans is simply that. Paying more interest. An extra thousand dollar interest deduction only equates to a $300 reduction to your tax liability if you are in the 30% bracket. Your still paying $700 too much.

 

[Bill Lucas]

No, PMI was created to make insurance companies money and to make it easier for a mortgage holder to foreclose

Wrong. PMI was created to protect the lenders' risk on low downpayment loans. If there was no PMI insurance there would be many homeowners who would still be renting or perhaps our country would have more veterans. The VA loan program allows a veteran to purchase a home with no money down.

BTW, the Deed of Trust is the document that allows the lender to foreclose. The Note is the security instrument and the Deed shows ownership.

 

[Angelo.M]

PMI was created to protect the lenders' risk on low downpayment loans. If there was no PMI insurance there would be many homeowners who would still be renting...

Absolutely correct.