What is better: PMI or 80/10 mortgage?

19 years ago

Hello everyone again.

I was wondering, is there a rule of thumb as to what is more prefered when taking out a mortgage? We will be buying our first house spring/summer of 2007 and will be putting down about 10%.

So what should we consider before deciding on the mortgage? We will be taking a fixed rate 30yr, and have no debt other then student loans. By next fall will will not have any more car payment either.

Thanks in advance,

Skrepka

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Comments (10)

rich69b
19 years ago
Skrepka, I don't have the answer for you, but try posting this on Home Buying and Selling forum. I'm sure you'll get lots of responses.
jules8429
19 years ago
This really depends on your financial situation. If the interest rate is favorable and you can afford to pay the HEQ loan off fairly quickly with no penalty then it will probably be cheaper than PMI. In addition, unless you are in a very high tax bracket or do not itemize your return, interest on that second loan may be tax deductible therefore lowering actual net amount paid. We took a HEQ out when we bought a new home last spring to avoid PMI. We are paying extra on it each month and should have it paid in about 5 years versus the 8-10 years the average home owner pays PMI. Whether this is the route you need to take is based on your individual factors. I suggest you go to some of the banking websites such as bankrate.com or cnnmoney. I found these invaluable resources when contemplating my own situation.
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I would investigate the PMI payment and rate separated further. Even if you cannot afford the 20% down now, you may have enough equity in a few years to request a cancellation of the PMI (which may cost you an appraisal but not much else). However, if your PMI is worked into an increased interest rate, then a few years down the road when you have that equity, you would have to refinance to get the lower rate which will cost you a bunch in closing costs.
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The idea of front loaded interest on mortgages is a bit of a misconception, while you pay more interest in the early years that is only because you owe more money (If you have a 3.9% mortgage then you pay 3.9%/12 on the outstanding balance you owe each month). While that may sound pertinent, the discussion is really about effective interest versus compounding interest. As you pay on your principle you pay less interest, so over time the interest charges are smaller because your principle is smaller. While on an investment you start with a principle and if left alone for some period of time the interest continues adding to the principle and therefore pays more interest. This discussion is largely around the idea of people who have some income coming in and some ability to make payments. While, I could note that guaranteed payment annuities are about equal to house payments, they are no more liquid than houses so not really an investment that is better than a house. In the end, we are discussing people who want to be done with the headache of a mortgage and not people who simply don't have the income to continue paying a mortgage. Edit: It is also important to remember that a 15 year mortgage doesn't mean you have to make 15 years of payments. Making even a few years of payments before liquidating the investments to pay off the balance will typically result in gains. I think a lot of people focus too much on the stress of coming up with the money for monthly payments and forget that any time you get tired of stressing over payments, you can simply liquidate your investment and pay off the loan. While I have said the same thing jn3344 has many times, I have a completely different conclusion. When you have a paid off house and little money in the bank you have no options for dealing with uncertainty. Cash gives you options, the farther you get from cash the less options you have, and nothing is farther from cash than a house. Think of it this way. My father was just this week presented with a treatment option for a medical condition that was not covered by Medicare, the time sensitive treatment was going to cost $35,000, but it would greatly improve his quality of life. What allowed my father to make that decision was having access to $35,000, if he paid for his house outright and didn't have any money then he couldn't make that decision. Now suppose spending this $35,000 means my father will not be able to continue paying his mortgage and will have to move out of his house into a smaller apartment. I feel confident he will tell you walking around his smaller apartment beats not being able to walk around his bigger house. Edit: Many people have a false sense of security from a home. The only real security a paid off home provides is the equity (the access to cash). Homes are fairly inefficient domiciles, the taxes, maintenance and less efficient utilities minimize any real savings over renting. The path to homeless has nothing to do with a paid off house and a lot to do with not enough cash.
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hrajotte
19 years ago
PMI, in my opinion, is never better. It is a ripoff, and does not insure YOU against anything. A mortgage w/PMI should only be a last resort, and I admit such a mortgage may be better than renting for some people.
When interviewing lenders, ask them how you can avoid PMI. That always worked for me!
joyfulguy
19 years ago
If this is mortgage insurance that you're talking about, please remember that the amount being insured is the decreasing value still owing on the mortgage. And the payee is the lender.

Many people in such a situation have several people dependent on them for ongoing income, which disappears if they die.

Which means that the family has need of assets, as well.

So they choose to arrange their own life insurance (usually term, to be at higher values in the earlier years when the need is greatest, and rates lowest), almost always for a larger amount than the original amount owing to the mortgage lender.

The amount of the insurance stays constant throughout the term of coverage - which means that a decreasing amount would fully retire the mortgage, if the survivor chooses, leaving an increasing residue for the surviving family. The amount of coverage can be adjusted at the end of the term, as desired.

And the payee is the surviving owner of the home.

Even worse than possible death is the possibility of disability, as it happens more frequently. And if a major breadwinner (or stay-at-home-parent) should become disabled, the person with the disability is one more mouth to feed, and may have medical/rehab costs, as well.

It would be wise to carry some disability insurance as well, I think.

Just some ideas that you may wish to consider.

ole joyful
bushleague
19 years ago
I think that a 30 year is a waste of money perhaps look at a 20 year fixed, it will have a lower APR and is only a few more dollars per month. Look at the amortization charts on bankrate.com.
happycthulhu
19 years ago
I got my loan through Regions Bank, and they still have the deal that I got.
100% over 30 years with no PMI.
It's a special that they've had for at least the last 2 years.
My intrest was really low as well.
good luck
dave_donhoff
19 years ago
Hi bushleague,

I think that a 30 year is a waste of money perhaps look at a 20 year fixed, it will have a lower APR and is only a few more dollars per month.

Wow! A 20 yr is an even HEAVIER waste of good money! It ends up devouring more good investable principle far faster than a 30 year term, and offers extremely little discount in return.

About the best thing to say about a 20 yr term is that it forces irresponsible people to send their money back to the bank, at the threat of losing their home if they don't.

Happy New Year!!!
Dave Donhoff
Strategic Equity & Mortgage Planner
bushleague
19 years ago
Okay Dave we all have different investing styles, let's hear
yours before I buy this next foreclosure since the young couples' 30 ARM turned into a 12.75% APR nightmare! When you're finished I'll sit you down and show you some real numbers, how they work for some, why they cannot work for others (the bulk of us).
steve_o
19 years ago
Not that I have a dog in this fight, but, bushleague, an ARM is a whole different deal. Dave is talking about fixed-rate mortgages. You know there's a difference. You also know there are people who get in over their heads regardless of the interest rate.
dave_donhoff
19 years ago
Bushleague,

You mentioned nothing about "investing styles." You specifically said a 30 year term wastes LESS money than a 20 year term. You even ACKNOWLEDGE that a 20 year term accelerates the amortization, reducing your working funds faster, and trapping them within the risk of the real estate itself.

THAT is what I challenge!

So... where are your numbers otherwise?

Dave Donhoff
Strategic Equity & Mortgage Planner

What is better: PMI or 80/10 mortgage?

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