Which mortgage is best of these three?

April 14, 2008 10:27 AM

Loan decisions for first time home buyer. Being offered three different flavors of fixed 30 year loans. Which is best?! (I know, it depends...)

My wife and I are buying our first house. I'm talking to a mortgage banker through the real estate company I'm working with. We're talking about three different loans right now, all are pretty decent IMO. I have good credit (750) and make around 80k/year and my total debt is less than 200/month.

It's a 238k house and I can pay up to 20k down.

The options:
1) 6.00% rate, 5% down, no PMI, 1.4k up front MIP
2) 5.75% rate, 5% down, 147/month PMI, 1.4k up front MIP
3) 5.50% rate, 3% down, 96/month PMI, 3.5k up front MIP (FHA loan)

All other costs are pretty much equal.

My intuition tells me that the "best" rate would depend on how long we stay in house and how fast we can accumulate 20% equity (which strongly depends on the housing market).

Any words of wisdom or advice from homeowners? Any fancy PMI-to-time-in-home-calculators? Thanks in advance!

posted by wolfkult to home & garden (16 comments total)

It seems to me that the third one is best. You put the least money down and have the lowest interest rate, so you should pay less over the long term. But you can work out the math yourself, using Karl's Mortgage Calculator.
posted by procrastination at 10:36 AM on April 14, 2008

Ok, I quickly ran some numbers, and here is what I came up with:

Mortgage 1

11900 + 1400 = 13300 down
1355.58 monthly

Mortgage 2

11900 + 1400 = 13300 down
1283.77 + 147 = 1430 monthly

Mortgage 3

7140 + 3500 = 10640 down
1239.31 + 96 = 1335.31 monthly

I would go for mortgage 3 for sure. It has the lowest down payment, and the lowest monthly payment. You can always put more down if you want, though I am not sure why you are worried about getting 20% equity, unless you plan to refinance at that point and think you can get a much lower rate. I don't expect that you will do significantly better than 5%, though, and it is best to plan to be able to afford the mortgage you have in case rates are higher later, or something else happens.
posted by procrastination at 10:45 AM on April 14, 2008

Keep in mind that with an FHA loan, the appraisal is key to the loan even being approved. They use their own appraisers, so you need to allow plenty of time in escrow. With our first house, the appraisal didn't arrive to the mortgage company until the morning of closing and things were quite tense for a while!
posted by Sweetie Darling at 10:47 AM on April 14, 2008

Thanks for that analysis!

Once I have 20% equity, from my limited understanding, I don't have to pay PMI. I thought that would factor in heavily but perhaps it doesn't.
posted by wolfkult at 10:49 AM on April 14, 2008

procrastination: I think wolfkult is probably talking about not paying PMI when he reaches 20% equity. There's no PMI on the first loan, so the first loan would be the cheapest monthly payment in the short term unless you could pay your PMI in a lump sum and either pay outright or have it bundled into your loan, I understand that's sometimes possible.
posted by robinpME at 10:50 AM on April 14, 2008

How long do you see yourself being in the home? If you're going to be there for 20 years then I would say #3. If you are going to be there for 5-10 years, avoid the PMI and go with #1.
posted by fusinski at 10:53 AM on April 14, 2008

Excellent question fusinski and a very hard one. Imagining 20 years or even 5 years ahead for me is very tough! I would think we'd be in this house for at least 10 years barring any catastrophe (me losing my job and not being able to find a similar pay job which, in the area I'm in, is unlikely).

Realistically I think it would take a while to build up enough for 20% equity, maybe 4-5 years.
posted by wolfkult at 11:02 AM on April 14, 2008

Oh, I forgot about dropping the PMI. I don't know how getting that dropped works. Would you need another appraisal?

And ack! I ran the numbers with the wrong interest rates (I used 5% for mortgage 3). Here are some revised numbers with a couple of extra options:

Mortgage 1 - 6% rate, 5% down

11900 + 1400 = 13300 down
$226,100 principal
1355.58 monthly

Mortgage 2 - 5.75% rate, 5% down

11900 + 1400 = 13300 down
$226,100 principal
1319.46 + 147 = 1466.46 monthly

Mortgage 3 - 5.5% rate, 3% down

7140 + 3500 = 10640 down
$230,860 principal
1310.31 + 96 = 1406.31 monthly

Mortgage 3 with large downpayment - 5.5% rate

7140 + 3500 = 10640 down
pay $9,360 more down for 20K total
$221,500 principal
1257.65 + 96 = 1353.65 monthly
Total interest over 30 years $231,256

Mortgage 1 with larger downpayment - 6% rate

11900 + 1400 = 13300 down
Pay $6,700 more down for 20K total
$219,400 principal
1315.41 monthly
Total interest over 30 years $202,257

So now, if I didn't screw these up, it seems that Mortgage 1 is the best. I am a little surprised, but using the $2,100 you would have to pay to get 5.5% to pay down the principal and getting 6% works out in the long term. Also, if you sell before the end of the loan, you should have a higher equity. You wouldn't get to lower your mortgage payments in a few years, though.

I would ask your mortgage broker for a similar analysis. They should be more practiced at it than me, and you can get a pro to check this.
posted by procrastination at 11:11 AM on April 14, 2008

Realistically I think it would take a while to build up enough for 20% equity, maybe 4-5 years.

Given the payment schedule of a mortgage, doesn't this occur much later, like around year 10?
posted by mkultra at 11:17 AM on April 14, 2008

Look up an amortization table and you'll be able to tell with relative ease.
posted by fusinski at 11:20 AM on April 14, 2008

Thanks again procrastination!

Mkultra>10 years if I don't add extra payments. I think I'll likely be able to pay up to an extra 1k a month on the mortgage (using my employee stock purchase plan money), if that is the smart thing to do (a lot of research on my part is needed I suppose). I guess it's a good starting point on calculating the effect of PMI though, to calculate how long I'd be paying PMI if no extra payments and a flat house-value.
posted by wolfkult at 11:22 AM on April 14, 2008

Assuming the value of the house stays constant (so you stop paying PMI once you have 20% equity relative to the current value), loan 3 is indeed the best choice over 30 years. Over shorter time periods, loan 1 could be better. Loan 2 is always more expensive than loan 1, with the same amount down, so there is no reason to consider loan 2. I've done some calculations: loan 1 is better over the first 188 months (more than 15 years), until loan 3 becomes cheaper (and ends up about $7000 cheaper after 30 years). Over 5 years, loan 1 is about $3500 cheaper than loan 3.

I've ignored inflation and I haven't made any allowance for the lower down payment on loan 3. If you were to pay the same 5% down payment on loan 3 as well, it would only take about 11.5 years for loan 3 to become cheaper than loan 1.

I used this amortization calculator to make this spreadsheet, which, if you email me, I'll set up so that you can do what you like with it (for instance, model the effects of extra payments or use a rough time value for money, which will make loan 3 slightly more attractive due to the lower down payment).
posted by ssg at 11:51 AM on April 14, 2008

I would go with option 1 personally. No mi and the cheapest payment by $50. Also, the upfront mi isn't always out of pocket like the down payment as it can be a seller paid closing cost or off-set by a tax credit.
posted by curlyelk at 12:00 PM on April 14, 2008

OK, now after reading all these answers I understand the jargon better and see I was misreading the information I have!

Again...
The options:
1) 6.00% rate, 5% down, no PMI, NO MIP
2) 5.75% rate, 5% down, 147/month PMI, NO MIP
3) 5.50% rate, 3% down, 96/month PMI, 3.5k up front MIP added onto principal so not really "up front" (FHA loan)


Most, if not all, of the discussion doesn't change though...
posted by wolfkult at 1:06 PM on April 14, 2008

With your updated info, loan 3 is even less appealing: it takes about 17.5 years for the cost of loan 3 to be less than the cost of loan 1, though your down payment is now ~$5000 less for loan 3. I updated the spreadsheet with your information.
posted by ssg at 1:18 PM on April 14, 2008

Thanks again ssg. I just sent you an email.
posted by wolfkult at 1:38 PM on April 14, 2008