How much money will I save on my mortgage by putting down 20%
April 11, 2007 12:44 PM   Subscribe

Should I buy a house now or wait to save a little more for a 20% downpayment?

I am very impatient to buy a house. I've been thinking about it for years and finally have gotten a real estate agent and started looking. I initially thought I would buy a house with no down payment or a low down payment. I have excellent credit and have already been pre-approved for a mortgage. I can totally afford the payment without putting 20% down, it will still only be 25% of my monthly income.

I have been looking since January --- and can't stand my apartment. My neighbors are incredibly loud, and my apartment is too cramped.

I just realized how much money I have saved and how close I am to having 20%. I have realized I will definitely have 20% in a four month time period, but that will be after the summer is over, after the bulk of houses have been put on the market.

Should I be patient and wait until I have 20% or just buy a house, and suck up the PMI and the higher interest rate? The mortgage amount will be $150,000. How much will I save by putting 20% down? Should I consider asking my grandparents to lend me some money?
posted by hazyspring to Work & Money (28 answers total) 11 users marked this as a favorite
If you only need four months, ask to borrow it if that's kosher with your family situation. It does make a huge difference at least for us - $200 a month plus the higher interest rate... no question. If you can beg, borrow or babysit, get that 20%. And even if you find a house right now that you like, you won't be closing on the loan for a month at least, so it's not like you need it this second. See if the seller will do a closing date in four months, if you don't want to borrow.
posted by orangemiles at 12:52 PM on April 11, 2007

If you get an 80/20 loan there won't be any PMI. Talk to a mortgage broker and see what your options are. I don't think 20% is a hard and fast rule like it used to be.
posted by electroboy at 12:55 PM on April 11, 2007

You may be interested in this story in yesterday's New York Times, which includes a calculator.
posted by Clyde Mnestra at 12:55 PM on April 11, 2007

but that will be after the summer is over, after the bulk of houses have been put on the market.

Actually, that might be a good time for you to buy - if some houses haven't sold, you might be able to find a good deal! Personally, I think you should wait - it's only a few more months. In the meantime, you can start packing and really getting in gear to move.

As for the money part - I'd wait till you have the 20%. We just bought a house and saved about $100.00 a month because we didn't need to take out mortgage insurance because we had the full 20%. $100.00 a month doesn't sound like a lot, but it adds up.

You might want to talk to your realtor. Ask him/her to run some numbers for you to see for yourself. But four months is not forever, and like I said, it gives you time to save that little bit extra and to start getting your ducks in order - packing, etc.
posted by Sassyfras at 12:55 PM on April 11, 2007

I bought with 5% down. I live in Canada, so I have what they call here a high ratio mortgage -- you are forced to get CHMC insurance on the loan. I'm still alive. Not paying rent feels good. If you can wait then wait, but you shouldn't feel bad about not waiting.

There are lots of other costs that come with buying, so you should make sure you are aware of all that. (Lawyer fees, land transfer taxes, etc.)
posted by chunking express at 12:59 PM on April 11, 2007

Keep in mind that PMI can be removed once you reach 20% on your loan (I believe this is a law) so even if you have to get it you'd only pay it for the 4 months or so until you reached the 20% figure. It still seems to me you should be able to work something out with the lender where you wouldn't need it if you're really that close to having 20% down. Perhaps you need to shop around a bit more and see what other lenders can offer you. Specifically tell them your situation and offer them the chance to sell you on something better.
posted by genial at 1:10 PM on April 11, 2007

While you may be able to lower your monthly payment with 20% down, there's also a lot to be said for having several thousand extra bucks around to play with, like for improvements on your new house or other investments. /devil's advocate
posted by wsg at 1:19 PM on April 11, 2007

I'm just a few months away from the 20% down payment myself. For the past six months or so, I've been going to open houses several times per month, getting a feel for what I wanted, what kinds of homes were in my price range, and what neighborhoods I liked best. When I came across a house that had everything I was looking for, in the exact neighborhood I wanted, at 20% below the going rate, I knew it was a good deal because of all the research I'd done and bid on it, last week. I feel OK about buying with just a 10% downpayment, but only because I really know what I'm getting into.

I'd wait, in your situation, especially if you live in the 80 percent of the U.S. where home prices are declining. Go to open houses in the mean time, get familiar with what you're looking for, and if you find a really good deal in the before you get to 20% jump on it.
posted by croutonsupafreak at 1:23 PM on April 11, 2007

Also consider this:

If you can't afford 20% down, but you can afford to do, say an 80/15/5 (where you put 5% down, and 15% on a second mortgage to avoid PMI) -- will you still have several thousand dollars left over to cover:
- Closing costs
- Tax costs (in Chicago for example you have to buy Tax Transfer Stamps that are expensive)
- Moving costs
- The cost of buying way way way way way more things that 50-dollar you to death up to at least a grand or so that you don't realize right now that you need (Home Depot will own your soul for a while because the practical thing to do is do painting and touch ups and fix things before you've moved in and put all of your possessions in the way of getting work done)...
- Enough still saved for emergency expenses afterward (car problems, trip to the hospital - normal life stuff unrelated to the new home)

You will also need enough of a balance in your account after putting 5% down and paying closing costs etc to fit certain financial criteria to get your mortgage.

If you can't afford to put 20% down, but you really want to buy soon, you could do the 80/15/5. Just be sure you'll still have enough left over to cover the above. That may mean having around $10-$15k left in your account after closing costs etc are covered. Moving is not cheap, and neither is Home Depot. These expenses add up faster than you realize.
posted by twiggy at 1:25 PM on April 11, 2007 [1 favorite]

I'm assuming you don't already have a prospective home picked out. So you might as well start looking now. There's no guarantee you'll find what you want before that 4 months elapses. And if you do find something you really like, you might as well get it, even if you wind up paying PMI for a few months. The right place is of incalculably greater importance than the burden of paying PMI.

Also, I'll second the idea of considering an 80/15/5 mortgage, and of keeping more spare cash on hand than you thought you would need.
posted by adamrice at 1:41 PM on April 11, 2007

Best answer: Make sure you ask specifically (get it in writing) if the PMI can be removed as soon as you reach 20% equity. My mortgage broker has some loans where it's 20% AND 2 years. So even if someone had 20% on day two of the loan, the borrrower would be stuck paying PMI for 2 years. What a raw deal. If the PMI definitely can be cancelled immediately, it could be worth it. Don't forget that PMI is deductible this year.

If you're that close, I'd go ahead and start shopping now anyway. It may take a while to find your dream house, and closing on a seller-occupied home can easily take 30-60 days (especially if they have to make your deal contingent on their new purchase). So you should have the last bit ready by the time it's needed.

However, talk yourself out of that feeling of urgency. Making an investment of this scale in a rush, because the neighbors are annoying etc, is something you'll come to regret.
posted by nakedcodemonkey at 1:43 PM on April 11, 2007 [1 favorite]

Don't buy at all right now, shit's hitting the fan. Wait for the fallout and get your house 100k cheaper than it's selling for now.
posted by afx114 at 1:44 PM on April 11, 2007

Here I was going to suggest an 80/10/10. The 10% you put on a second mortgage is usually a "line of credit" that you can pay off anytime you like, and is still there for emergencies ("oh my god! the roof!"or "um, honey? do you remember hearing that certain antibiotics might make birth control pills not work?") should that be necessary.

As a first time homebuyer, you should be aware that there is always something that comes up. In my case, the front awning fell off the house a few hours after closing; turns out we had a carpenter ant problem. A few months later we ended up spending about $3k on new windows. So I must reluctantly agree that you should think twice or even three times if you have "just barely enough money" to close.

As for the original question of "how much money can I save," you can easily find that out using the mortgage template that came with Excel. Plug in your interest rate, start with what you'd pay at 20% down. It will figure out all the compounding for you over the course of a standard 30 year mortgage (if you can only afford an ARM or other "creative financing" deal, sit on your hands and wait). Remember that figure. Now ask it to calculate your payments if you only put down 15%, 10%, or 5%. According to Century 21, "PMI costs vary from one mortgage insurance firm to another, but premiums usually run about 0.50 percent of the loan amount for the first year of the loan. Most PMI premiums are a bit lower for subsequent years. The first year's mortgage insurance premium is usually paid in advance at the closing." So add half a percent of the initial loan amount into your closing estimates.
posted by ilsa at 1:48 PM on April 11, 2007

P.S., its all of those exotic 80/20, 80/15/5, 0 down "creative" loans that have created all the said shit which is now hitting the said fan. At this point it's best to rent and stash cash away for a down payment. You'll be ready to snap up a nice place for cheap after the shakedown.
posted by afx114 at 1:49 PM on April 11, 2007

The headline at Money today was "Housing prices headed for historice drop". I've been of the opinion that housing prices have been headed for a drop for while. There's been a huge price run up and the gap between prices and rents is too big to sustain further entry by investors. Also, up till recently, people renewing their mortgages were seeing lower rates, but the people seeing mortgages renew now are renewing for around the same as 5 years ago. So they don't have more money to trade up. Hence market stagnation is inevitable. Throw in some deaths, divorces and transfers, and you'll have enough uncertainty to send the market down.

Now, if you can live with your home falling $20k or $100k in value and you don't think you'll have to sell for 10 years or what-have-you, it's not a bad idea to buy. However, when a market is headed downward, it's the people who bought with the least down who often end up in tough situations...especially if interest rates are higher when they renew.
posted by acoutu at 1:51 PM on April 11, 2007

Best answer: I'm mentioned this before in another askMe, but its relevant here too. My financial advisor told me that if you get a mortgage and come up with 20% downpayment _without_ taking a second loan (saving up beforehand) you will get a better interest rate on the mortgage. If you take an 80/20 or 80/10/10 you will get a higher interest rate on the 80% mortgage. Since that's your long term loan and where you will get hit with the interest costs, you want to keep the interest rate on that loan as low as you can get it.
posted by kookywon at 2:05 PM on April 11, 2007

If you really want to buy now, and have excellent credit and not too much debt, and are that close to having 20%, get yourself a credit card with an introductory rate of 0% for a year and charge it. There are some cards with introductory offers that let you do "balance transfers" by writing a check to anyone, even yourself, and still waive the normal cash advance fees. (Even if they won't waive the fee, most of the time it has a cap of $50 or $75, which, if you borrow $10K on the card, works out to only 0.5%-0.75%, which is still a lot cheaper than what you'd pay on a mortgage.)

In fact, if you can find a deal like that, you might put as much of your down payment onto it as you can, and leave any leftover cash in the bank drawing interest until you need to pay off the card.
posted by kindall at 2:07 PM on April 11, 2007

What twiggy said. PMI requires some work to get rid of. When you pay off the second mortgage, it's paid.

You say you are looking at a $ 150,000 loan? Look at your local market, not the headlines about nationwide trends. There has not been a huge price run up in every single town in the US.

Afx114, 100k cheaper? I think hazyspring lives somewhere with different housing prices where you live.
posted by yohko at 2:13 PM on April 11, 2007

The best thing I have heard on the question of a drop vs slow growth vs slow decline vs dogs&cats living together was on my local NPR station on Marketplace. Their expert discussed the situation, projections, etc, and closed with the statement that all speculation about what's going to happen is highly questionable - the last few years of growth were completely unprecedented, so an equally unprecedented new situation is impossible to rule out.

In short, be cautious about taking afx114's position (or one completely opposed to it) as a likely outcome. We all have some expectation but none of us can know.
posted by phearlez at 2:16 PM on April 11, 2007

Should I be patient and wait until I have 20% or just buy a house, and suck up the PMI and the higher interest rate?

My advice would be to wait. Don't buy a house under pressure; if you can't stand the apartment you're in now, move to a different one.

If you want to know how much you'll save by waiting: how much would the PMI be? And what would the interest rates be with and without the 20% down payment?

It's easy enough to do the calculations yourself. See this thread.
posted by russilwvong at 2:37 PM on April 11, 2007

I just realized that you said the mortgage amount would be $150k, not that the downpayment would be $150k. That means you're not in a really expensive market, where you have the potential to be upside-down by $200k if the market drops 20% or 40%. In that sort of scenario, you'd be down more like $35k or $70k. And, if you had to renew at a higher rate, it might only be a hundred or so more a month, not hundreds. Depending on your income level, you may be in a position to handle that, especially if you have an emergency fund.
posted by acoutu at 2:38 PM on April 11, 2007

Can we not debate the housing bubble here? yohko said it. If hazyspring is buying for < $200k and with a mortgage that's 25% of his/her income, it's not super-likely s/he's living in a place with a housing>
The only reason I'd think about temporary shifts in the house's value are because if the value of the house drops, it'll be harder to get it reappraised to prove that your equity = 20% and get PMI taken off. I think you have to show (Current value - what you owe)/(Current value) is > 20%. That plus what nakedcodemonkey said about finding out whether you could drop PMI as soon as that point is reached or later. That second appraisal is another expense you might try to skip by waiting or delaying.
posted by salvia at 2:43 PM on April 11, 2007

Response by poster: A few clarifications:
- I live in Buffalo. Depressed housing market, but it seems that properties in good condition are in demand. I don't believe there will be a steep drop in the market here, because things weren't that overpriced to begin with. But - maybe I'm wrong. I think things have leveled out though.
- I have been officially looking since January, even made an offer on one house, although I did not get it (multiple bids)

- 80/20 - Thanks to recent tax changes, PMI is now tax deductible. So, before it was beneficial to do the 80/20 because all the interest was tax deductible, now not necessarily. I crunched the numbers, and ended up cheaper for me to do 1 fixed rate mortgage. And kookywon is right. If I put 20% down, my interest rate will be lower than the 1st loan on an 80/20.

I love all of the responses. This is the sort of debate I've been having in my head.
posted by hazyspring at 2:46 PM on April 11, 2007

My experience, YMMV: I just sold my old house in January and bought a new house in February. I compared an 80/20 with an 80/10/10. In my case, I came out ahead with the 80/10/10. Since I only put 10% down, I used some of the cash that would have otherwise gone toward a down payment to pay points on the 80% loan -- essentially, buying a better interest rate. Those points will also be tax-deductible, which will be very helpful to me in several ways at this juncture. And I had enough cash left over to make some additional improvements to the new house.

The 80 is a fixed-rate 30-year loan; the 10 is a fixed-rate 15-year loan. I plan to be here until I retire -- I'll be 60 in 15 years and probably ready to downsize.
posted by Robert Angelo at 3:22 PM on April 11, 2007

Closing costs WILL be more expensive than whatever estimate you're given. Do you have a few extra thousand factored in for that?

What about moving expenses/home improvements/whatever and all the other little niggling things? It sounds like you're stretching yourself pretty thin to hit that down payment, and I'm not sure if that is inclusive of savings for other stuff.

I would say you can keep looking, but you can also get a lot more picky. If you find your dream home that justifies the PMI, then you can buy and if you don't, then you'll have more money next week than you had this week. Either situation is a win for you.
posted by willnot at 4:35 PM on April 11, 2007

Buffalo is apparently one of the top *gaining* markets. Doesn't look like you need to worry that much about a drop.
posted by Melinika at 4:39 PM on April 11, 2007

In addition to shopping for a house, start shopping for a mortgage. Join a credit union, if possible. When I had a loan with a typical mortgage lender, my mortgage was sold and re-sold, to financial institutions who were unpleasant and difficult to deal with. My credit union kept the processing in-house, maybe even the loan, and it has been much easier to deal with. Your lender should be able to help you figure out how to choose a loan, and whether to wait until you have 20%. When you have a lender ready to go, you'll be wayyyy better prepared in case you fall in love with a house.

The housing market and mortgage market are in a state of tremendous change and upheaval. House prices look like they will head down, and loans may get more expensive and difficult to get. No one can accurately predict any of this, and it is very location-specific.

When I got my 1st mortgage, I put everything in a spreadsheet - points, costs, rates, etc., and was able to choose my mortgage based on my needs. Good luck.
posted by theora55 at 6:16 PM on April 11, 2007

Here's an on-the-other hand...

Say you put that $30,000 in the house. Now it's saving you 6% or so by having that much less mortgage, and saving you $foo by avoiding PMI, and saving you $bar by lowering your interest rate.

On the other hand, you could throw that $30,000 into a mutual fund, which might easily earn more than you'd save by using it as a down payment. Mortgage interest is cheap, cheap money. With very real risk, too, though.

Also, don't you fucking dare by any of the houses we might want.
posted by ROU_Xenophobe at 9:20 PM on April 11, 2007

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