Question

With mortgage rates being at or close to 3%, what is the value of putting 20% down versus doing the minimum of a conventional loan at 5%? I have enough to put 20% down on a home I’m looking at, but am curious if having the extra cash to invest in the market after putting down 5% ultimately outweighs the higher monthly payments I would have.  

Answer 1

When I refi’d in December, (rates have changed, concepts might not have) I had 20% + equity either way. I could get a conventional at 3. 8% and avoid pmi or go FHA at 2. 99% with . 8% pmi for 11 years then it drops off and I am effectively 2. 99% for the rest of the loan. Seemed easy enough math to me to take the pmi until it drops off. At either of those rates, I feel zero incentive to throw an extra dime at the mortgage. I would rather invest it, that is not a hard benchmark to beat over the life of the loan. The part that I relate to you would be the benchmark, how would you deploy the extra cash vs the cost of mortgage + pmi which would be for the life of your loan.  

Comments

Thanks, that’s helpful. Most of the cash I’d keep on hand I would invest/keep in investments. Also, I figure it might be wise to stay more liquid considering We’re in the middle of a pandemic and not sure how it will all unfold.  

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There is value to liquidity, even if your investment returns match your mortgage rate there is certainly still value to having it completely liquid. Keep in mind over a 15-30 year time horizon, your mortgage rate is fixed at what you lock in at vs compounding returns on the investment side. Comparing a realistic worst case 5. 5-6% return on your cash vs a 4% net rate on the mortgage. There is a big difference from the compounding gains when you get 15-20-30 years in and you are still paying 4% interest on a diminishing loan.  

Answer 2

Can you avoid PMI with the loan you're taking?  

Answer 3

I would do what it takes to avoid PMI

Answer 4

I think I’d have to pay PMI, unless there is way to avoid that and not have to pay 20%? Assuming I can’t avoid it, the monthly payment would be $500 more at 5% down versus 20%. Paying only 5% would free up $60k in extra cash now. So I guess the question is if that $60k is worth more by investing it versus having the lower monthly payments until I hit 20 percent in equity.  

Answer 5

Some banks now requiring 20% and excellent credit after the downturn ://nbcnews. com/. /why-it-s-suddenly-more-difficult-get.  

Answer 6

Some credit unions have loans that don’t require PMI-that’s the only way I’ve heard to avoid PMI without the 20% down. One other thing I feel like I was offered was to get a pre-pay discount on PMI if you pay at closing-you’d need a pretty strong guarantee that you’d be in the house long enough and not re-fi I would think for that to ever be a possibility.  

Answer 7

As you can clearly see from the comments, there are a lot of options out there, shop it around. When I bought my place, I needed less than 5% down, and avoided pmi!  

Comments

How did you do that? I figured it was basically necessary to put down 20 percent to avoid it but now it seems that’s not always true.  

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Not always nope :) the bank I went through had a special program in place. In fact the bank I work out of has a similar program. It's not typically advertised so you have to speak to a few different MLOs and see what they have to offer

Answer 8

PMI is the biggest factor. You'll have to re-calculate an effective interest rate adding PMI on to actual interest expense if you go 5% down to see if you still think it is worth it.  

Answer 9

The math says to put as little down and make the loan as long as possible and invest the rest. I personally paid off my home when i turned 30. Which is not the best math move.  

Comments

@capri man u must not live in California haha

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Nope, i live in austin texas.  

Answer 10

This is a good question, I’m also researching on this. I can put up to 50-60 % down payment. However, I want to know same as you that if it worthy to put as much in down payment and then start investing the remaining difference in mortgage from day 1. Ultimately, the thing that matters is if u r not putting much dollars in down payment, all of those remaining dollars must go to the investment from day 1. If it keeps sitting in bank accounts, then it would be beneficial to put them in down payment.  

Answer 11

Not sure if your house needs work at all. If it does you can force equity and get that PMI to drop sooner. Whatever works for your numbers though. Is this a rental or for a primary residence?