I've got two fairly attractive options on the table for financing the purchase of a house, and I can't quite figure out how to determine which is ultimately a better deal financially. Purchase price is approximately $200k. I have about $11k in my checking account. Seller will pay $5k in closing costs (which is for all intents and purposes, all the closing costs). I'm going to do a 30 year mortgage.
I could do a conventional Fannie-Mae-backed loan with a leading private mortgage company, with 5% down, a nominal interest rate of 3.75%, and APR of about 4.1%, with PMI of about $100/month.
Or I could do a loan with a local credit union, with 0% down, a nominal interest rate of 4.25%, an APR of about 4.6%, with PMI of about $115/month.
PMI in both cases would be cancellable as soon as LTV>80%. The credit union also offers an option with lender-paid PMI with an APR of about 4.8 for the life of the loan, but I don't want that, because I want to eventually cancel the PMI. There's also a 3% down option for first-time buyers with no PMI that I could use if I applied jointly with my wife, but for some unknown reason, it has an APR over 5%, which significantly higher interest than the 0% option, so I don't know why anyone would ever choose it (and by the way, you can't do the 0% option and actually put 3% down; you have to actually put no money down; it's all quite peculiar to me).
Obviously, I would save money on mortgage interest if I put 5% down, in that the principal balance would be slightly smaller, my rate would be a bit lower, more of my payments would go toward equity, and I would start out with almost enough equity to pay a realtor's commission if I needed to sell on short notice for any reason.
On the other hand, 5% is almost all my cash on hand, so I'd have to borrow in the event of an emerency, which could put me back in a situation that I was pretty proud to get out of (2 years ago, I had over $15k in credit card debt and a 650 FICO; no I have no credit card debt and a FICO that occasionally hits 800). Plus, the difference in monthly payments isn't really that much (less than $100/mo. difference). Mortgage interest is tax deductible, and I could put a portion of my cash into my 401(k), and get instant returns. Also, if I keep my current money in a cash-convertible form, I could use it to write a check at the closing table if I needed to unload for some unforeseen reason.
I'm actually leaning to doing a 0% down deal, because I like having money in the bank. But the risk-averse ghosts of my anti-debt grandparents are tugging at my conscience and telling me that more mortgage is always bad, no matter what. I'm not financially savvy enough to run an expected future value computation over various time frames to figure out which deal is better. Anyone want to take a shot at that for me?!
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