@NC_Mtg_Loaner wrote:
The answer to your question really lies within your own comfort level/risk tolerance zone.
Any money you "pre-pay" or use as a down payment > the Minimum Required Investment for your loan program of choice really is only generating a rate of return that's likely to be less than 4% or whatever the 'note rate' is on your mortgage loan.
Yes, when you increase your down payment or MRI from 5% to 10% or 10% to 15% or 15% to 18% or even 20% your monthly MI is likely to decrease and you are likely to be required to pay it for a shorter period of time.
However, the trade off here is in the Opportunity cost of spending/investing that money elsewhere where it could be generating a higher rate of return. Let's say you have an extra $10,000 for a down payment. Let's say you bought this house last year and used this $10k for the extra money for a down payment. If your interest rate was 4% fixed, this $10k would've saved you $40 per month ($480 per year) but if you had it invested in the stock market in a growth and income fund, that $10k would've earned you roughly $2500.
Which would you prefer down the road? Lower house payment or higher savings?
There are ways around this.
-Use a 401k loan. You pay yourself back the interest of 3-4%. It doesn't count against DTI if you have one out. You can only take out however up to 50% of your loan balance at any one time up to a max of 50,000.
-Take out a margin loan from your brokerage. The problem here is you must maintain at least 50% equity in your account and the margin loan has to be tied to specific securities (e.g. apple stock). To be safe usually figure 30% of your brokerage balance.
-Put an amount worth 30% of the DP and put it into a single premium whole life insurance policy. Depending on the issuer you can pull 70-90% of the value out immediately and the full premium value will grow at a compouned 4-7% interest a year.
So yes I wouldn't recommend someone blindly saving up 35k and then depositing it as a down payment. Depending on the lender 10% might be sufficient for a conventional no PMI loan which is significant if you had already negotiated down the price of the home by 5%. Even that 10% could be borrowed from a source rather than directly out of savings.
Official travel point totals as of 12/26/23 (1,382,693 Total Points)
Chase Ultimate Rewards 661,525 | IHG One Rewards 144,443 | Hilton Honors 143,801 | AMEX Membership Rewards 102,729 | World of Hyatt 90,413 | Marriott Bonvoy 65,343 | Citi Thank You 62,712 | Wells Fargo Rewards 33,652 | Southwest Rapid Rewards 28,105 | United MileagePlus 13,316 | British Airways Avios 12,333 | Jet Blue TrueBlue 11,661 | NASA Platinum Rewards 1,883 | AA Advantage 1,744 | Navy Federal Rewards 792 | Delta Sky Miles 175 | Virgin Atlantic Virgin Points 100 | Lowes Business Rewards 6,992 ($69.92) | Amazon Rewards 475 ($4.75) | Discover CB 499 ($4.99)
