down payment question

[Anonymous]

I have a two part question for the experts out there.  I would like to buy a house later this year and am currently saving for a down payment.  I should have enough saved to put 20% down, but my problem is that 20% will leave me with little left in savings. I am nervous about not having enough money left over after I buy.  Hopefully I'm worrying about nothing and I can put 20% down and still have a decent cushion, but that depends on how nice of a house I want.

So my question is, should I put down the full 20% ?

If I don't put down 20% are there programs out there that will let me put down 10% or 15% without having to pay PMI or taking two loans?

Thanks for your input.

[pattycake]

Shane is definitely the expert, but I have talked with lenders who tell me that 10% is required, and with others who tell me that 3-5% is required with FHA or other loan programs. I personally plan to go with a loan that will let me go with no more than 10%, since I need to have the rest of my savings for emergencies. I think it depends on the lender. I will defer to the expert, Mr. Milne.

[ShanetheMortgageMan]

On conventional financing you are required to pay PMI on LTV's over 80%.  You can choose to pay PMI in the traditional sense, called BPMI (for borrower paid MI) or you can accept a slightly higher interest rate and opt for LPMI (lender paid MI), so it's just charged to you in the form of a higher interest rate.  Or you could just opt to do a combo loan, little higher rate on the 2nd but it's not a bad alternative since you can just concentrate on paying extra on the 2nd to eliminate it.

Personally I wouldn't put all 20% down and leave you with little to no reserves... I hate the feeling of being "house rich and cash poor", as it's much easier reaching into your checking account to get money out vs. applying for a home equity loan to get more of your equity out.  Plus with interest rates so low, I'd leverage as much of your cash as you feel comfortable with.

[Anonymous]

Thanks for the advice.  What do you mean by "leverage as much cash as you feel comfortable with."  I'm new to the process, I've never leveraged anything.

[Anonymous]

I'm guessing hes saying make sure to keep some in the bank for emergencies, or other things than putting that 20% down. Just because you have the 20% doesn't mean you need to put it all. You can always put more money in it later.  Just make sure your comfortable putting your 20% and still having a reserve in case you run into other problems (illness, etc).

Maybe go with 10%, and keep the other 10% for a bit. Later on if your comfortable put in the rest.

[ShanetheMortgageMan]

Leveraging is using the mortgage debt in order to keep your funds to invest in other vehicles that would produce greater returns.  The idea is to borrow at a rate of interest that is less than your investments rate of return... thus you are leveraging your position (being able to borrow more debt) to make more money.  If it turns out the rate of return on the other investment starts performing below-par, you could take the initial investment + the returns on that investment and use it to pay down your mortgage debt.

[Anonymous]

Thanks for the information.  I like the idea of keeping my cash and investing it, but I doubt I could get a high enough rate of return without taking too much risk for my comfort level.  The local credit union that I had planned on using currently lists the rate on a 30 year fixed mortgage at 6.25%.  If I could guarantee that rate of return on my cash I'd do it.

What I think I'll do is if I end up with low reserves, I'll take out a mortgage with two loans, one for 80% and the other for 10%, and put 10% down.  I'll keep my other 10 percent for a while and put in a money market account.

I can then build up my reserves for 3 to 6 months, until they get to a level that I feel safe with.  Once my reserves are large enough, I take the 10 percent out of the money market and pay off the second loan.

Does my thinking make sense?

[ShanetheMortgageMan]

It'd be a good idea to speak to your financial advisor to make sure you are fully set on all retirement plans, etc.  The 80/10/10 idea is a common one to avoid having to pay mortgage insurance, however the 2nd mortgage of the 80/10/10 combo usually has a higher interest rate, which makes getting 1 loan at 90% an alternative worth looking into... you'd compare the 80/10/10 payment vs. the 1 loan at 90% with PMI payment (you can also buy the PMI out for an upfront fee).  I like the idea of putting the remaining 10% in a money market account as well.

[Anonymous]

Thanks for the advice, I'll be sure to look into both the 80/10/10 mortgage and the 90 percent financing with PMI.  In the end I think it will come down to how much I spend on the house.