Does It make sense to put 5% more to reach 15% downpayment on a home purchase?

[adriaan]

Hey all,

I would like your help to understand if it makes financial sense to raise my house downpayment to 15% from 10%.

5% is $33,000. Loan interest rate %4,99

5% more Downpayment on the home​

Home monthly cost with 10% (Including Taxes, PMI, Insurance): 4,564.00
Home monthly cost with %15 (Including Taxes, PMI, Insurance): 4,296.00

The difference means PMI go from $170 to $81

Saving by months: 4,564.00 - 4,296.00 = 268 monthly

12 * 268 = 3216 yr in savings

SOFI High Yield Savings Account​

$33,000 * 0.042 = 1386 yr (First year)

Stock Market​

$33,000 * 0.08 = 2640 yr (First year)

Pro and Cons​

I understand there is more opportunity cost by having those 33k liquid, But I don't know how I can take advantage of that opportunity.

There is a bit more piece of mind on lower home cost. Also, I plan to use those extra 268 to pay towards the principal until I can lower the monthly cost below $4,000.

Let me know your point of view and feel free to share other investment options that could be worth looking at.

For reference, I max 401(k) each year and either option would allow me to save a bit for my brokerage account.

 

[grace302015]

@adriaan Personally If you have to ask then it’s usually not a good idea. Not trying to be harsh but I would suggest finding a less expensive house, as this would achieve many of your goals. You could even knock out PMI entirely, and have some left over for the miscellaneous repairs you will come across within two years.

 

[steephenkarar]

@adriaan Based on your post history: no, it does not make sense to put an extra 5% down, and it has nothing to do with opportunity cost.

You are a high earner, so you can easily eat up the extra monthly payment. The problem is you have only $110k for everything: down payment, closing costs, maintenance, personal emergency fund, furniture, etc. And you intend to buy a house worth over $600k.

• $65k for 10% down
• $20k closing costs
• $30k 6 month emergency fund

Already, you’re out of money.

Don’t lock up money that you probably will need very soon. I’d keep it in an HYSA because you have low liquidity.

This advice assumes you were honest in past posts and truly only have $110k outside retirement accounts.

(FYI, your estimated monthly costs seem incorrect for a $650k home in South FL. Do you have an insurance quote or are you just guessing based on Zillow/seller’s ads? Recently, those estimates are about half the actual cost in my experience.)

 

[adriaan]

@steephenkarar Thanks for your analysis.

The insurance quote is based on a new construction, I expect it to go higher next year. Property taxes are already including the value of the land and the property.

Insurance is about 2k for the first year.

Would your answer change if I disclose to have 5k (aside) and ~15k incoming 4 week after closing (guessing the closing happens on schedule), and 25k in November ?

 

[steephenkarar]

@adriaan It depends on the date of closing, but probably not. You will be low on cash, and I didn’t even include moving costs or furniture in that breakdown. It also assumes the house is in perfect condition after move in. If you close in October and that $25k in November is truly guaranteed… maybe, because you can put any unexpected costs on a credit card and pay it off before the balance is due, or you can deplete your emergency fund and immediately replenish it. I’d just accept the temporarily higher monthly payment and stay liquid. You can still pay extra to lower your principal even if you keep that cash on hand.

$2k/yr insurance seems low unless it’s interior only (i.e. HOA dues cover exterior insurance) and you’ve got decent wind mitigation (e.g. impact glass). I live a bit northeast of where you’re looking, but my lowest interior replacement cost insurance quote was $3.3k/yr and I was looking at homes ~$50k cheaper. That said, those weren’t new builds, so I was paying extra for things like aged roofs. Don’t take my insurance experience as a given, but you’re going to want quotes before you start treating your estimates as accurate. They might even be accurate, but I’d still want to be certain.

 

[may161965]

@steephenkarar Where the heck are you spending 20k on closing costs? Parents just bought a new place and spent about $5k-7k on closing.

 

[steephenkarar]

@may161965 Closing costs depend on the cost of the home as well as location. In Florida, a $660k home will probably cost $14k-$20k at closing, but it depends on the lender. Typically lenders will require 1 year of insurance paid at closing, and for the price OP is looking at, that alone is already exceeding the amount your parents paid if it’s a SFH. Even a cash buyer would likely pay ~$7k at closing on a house at that price.

However, since OP is considering a new build (hence the great rate), I bet closing costs will end up being lowered.

 

[may161965]

@steephenkarar I didn’t consider that location can impact cost.

Honestly I bet the house being new costs more up front. While technically not closing costs, a lot of new houses need additional landscaping, patios, shelving, and things.

 

[bulatcitly]

@adriaan Hmm, seems like more direct and certain savings from the higher down payment, but PMI doesn’t last forever, right? Only until you get to 20% equity? Do this over multiple years with an interest rate range to simulate the savings account rates and pick what you’re comfortable with.

 

[kelsey12]

@adriaan Do what you can do avoid the pmi. Even if your home increases by 20%, it should technically drop it off then, but it most likely won't because loans are structured so that you have it for at least 3 or 5 years in that scenario. You'd then have to refinance to get it off, but seeing as how rates may go higher, it'll be unlikely that you'd want to do that either. So aim for getting the pmi off. Talk to your loan officer

 

[adriaan]

@kelsey12 Do you know what other options could be possible on a conventional loan besides reaching 20-22% equity?

 

[kelsey12]

@adriaan Ask your loan officer. They can sometimes provide a slightly higher rate without pmi. That would still save you in the end if the pmi is a few hundred a month for nothing. At least your interest is deductible

 

[ovrclockd]

@adriaan A few points.

1. Many banks actually offer a lower loan interest rate with a higher downpayment (because less risk for them). I guess the extra interest rate in your location is called PMI. How much do you pay for 10% downpayment? and how much would you pay for 15% downpayment?
2. For how long is the loan interest rate fixed at 4.99%? Do you pay down the house to 0 for the period of the fixed interest rate? If not, you face the risk that in n years you need to re-finance the rest at higher interest rate.
3. 8% you plan to earn on the stock market, has a high volatility, the 4.99% you need to pay has 0 volatility for you - you just pay it. Thus, you need to invest long-term in stock market to average out the bad years.

 

[adriaan]

@ovrclockd Hey!

1. At 10% PMI $170 and $81 with 15%. The %4.99 won’t change with the down payments
2. 30yr fixed at %4,99

3.yes, Stock market would be better after 6 years of a steady %8 compound interest gain.

 

[ovrclockd]

@adriaan Which part of the 4,564.00 or 4,296.00 is a fixed amount that doesn't depend on the loan amount? Insurance, is it a house insurance? How much is it? Taxes - do they depend on the amount of the interest you pay?

 

[adriaan]

@ovrclockd Homeowner Insurance and property taxes are fixed.

• property taxes $1001 monthly
• home owner insurance $179 monthly

 

[ovrclockd]

@adriaan I'd see it as follow (over-simplified).

Option A. $594k outstanding (90% of $660k), monthly payment of $3742 (4564 - 1001 - 179) for 30y. Implied interest rate is 6.47%

Option B. $561k outstanding (85% of $660k), monthly payment of $3474 (4296 - 1001 -179), implied rate is 6.3%

A more nuanced calculation would be to consider the falling PMI as you pay off your debt (from 20% it's $0, right)? At the same time, you can probably subtract the interest payment from your taxes.

My conclusion. Your real loan interest rate is actually higher than 4.99%. Thus, it's more profitable for you to pay down $33k towards your mortgage.

 

[adriaan]

@ovrclockd Thanks for your analysis. It seems that you missed to subtract from the total cost the PMI which is $170 with 10% and $81 with %15

The principal and interest on 10% is 3214 and 3036 on %15.

 

[ovrclockd]

@adriaan No, I didn't miss to subtract PMI. It's part of the loan interest rate even if not on paper. In some countries, the banks are required by law to determine the interest rate considering all costs (like PMI).

 

[adriaan]

@ovrclockd Oh gotcha. Thanks for the clarification.