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Advice on Mortgage Type

2ManyMigraines posted 2/25/2019 12:34 PM

Just looking for opinions on what you would do. We will be moving out of state because of my DH's job once the kids are out of school. We will not be moving into our "forever home", just a big one that will accommodate about 7 of us (us, our 3 remaining children at home, and my parents) until they start moving out or my parents pass away. So I'm looking at 5-6 years before downsizing due to kids moving out.
Our realtor suggested rather than putting 20% (or more) down on the next house, we "keep" our money and just put down like 5% and pay PMI since we'll be moving again within a decade.
What do you think?
TIA!!
Sidenote: I'm not WANTING the children to move out and definitely don't want my parents to pass. Didn't intend for my post to sound that way!

WornDown posted 2/25/2019 14:01 PM

There are a lot of variables here that make it (probably) too difficult to give you a straight answer.

I'm guessing that the realtor's advice was to take the "extra" money that you aren't putting into a down payment on the house and invest it, right? Well, to see if that's a good idea, you need to figure out if you'll make more $ investing that putting it in the house.

So, here's how you do that: figure out how much investment income you would earn on the "extra" (on a yearly basis - you can do compound interest over multiple years, but I'm keeping it simple). So, say you have $50k to invest. Now you have to figure out how much return you would get. I'd pick 5% as a good number (I'm being conservative - in a good year you could get more than that, but it's also just for the short term (since you plan to move) so one bad year and you don't have a lot of time to make it up).

So, $20K * 5% = $2500.

Now, figure out how much not putting the down payment would "cost" you. Step one is the monthly PMI *12. Let's say the PMI is $60. that's $720.

That seems easy ($2500 > $720), but now you have to figure out how much extra interest you would be paying on that mortgage. I think here, you'll need to calculate the monthly payment and what the interest/principle payments are (see: amortization tables). Also check if you'll be paying higher interest on the 5% down vs 20% down (ie, 5% interest vs 3.5).

If the total (and you might even want to include the difference for a higher mortage payment (I'm assuming the 5% down would be more)) is greater that what you think you can get investing, then maybe it makes sense.

If this all seems really complicated, then you might be best off just putting the 20% down and paying your mortgage. (That's what I'd do - I don't like to play games with my living situation)

(I would definitely recommend a 30 year (or 15 year) fixed rate mortgage though. Interest rates are at historic lows - there's really only one way for them to go, and that's up. Don't get a ballon payment mortgage - that's how a lot of people went underwater in the great crash)

sisoon posted 2/25/2019 17:01 PM

Actually, interest rates are not historically low. They have been rising in recent years, and they were much lower 5-10 years ago. We refinanced 4 years ago at something like 3.75%, 30 year fixed rate. That's less than today's rate for a 15 year fixed or 5/1 adjustable in our area.

I'd stay away from paying PMI if I had the 20% down payment. It's a lot more expensive than it sounds. OTOH, if you think you can invest the extra 15% and get a higher return than the cost of the PMI, pay the PMI.

Also, if you're sure you'll be downsizing in 6 years, you'll save a bit by getting a 7/1 year loan with a balloon payment. If you sell in 6 years, you'll pay your mortgage off before the balloon payment is due.

little turtle posted 2/26/2019 08:40 AM

If you have the 20% to put down, I think you should do that. You'll save in PMI, you'll have a lower mortgage, and you should get the money back when you sell. But like WornDown said, there are so many variables, it's hard to know for sure without knowing more information.

It's also impossible to know when you'll be able to downsize for sure. You could be there for 10 years.

2ManyMigraines posted 2/26/2019 09:48 AM

Thank you for the replies! You've given me much to think about. I also do not like playing games with our living sitch, especially with so many people currently depending on us. I think we should go the safe route and pay the 20% down and avoid PMI. It'll also give me peace of mind keeping the monthly payment lower.

WornDown posted 2/26/2019 11:10 AM

Actually, interest rates are not historically low. They have been rising in recent years, and they were much lower 5-10 years ago. We refinanced 4 years ago at something like 3.75%, 30 year fixed rate. That's less than today's rate for a 15 year fixed or 5/1 adjustable in our area.

Depends on what your definition of "historic" is.

IMO, five years is not historic. 30-50 is. Or 15-30 which is what most loans are for.

Overall interest rates have been abnormally low over the last decade when compared to the last 100+ years.

My point is, that today's 4.3% rate (average 30-yr fixed) is not that much different from the truly low 3.75 (or 3.5 even) of a few years ago as compared to 6-8% which has been the "norm."

I would say it is much more likely that interest rates are going to higher than today than lower.

Also, if you're sure you'll be downsizing in 6 years, you'll save a bit by getting a 7/1 year loan with a balloon payment. If you sell in 6 years, you'll pay your mortgage off before the balloon payment is due.

I really suggest people avoid these. You get a low teaser interest rate/payment, but then in x years you have to refinance.

If the interest rates are higher then - and as I pointed out above that's a pretty darn good bet, you will suddenly be looking at a much higher mortgage payment.

That is exactly how people ended up underwater during the 2006-2009 crash.

We may THINK we'll be moving, but we never really know what life will throw at us in the next few years. If nothing else, my whole experience with infidelity has taught me that.

[This message edited by WornDown at 11:17 AM, February 26th (Tuesday)]

secondtime posted 2/26/2019 11:32 AM

Is renting an option?

If you are only staying put for 5ish years, I don't know that I would buy. You won't be getting a ton of equity in the house in that time. You also could be in a position where you lose money on fees, closing costs, etc.

Plus, what happens if there's a market downturn?

A recession is coming. They always do. Of course we don't know how it will hit, but it will.

Also, are saying that kids your kids are completely unwelcome in the home after they turn 18? Or are you intending to buy a house over 3000 sq feet?

Even my super achiever BIL ended up needing to move back in with my ILs a few times for a month or two when he was inbetween things (like prepping for the peace corps or teaching english abroad).

We're a family of 6 in 1800 sq feet, traditional 70s style two floor house. It's big enough to accommodate our kids AND running a part time business out of our house. But, it's not so big that we'll need to downsize when a few of them move out.

ETA: it could even get more crowded. I have 14 years between my youngest and oldest. The baby will likely be an aunt, and we'll likely be grandparents before she turns 18.


[This message edited by secondtime at 11:34 AM, February 26th (Tuesday)]

2ManyMigraines posted 2/26/2019 13:33 PM

secondtime,

We thought about renting last year. But the payment would easily be over $400 or more per month than a mortgage would. Our children would be welcome to move back home if they needed to. My parents are in their 80s so not sure how long we'll have them with us. We are looking at homes around the 3000 sq ft size so that we will have space to spread out some. I know how my mother is. I'm planning to find somewhere my children will mostly have the 2nd floor to themselves. My parents cannot maneuver stairs very well.

CaptainRogers posted 2/26/2019 23:16 PM

Thoroughly random piece of information regarding recessions. Hiatorically speaking, the best leading indicator for a recession is what is called a "yield inversion". Yield inversion is when the rate for the 10-year Treasury note and the 2-year Treasury note invert. Currently, the 10-year is 2.64% and the 2-year is 2.5%. When the yields invert (the 2-year yields higher than the 10-year), that signals a recession start in 6-24 months.

That isn't the only indicator, but it is one of the best.

2ManyMigraines posted 2/27/2019 10:24 AM

CaptainRogers,

Interesting! Good to know!

barcher144 posted 2/27/2019 10:48 AM

I think we should go the safe route and pay the 20% down and avoid PMI.

My question is... can you afford to do what is best in the long-term? Or do you have short-term financial needs that require cash?

By putting down 20%, you avoid PMI... which is an added expense. In return, you free up more cash for whatever you want to do.

My guess is that your real estate agent is trying to get you to put down a smaller down payment so that you can buy a bigger house, which means a larger commission for him/her.

A lot of it is about personality. I absolutely hate paying interest and PMI... so even if I *know* that I need the cash, I hate doing that.

TwiceWounded posted 2/27/2019 10:57 AM

While renting may seem appealing, you'd have to look into the tax implications. If you sell your home but don't use the proceeds to buy another house within a certain amount of time (1 year? maybe 3 years? you'll have to pay income tax on it. That can be huge, depending on how much equity you have.

And I also hate paying PMI. It's literally throwing money away.

The only 2 reasons I see for going with a small down payment instead of a big one, is if it blows all your savings so you have no emergency fund, or you think you can earn more investing the down payment elsewhere than you'd be paying in mortgage interest.

2ManyMigraines posted 2/27/2019 11:16 AM

barcher,

The real estate agent who suggested the smaller down payment is the one who will be listing our home to sell. He won't be on the receiving end of our buying home. He recently bought a home himself (he's young), and doesn't mind paying PMI so he could avoid "giving the bank the huge down payment" so they wouldn't have the bulk of his money.
I really do not want to pay PMI. I'd rather put the large chunk down, and have it returned to us once we sell again down the road. I'm very glad to have the suggestions and advice. This will only be the second home we've ever bought. And the first is the one we had built.

barcher144 posted 2/27/2019 12:24 PM

I really do not want to pay PMI. I'd rather put the large chunk down, and have it returned to us once we sell again down the road.

This is YOUR answer. You do you, you know?

Good luck with everything.

WornDown posted 2/27/2019 12:25 PM

If you sell your home but don't use the proceeds to buy another house within a certain amount of time (1 year? maybe 3 years? you'll have to pay income tax on it. That can be huge, depending on how much equity you have.

That's not completely true.

If you sell your house you get the first $250k ($500k for marrieds) of the proceeds (capital gains = sale price - purchase price - improvements) tax free. You just have had to have lived in it for two out of the last 5 years.

In return, you free up more cash for whatever you want to do.

Not really. That's basically a loan you are taking out to do "whatever you want to do."

stubbornft posted 2/28/2019 13:01 PM

doesn't mind paying PMI so he could avoid "giving the bank the huge down payment" so they wouldn't have the bulk of his money.

The down payment is your money put into your home. PMI is for the bank ONLY. It is insurance for them ONLY and does nothing good for you.

I would go with the no PMI option personally and as far as the proceeds from your current home having to be used for a new home - talk to a tax professional about that but I believe WornDown is correct.

2ManyMigraines posted 3/1/2019 13:23 PM

Thanks, stubborn. We've decided to avoid the PMI. The properties and taxes over there are higher than they are in our state, so the proceeds from our home will go into our new house

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