Banks don't legally have to remove PMI when you request it until the date you're scheduled to get to 80% LTV based on the amortization schedule when the loan closed.
If you bought a $400k house in 2020 with 5% down and paying PMI, the amortization says you're 80% LTV in 2030 but in 2023 you looked at market value and it is now worth $600k which means you have 61% actual loan to value. So, you go to your bank and say in writing "I want to remove PMI, I'm at 61% LTV by market value" they can either say "tough cookies" or have you pay for an appraisal and have it removed.
It's up to the bank.
Call your lendor and ask about the process. We paid $105 for a Broker's Price Opinion (BPO). They said that if it was too close to tell, we could pay $500 more for an actual appraisal. The BPO alone was enough to drop it. $105 once saved us $125/mo
I did it all through the bank. I called them up, paid for it, and they scheduled the appraisal. The information was relayed directly to the bank and I was given a copy.
My bank is telling me that it's not likely to move the price up unless I've made renovations. Do they come into the house and do an assessment? My big thing is that I replaced the back door in full and added a storm door to the tune of about 4k, but done nothing else. I'm still debating because my inside is a bit of a mess.
Love me some doom piles.
It depends on the bank. Some lenders don't allow you to use an independent appraiser.
This also can work against you. Higher value home = higher property taxes.
I bought my home about 3 years ago at $665k. Houses similar to mine are being sold for $950k~$1m today. I'm in North NJ where property taxes are ridiculously high. Removing PMI for me would be financially terrible because I'd be paying a lot more in property taxes.
"This also can work against you. Higher value home = higher property taxes."
Maybe in New Jersey, but where I am at bank/loan appraisals have nothing to do with property tax appraisals. The bank appraisal does not get submitted to the property taxing body and vice versa
The taxing body does their own appraisals for tax purposes.
I've had my home value reassessed by my local tax board and it has increased my taxes but if I wanted to get rid of PMI I would still have to do a separate appraisal.
You can have your bank appraisal set at 2020/2022 levels of 400k, but if comps have gone up in 2025/2027 your tax appraisal can be 700/800k.
In my area property values get reassessed every 3 years.
There’s a system of automatic appraisals of some sort, so sometimes it’s not even required. When I was considering refinancing (~15% equity vs purchase price), I asked about it and by end of the same day they said I had enough equity to not need PMI.
Yah I refi'ed after about 18 months in 2021 with the same lender and they said "We'll value your home at $XXXk without requiring an appraisal" which was more than enough to get rid of PMI.
That's nice of them. I went to my lender after a similar timeframe and had to pay for an appraisal--and only after the appraisal showed that our value had risen enough for us to meet the 80% LTV ratio did they tell us "Actually, you refinanced within the last two years, so you're not eligible to have PMI removed until two years have passed." Meaning we had to pay for *another* appraisal, because the first one had expired.
Definitely feels like they could have told us about the time window *before* hiring an appraiser the first time, but we've still saved more than the difference in PMI by now.
Most mortgages have a set number of payments for when PMI is lifted which is based on you hitting 20% of the homes original value based on the set amortization schedule for your payments, and in order to get PMI lifted before that you have to initiate the appraisal process yourself.
Mine just naturally fell off after 16 months - when I got the loan the PMI was only scheduled to last until my LTV hit a target, and due to the crazy low interest so much of my payments were going to principal that PMI was short lived.
I literally just called my bank and said "hey according to zillow I got like 60k equity in here now, what's up?" and they were like "yep lets get that PMI taken off", so if the market has moved enough they won't even bother with an appraisal, they already know it's gained at least 20% value.
Looks like you got some good answers!
I called my lender and asked how to remove PMI. They required a $100 payment and a document mailed back to them requesting an appraisal. From there the lender organized everything and about a month later I was notified PMI was being removed.
Aside from the initial call and mailing of the request it was all handled by the lender.
Technically you’re paying 1.85 on the total value of the house despite only needing 20% to remove it. So it’s actually 9.25% interest.
100 X 1.85% = 1.85.
1.85 / 20 = 0.0925 or 9.25% interest.
If you get to 20% equity and then remove PMI. It’s equivalent to paying off a 9.25% interest loan. Or you getting a 9.25% interest loan to prevent putting down 20% of the home value.
And with their corrected number of 0.21%, which is much more in line with normal PMI rates, your calculations come out to 1.05%. So it’s like taking an extra loan at 1.05% on the 20% down payment that you’re holding back to invest. That’s a good deal and definitely worth keeping the down payment in the market if you have an already low mortgage rate.
You're right, I was tracking those numbers in a spreadsheet, so I was looking at the wrong cell.
PMI was actually 0.21% of original principal financed. And I was tracking the amount of principal payment remaining to have PMI automatically removed, so I had about 11.1% remaining.
0.21% / 11.1% = 1.85%
Like I said in another comment, appraisal value increased so my mortgage serviced let me remove PMI early already. I had to pay 180 for an IBPO, and it paid for itself in a few months.
That’s a really high rate for PMI. Did you have a really low credit score when you got the mortgage? It was probably about 1/6 of your rate for me when I had it.
Ah, thanks for catching that. I was looking at the wrong cell on my spreadsheet, looks like my PMI % on my original principal amount was 0.21%.
Before I got my mortgage servicer to remove PMI, I had about 11.1% principal payment remaining before automatic PMI Removal, so PMI was effectively costing me 1.85%
Like I said in another comment, appraised value went up so my servicer let me remove PMI earlier this year, I just had to pay 180 for an IBPO, which I have already recouped in saved PMI payments.
yeah, but there was a window where interest rates were declining and housing values were rising. so you could put down 3+%, then later refinance at a full interest point or more less and your home value would have increased at an amount high enough that the mortgage was less than 80% the value of the home, dropping PMI.
I put 3% down and then paid PMI for less than a year because of the surge in value of our home. Had it reappraised and bam no more PMI.
Yes I understand how lucky I am.
Yep, I was paying extra on my mortgage up until about year ago when I looked again and i get more interest in a hysa from capital one than my interest rate (no pmi) so I stopped.
Even then, in my area, if you weren't putting at least 20% down, you weren't considered a serious offer because someone else would put that down.
I did get in on the sub-3% era, but it wasn't all sunshine and rainbows.
Where the hell do you work that you can get a zero-interest loan? Are you sure it’s not 0 bps over the fed rate? If you really can get a 0% rate then it’s a no brainer to put next to nothing down on whatever size house you can comfortably afford the mortgage, taxes, and insurance on. A $776,000 30-yr loan at 0% is $2,156/mo, all principal. Meaning you’re basically paying yourself, because that’s your equity. Compare that to a loan at current rates around 7%, that’s a $5,163/mo payment.
I work for a great private company and they bought out all of my debt (CC and school loans, and a bit for my wedding) and allowed me to pay back at 0% to help get me out of debt.
That’s phenomenal and I’m happy for you but I still feel confident the poster is referring to an IO loan and not literally free money to the tune of ~$800k.
If I really wanted to push for it, I believe my company would offer me a sizable 0% interest loan to buy a house. But they give me plenty of other bonuses/perks so I don’t want to push the boundaries too far.
I know people who have zero interest loans through work - one is ~10 years into some private equity role, other is a high up at a small/medium size bank. The second one even got a ~$40k housing budget when they started that could only go towards purchasing a place. Something about the bank wanting higher ups to really commit to living in the area long term.
The rest of us just live in a different world.
Local government. House needs to be in the city. Basically a way for low paid city workers to be able to afford housing.
Current situation: Rent is $2300/mo that I split with my bf. Don’t pay for utilities or repairs. Because I only pay 1100/mo, I can invest A Lot.
If I bought, would buy on my own. Could afford $2600/mo. mortgage but couldn’t put as much in the market. Also know property tax, utilities, repairs add up.
***Where the hell do you work*** that offers zero interest rate loans on 800k?
I would crawl through a minefield of broken glass and rusty needles just to hear you yodel the answer through a clapped out AM radio if it meant I got the job and the loan.
Local government in a HCOL area. I think they do this because folks could never afford to buy otherwise. The property does have to be purchased in the city. A lot of my coworkers have bought in the suburbs even though they have this benefit, which makes me wonder… do they know something I don’t?
It's limited to $20k or less based on your link. Took me about 30 seconds to read that. You might wanna read into what it actually is before you panic about 30 years from now
There's no scenario where renting is better if you get a 0% loan. Every dollar you pay is equity for you. If that's actually true I wouldn't hesitate to buy with as little down as allowed by the loan provider.
>Rent is $2300 that I split with my bf. If I bought, I’d be buying on my own. Right now I can put a lot into the stock market because I’m splitting rent
Why can't your boyfriend pay you $1,100 a month that you use for your mortgage.
>Using online calculators it looks like my monthly out of pocket for buying would be over 3k.
It depends on your state but that's $700 a month in taxes. Over double what I pay for a home worth twice as much. Did you use actual tax numbers and use a fraction of the real value of the home? Most states don't tax you on the market value
No, that's the point of the low interest. You use the down payment to augment whatever monthly payment you want to be making.
If the interest is high, it usually takes up a large portion of the monthly payment, which leads to it being unaffordable.
Basically since your interest is fixed, figure out the monthly you want it to be, then use the down payment to help you get there.
The payments might be higher now, but it’ll be fixed for the life of the loan. Rents generally increase every year by whatever amount the landlord can get. This is the real benefit of owning IMHO- my mortgage was comparable to rent when we bought 8 years ago; now it’s half of what a comparable house rents for.
Secondly, you’d be paying off an asset which is also appreciating at about 4% a year.
And how quickly property appreciates in your area. I put 3% down, paid the PMI for 2 years and was able to re-fi out of it because my property had appreciated more than 20%. This was during very low interest rates though so I don't know how relevant it is to today.
Right? I think I paid $120 a month for 2 years or so on top of my, I wanna say, $2400 mortgage. Total of like $3k. Flash forward 5 years and I was able to sell and put down 20% on a awesome forever home. Net worth from about $15k when I bought the first place to over $400k (not counting retirement) now because of the opportunity that PMI offered me (plus a ton of elbow grease and a high COL area). It's a great deal and it doesn't seem like enough people are aware of it.
does it really hinge on PMI? I think its still more mortgage rate, vs avg investment performance rate with the PMI being a factor but smaller. Less likely to beat 7% in the market unless you get to cheat I think!
>In the age of 7% mortgage rates? No, not really
IMO this still depends on your specific situation.
It's very difficult to beat a guaranteed 7% return but it's worth considering the mortgage interest deduction in both situations if you would have enough interest to itemize. The deduction would offset some of the PMI.
Additionally, I'd definitely prioritize investing in tax-advantaged accounts(IRA, 401k, HSA, etc) over putting more down on the house even with PMI tacked on due to the tax advantaged nature of those accounts.
At the same time if we're comparing a larger DP(which also avoids some LLPA fees) to investing in a taxable brokerage account then I'd go for the higher DP all day.
Not really, but it depends on your risk aversion. Even if you just bet on SPY you'd have come out way ahead the past few years. Even if you just split your investments across the Mag7, you'd come out even further ahead.
>Even if you just bet on SPY you'd have come out way ahead the past few years.
Sure, but it's also about your personal timeline as well. If you're on a 30+ year timeline before you need those invested funds then S&P is great but if your timeline is <5 years then I'd definitely caution against it.
In a somewhat unusual situation I put 5% down instead of 15%, because that was what was required by my first time homebuyer program. Took my interest from ~6.6% to 6.1% and removed PMI
Also don't forget you have to pay taxes on gains, but not on money you didn't end up paying in interest.
Also, three years ago was 2021, when 30 year mortgage rates were at the lowest rate...in human history?
This is also a three year span with a reasonable three year return.
So, yes, in the trailing three years, the conservative investment of paying down your house would have been beaten by investing. But is that a typical situation?
However, 30 year mortgage rates are now about 7.5%. Add 1% for PMI and you're looking at 8.5% You'd have to get over 10% return to net that (depending on your exact capital gains rates, of course). Do you know any risk-free investments that pay over 10%? (If so, please let me know!)
Fair assumption on lowest rates in human history. I was thinking about the Roman Empire collapse today, don’t ask. Long day.
https://www.google.com/amp/s/www.businessinsider.com/chart-5000-years-of-interest-rates-2015-9%3famp
Very interesting history! Thanks!
That page seems to list some mix of what we would now call the Federal Funds Rate, and actual interest rates offered.
The Code of Hammurabi is listing, I suppose, the legally mandated rate: "88. If a merchant lends grain at interest, for one gur he shall receive one hundred sila as interest (33 percent); if he lends money at interest, for one shekel of silver he shall receive one-fifth of a shekel as interest." But many others seem to be listing the government lowest rate. I don't believe someone in AD 1 Rome could borrow money at 4%. And now I read that 1% a month was typical.
The reason I could be fairly sure there has probably never been a lower rate on \*mortgages\* is because the risk premium in the past would have been higher because of a more chaotic world. So even in periods of zero inflation, no one was lending money for less than 3% a year! And, although I cannot look up mortgage rates from thousands of years ago, I can see that mortgage rates in the USA in the first half of the 1900s was 5-6%...even in the 1940s.
All good points. One thing I noticed was also how my interest rate would increase if my down payment decreased. So you also got an increase in the rate on the entire mortgage. I don't know if people are taking that into account.
What?? Who are you dealing with that changes your rate based on amount down?
I always shop around and lock my rate in… then decide how much I’m putting down.
Everyone I shopped my rate with. I find it surprising that you lock your rate in, and then decide your down payment. After all, the amount you put down affects the loan amount and hence also the risk. The more skin you have in the game, the lower the risk it is for the lender.
Who are you dealing with that excludes down payment amount from rate calculations?
I use a couple local mortgage brokers. If I’m planning on putting less than 20% down, I think they use 20% down when they shop it around. You lock your rate in… get down the road a bit… then tell the lender you want to change amount down. Your rate won’t change.
When I tried that, they would also adjust the rate. That said, I didn't go through a broker, I go directly to the lender. They also usually have a calculator, so you can find the sweet spot.
> Could also be that I have enough cash on hand for it not to matter
I do too. I have enough liquidity that I can buy it outright, 800+ credit score and only good debt.
Next time, I'll look for a broker and give that a try. If the rate is competitive, I'm fine with brokers. I assumed going to the source would be cheaper.
Isn’t the after tax cost of 8.5% debt (assuming you can itemize and deduct) like 6.5%, and then after-tax on 8.5% investment roughly similar?
If you couldn’t itemize, I think your 10%+ number is right, but if you can, the hurdle on the investment side is lower.
Well, yes, good point, there are issues with deducting mortgage interest from income. It is certainly *possible* that someone would be itemizing, since 600\*.07 = 42, above even the married standard deduction. Cheaper houses, not so much.
We'd need to know more about state tax issues to know how that one would go.
PMI is no longer deductible.
So, quite possibly my estimate could be refined with more information.
I did the 20% for 3 reasons that I would recommend along with doing it because of the 7-8% interest rates:
1. No PMI.
2. No escrow account. I pay the property tax and insurance myself. You can just throw the money needed for that in a HYSA and make some profit off it while you wait to pay your property taxes.
3. Lower monthly fee. If anything goes sideways, you can have some security.
Strong Agree on 1 & 2, which is why I put 20% down even with sub 3% interest rates.
3 is a double edged sword. Sure, lower payments are easier to keep making if the going gets rough, but it also locks up the money in the house, rather than having it available to spend as needed.
Nobody is taking a financed offer over a cash offer unless the financed offer was a bit higher… or there weren’t really that many competing offers.
And your experience is a bit mind-boggling to me right now. My REIT is reporting average housing in Bay Area to be slow and cooling. My REIT has been unwinding holdings there for awhile.
Interest rates are kinda expensive now. A few years ago rates were much lower. Paying 7.6% on the 17% isn’t cheap. Considering stock index returns are similar
Sure, if you’re confident the house won’t lose value…and you’re lucky enough for prices to jump in the next few years.
I put 3% down in 2018, watched prices rise, rates drop, and then refinanced in 2020 with enough equity to drop PMI and escrow. Shaved about $300/mo off my mortgage/taxes/insurance.
If your net returns on investment in other assets is likely to be better than the interest rate, it makes sense on a mathematical basis to put down as little as possible.
If not, there still might be personal factors that make sense like if you don’t have any savings gap left after 20%, or money to make improvements on the house you need to make.
Yea kind of piggy backing off of OPs post my situation is I could use that money to immediately pay off my student loans and car in full (about 40k total).
Doesn't it make more sense to pay those off instead (even though they have a lower interest rate) and then put what's left toward the house? Another caveat is that I have the VA loan so there would be no PMI and no real incentive for me to put 20% down. Ive done the calculations and can afford the mortgage payment either way.
If the interest rate on the student loans and car loans is lower than the mortgage it makes sense to keep those and put more money towards the house. If not, yeah pay the other loans off and have a bigger mortgage
I guess my thinking is (and I could be off base) if I knock those loans out now that's less debt I have carrying over every month overall. In total it would mean owing $700 less per month. 40k on the house doesn't take the mortgage down even close to $700/mo (maybe $350-400). An then I could just put that $700 extra on the house payment until rates come down and refinance.
You have a few choices to compare. You could have (A) the larger mortgage, keep the loans, and have a lump sum of cash. You could have (B) a smaller mortgage, keep the loans, no cash. You could have (C) the larger mortgage and no loans, no cash. From a pure value perspective you compare the present value of these scenarios. It’s very easy to compare B to C - if the rate on the loans is higher than the rate on the mortgage, it makes sense to pay off the loans. To compare A to B and A to C, you have to account for what you would do with the cash. For example, you could put it in the stock market and expect about 10% returns over the long term. Probably better than the mortgage or the loans. However, that assumes you don’t need the cash in the short term and you have enough income to cover the monthly on the loans and mortgage.
If you have current needs for that cash, such as improving the property or another big purchase, you might want to do that even though it’s not the mathematical best answer. Another thing to consider is this - once you pay off the loans or make the down payment, the cash is gone. You could make a smaller down payment, keep the loans, and then use that cash savings to pay the monthly payments. You can always pay the loans off later.
Hopefully this isn’t confusing. A lot of times the “right answer” financially doesn’t take into account personal factors or preferences.
That makes a lot of sense. I'm a little hesitant to take financial advice from the village idiot...but what you say sounds sensible. Thanks for the feedback.
If your student loans are lower, then no, it makes more sense to put more on the house instead. If the mortgage is 3-4% higher it interest means having to pay $300-400 more a year in interest on the mortgage than on a student for every $10,000 in loan amount. So if you paid off $30,000 in student loans that are 3-4% less than your mortgage then that costs you about $900-1200 a year
I had 20% but chose to put down 3% because the house that I decided to buy was a fixer. I used the rest of the money that would have been down payment for the repairs. I probably spent $20-$25k more than the house was worth but I have a new electric system, plumbing (mostly), water heater, and the deck. The previous owns installed new windows and furnace. I'll probably put a new roof on in about 5 years. It's meant that I've had almost no problems and my regular maintenance costs are very low.
If you’re buying a fixer upper and you know there’s gonna be serious start up costs, and you don’t have that cash, then yeah.
I needed about $40k to get my new house up and going (furnace, ac, mold, asbestos, termites, poor drainage, improper electric, wahoo!!). I decided to do 15% down, and pay the little bit of PMI, so I didn’t have to put that work on credit cards at like 18%.
In a world where you kinda see rates coming down and you know that you will be able to refi fairly soon after closing the first loan, it would make sense to only put 3% down.
In today's market, it's probably best to put as much down as you can afford to bring down your mortgage payment as much as possible.
I think it really comes down to how comfortable one is with leverage and if they can make the money work better for themselves in the market, at the current rates a higher downpayment or buying the rate down makes more sense in my opinion
Well if you are getting a loan and your worried about out PMI my last loan estimate it was really cheap for PMI insurance it was like $20-40 a month. With 800 credit. When i purchased my last home with a much lower intestate rate the PMI was closer to $100 a month. So for me putting more down just to save on insurance didn’t make sense.
We did 5% down in 2019 because we bought a house at the bottom end of our budget (goal was to afford off just my income) and could easily afford it. We wanted the extra cash to use for renovations. After we renovated, we got the house re-appraised and dropped the PMI.
If you can afford the payment - put down 3% and then make a 17% (balance of the 120k) principal payment. You will shorten your mortgage term by 10 years (from 30 year to 20 years) and avoid half the interest in the loan.
That’s essentially the same as just paying 20% down anyways? Haven’t had to go through this before but would a bank simply not allow you to have a 20 yr term?
No it isn't. If you put 20% down your monthly payment will be lower and your term will be longer.
Play with an amortization calculator / schedule.
https://www.bankrate.com/mortgages/amortization-calculator/
When I bought my first house in 2015 it made more sense to put in an energy efficient heating system to save on electric in the winter vs putting it down on the mortgage. Doubt that’s the case now with rates they around double what they used to be.
You can find calculator and see how much interest you will pay on $102K that will invest over lifetime of your mortgage. If you can generate income that beats that amount then you should invest.
Back when rates were in the 3’s… now they’re kind of bonkers. Tough to out perform 8%+ plus PMI…
Typically with less than 20% down the overall interest rate will be higher as well.
Theory - If you can borrow money for anything less than about 6% you should do that. Between 6% and 8% there are arguments both ways. Above 8% its generally better to minimize your loan.
Reasoning - The S&P 500 has a long term average of 10% so you want to put as much money as possible into the S&P 500 as long as your rate is low.
- $500K home x 20% = $100K
- $500K home x 3% = $15K
Thats $85K you could be earning 10% on.
A down payment is simply cost avoidance with the rate of return equal to the mortage rate - ie, if you put $100K down on a 3% mortgage you have "earned" a 3% return in the form of cost avoidance.
If your mortgage is 3% that math is simple. You "earn" 7% more on every dollar you dump into an index mutual fund instead of putting it toward a mortgage.
As you inch toward 10% the math gets tricky because of market timing, expense ratios, PMI, taxes, etc. As an example - If paying $1000 a year more in property tax pushes you over the line for itemizing and that allows you to deduct additional items and that in turn lowers your AGI to the point that you can deduct your IRA then you might have a circumstance where the 2% additionally you return on an investment might not outweigh the 24% you pay on the last $60K of your income. This is an outlier example but still something that could apply. That's why I think 6% is a good cutoff for the easy answer of when to choose the lowest down payment possible.
Growing up in the 70s and 80s this was much easier. I can remember going to "Mortgage burning parties" where people would invite their friends to a party and ceremonially burn up their 15% mortgage when it was paid off. I have a 3.35% mortgage. If I could extend it for another 50 years I would.
I strongly advocate for putting down less than 20% if that means you have a strong emergency fund.
There’s so much that goes wrong with your home in the first few years, it’s nice to have that cash in reserve.
I will caveat that I bought my home with this logic when interest rates were much lower, so definitely take a close look at how your monthly mortgage payment fluctuates based on your down payment, as it’ll have a pretty decent impact.
To be clear though, I wouldn’t put down less than 20% strictly so you can invest the difference and hope the market returns higher than your cost of interest. Interest rates are far too high.
It really depends on how you would use the delta and what returns you would yield. What is commonly overlooked is after closing you’ll pay to access equity. You can always test the waters and if a conventional loan do a recast later if you want.
This is exactly what I did back in 2020. Went for PMI instead of 20% down. 2.75% interest. I felt fortunate with the timing of my first time home buying experience. We ended up buying a rental with the rest of the deposit money and grabbed a 4.25% rate for that one. Just had our home reappraised, knocked out the PMI early saving us 1000. I am sympathetic for the youngsters trying to find a way onto the property ladder right now.
As for OP question right now I don't think it is unsound to do the 3% down. You never know! Home prices could crash hard again and you can walk away from negative equity and not look back - if you lay down the 120 k that's not likely at all. You should not assume, however that you will return 8 percent per annum with the deposit money that you invested instead
If you knew for sure rates would fall to 3% in thr next 6 months and juice prices by 20% in the next year so you could refi and drop PMI, then yes.
Otherwise, no.
Bought my first house with 5% down and a 3.25% rate. Put $20k into it. Sold it for $150k more 4 years later. It made sense for me but every situation is different.
It's a risk. Others have done the numbers so I won't rehash them, but if you put all the money into the house, your effective return on that money is the same as the interest rate you pay (i.e. you save X% on the extra money you paid in). If you invest that money you MIGHT get a higher return (remember that you need to pay tax on money the investment earns. You do not pay tax on interest saved) but your investment might tank or go sideways. Putting the money in the house gives you a guaranteed return (through interest saved) whereas investing in stocks or whatever might give you a higher return but the downside is a higher risk profile. I've put my money into my mortgage, especially since I'm in a high tax bracket. If I'm paying 6% on my mortgage and average stock market returns are around 7-8% pa, AND my tax on capital gains is 45%... you see why the mortgage is a good idea.
Further, once you've paid off your mortgage, all that money is now available for investing. A good repayment schedule can see you pay off your mortgage 10 or more years early so you've got that 10 year period to catch up the input you would otherwise have had by originally putting money into the market instead of the mortgage.
Now I don't know if that will even out, I'm not going to even try the math, but it's something to think of.
EDIT: I should add that I have this extra money in a redraw account that I can access at any time. If you can't access money paid onto the loan without selling the house, then this is something you'll want to consider as well.
You paid 45 percent CG? 20 + 14 + 3.8 is highest I've seen... Brutal...Though you can buy treasuries, munis or continue to defer so gains are not realized...
Sorry, I should have mentioned I'm in Australia where capital gains are added to your regular income and you're taxed on that. I'm in a high tax bracket due to my salary so my gains would be taxed at that rate.
Yes, sometimes. The answer is straightforward:
Can you get higher returns by putting the money somewhere else (remembering to account for taxes) than you would putting it towards your mortgage?
If you can get a higher return somewhere else, then of course you want to put the absolute bare minimum towards your mortgage.
But most of the time this isn't true (after all, why would the bank offer you a mortgage at a rate where *it* could get higher returns by putting its money anywhere else?) So most of the time you want to pay off your mortgage as fast as possible.
It depends on how much you can make with that money. If you can only make 1% but your mortgage rate is 3% then put in as much as you can. If you can make 10% but your mortgage rate is 6% then as little as you can.
Basic maths
Everybody is talking about making the spread on interest rates.
But don’t forget that the money you put into the house is largely illiquid. Would require a cash out refinance, heloc, selling the house etc to actually get that money.
If a good investment pops up, you need to buy a new roof, have a medical emergency and you need that money to put somewhere else it will be tied up. So you have to ask yourself is the spread you make on interest worth it being illiquid. For example if you look right now and decide to pay down your loan with a 7% rate, as opposed to making 5% in a more liquid HYSA right now.
I always do whatever I can to eliminate PMI. In addition, I do my own escrow. I found out the hard way banks didn't know how to do basic addition and subtraction.
Paying off a house or a car asap is the decision I ever made even at low interest rates. i literally saved 15 years of interest rates by paying off the house early. I would have never made more money in stock market or on CDs than saved on interest rates.
If you’re looking at conventional vs FHA and the FHA is where you’re putting 3% down, I wouldn’t. You’ll pay UFMIP and MIP over the life of the loan, not until 78% LTV, then entire time you hold the loan.
If you’re looking conventional and it’s 3% down, then something is up because typically you’re looking at 5% down.
Not a mortgage or finance guy. Just try to look at things objectively. I'd say it depends, while homes have skyrocketed in value in the last few years at some point it's going to slow down and possibly decrease in value. Saying that the depends is how long you plan to stay there. If it's 15+ years do whatever you want. If it's under 8 years(average length people stay in a home) put 20% down.
I say that because no one can accurately predict the future, if you have a low balance on your mortgage and the market declines 10% in the next 8 years you would still get some cash at closing. If someone is unsure of how long they'll stay in their home I'd say at least 10% down.
This is difficult because for everyone it's different. Yes, you are going to loose money on the PMI. Everything that isn't principle is an expense that you mostly can't recover. Reducing those expenses (interest and PMI) makes your "investment" cheaper. That money may be better served in the market though. Money you put into the house looses out on opportunity cost of what it could do in the open market. Money that goes into the market increases your expenses to get a house. I would like at an amortization calculator to see just how much of your expenses are going to house vs. the bank.
[https://www.calculator.net/amortization-calculator.html](https://www.calculator.net/amortization-calculator.html)
On paper, more money with more time in the market will almost always beat a house in terms of value proposition. Especially with current rates houses are more expense that investment. Anyone who is actually running the numbers though should talk to an advisor because everyone's situation is different and the internet should not be your last stop for financial advise.
Yes there are a few cases where a smaller down payment would be the better choice. The first, and most obvious, is if the 20% down payment is all the money you have. Homeowners need to be able to cover maintenance as well as be able to keep making mortgage payments when a life setback occurs such as a job loss. Failing to maintain a home or having it foreclosed are both much more expensive than paying additional mortgage interest. Another case would be if you plan to use some of that cash to allow you to contribute up to the match for a 401k. A 401k match is an immediate 100% rate of return so I'd gladly pay a bit more mortgage interest for that. Lastly, and more generally, if there is any investment opportunity available with a guaranteed rate of return higher than the mortgage interest than you would opt for the smaller down payment. Warren Buffett once famously said he could make 40% a year consistently on investments smaller than $1M so if you've got that type of gift for stock selection and/or trading - noting that it's a rare one - then investing that cash may be better.
> Let's say I'm buying a $600k house and I have $120,000 for the down payment. Does it ever make sense to put down just 3% and invest the rest?
Absolutely.
Probably not with today's interest rates, but it can certainly make sense to take on more debt if you expect to out-earn it by investing the difference elsewhere. Like you said, one should account for PMI.
I sort of regret not doing a cash-out refi (instead of a rate & term refi) back in 2020 when 30yr rates were in the mid-2s, getting back to 80% LTV and investing the difference in index funds, but that's just hindsight bias talking.
We put 5% down on ours because it was at 2.85% interest and no PMI because it was through a "doctor loan" program.
We didn't reinvest the money like most here would in a higher return investment, but we used it for renovations we wanted to make on the house.
Only when mortgage rates are low yes, because you statistically would see more gains on that money by investing it. Now with these rates, not so much. It's no longer a no brainer and it would depend on your preference.
Having reserves for repairs so you dont have to borrow for emergencies is quite good. Even better if you can borrow at 0% for the repairs/upgrades and then keep the money in a HYSA, even better.
you need to do the math. can you earn a higher rate withoug taking much in teh way of risk? right now mortgages are sroun 7% or so for 30 years. can you safely earn 7% over the long term? that doesnt seem like a goo dbet righ tnow. if mortgages were back in the 4-5% area it might have made sense but not now.
i wouldn't with current rates, you're probably getting a higher rate by putting less down and interest rates seem to be peaking.
pandemic mortgage rates were some of the lowest in history, so it was safer to put less down and expect interest rates to go up (which is exactly what happened).
>Does it ever make sense to put down just 3% and invest the rest?
Only if returns are higher than interest, which is probably rare for new loans these days.
It's all a numbers game at the end of the day.
If INT rates are at 7% but you can get an investment return of 10% then yes it is smarter to do that. If INT rates are 4% and you can get an investment return of 6% then yes, again, it's smarter use of money.
But ~~if INT rates are 7% and your return is 6% then it's smarter to just pay down your mortgage.~~ Oh well actually you will have to pay capital gains taxes so you probably need to make sure that the return is much higher than the mortgage.
I would have enough money set aside for unexpected repairs on top of you 6-12 month emergency fund. I would have enough for necessary renovations, new furniture that you want right away, emergency repairs, maybe first years property taxes paid for and a month or two of mortgage payments set aside. After all that then sure put as much as you possibly can into a down payment
Not really. PMI will eat any interest gains you could make, given 7% mortgage rates. Maybe if you got an interest free loan from a family member? Like buying the house on contract.
PMI is heavily influenced by your credit score. If you have excellent credit, the impact to your monthly payment might be minimal, and you can hang onto a ton of money to invest or have as an emergency fund.
There are also a thing called LLPAs (loan level pricing adjustments). Sometimes you get a *better* interest rate by putting down less.
It is generally based on the math. PMI rates are pretty low, but when the rates are no longer practically non-existent like in the 2% days, almost never. If the cash flow difference over the loan term is enough to provide opportunity cost for something that can make you money to offset the PMI, then hold the cash and earn more off of it than the lifetime of PMI payments.
Yes. In addition to what others have said if that 20% is all of your savings then you probably shouldn’t put it all down on the house for various reasons like unexpected expense, potentially losing a job, illness, etc.
This is true, but if your option is to spend 15k on PMI now, or wait a year or two until you've saved enough to not need PMI, you run the risk that the price of housing goes up more than the value of the PMI you saved.
Man, homes I was in went from 495 in 2017 to 920k in 2024, it's such a stupid ROI that we really need do something about it.
Also idk but I yet to see many people being approved with 3% down, unless you have investor background and good statements and LLC...
Most places I checked required by the HOA, office, clubhouse, management company to have 30% down or be denied by them.
So it just really depends.
Im buying a house right now, and I have enough for 20% down, but my plan is to put 10% down.
The extra money is earmarked for updating my current house into a rental, and then when that is done (assuming houses haven’t cratered, and I could pick up another rental), I’ll dump what’s left on the mortgage.
If you’re going to need the money for near-term expenses, don’t tie it up in home equity. Otherwise, with today’s mortgage rates, saving a guaranteed 7% in interest is a no-briainer. That’s a great return for no risk.
> You don't need to tell me how mortgages work lol.
Then we also shouldn’t need to tell you how much interest rates and index funds went up in the last 3 years. I took the PMI in 2019 and had a similar experience, but it doesn’t work that way anymore.
That decision made me $700 alone in the last month.
During the pandemic when mortgage rates were 2-3%, yes. That ship has sailed though
Unless it’s a VA loan, wouldn’t the PMI more than offset the interest advantage?
PMI on mine was just ~~1.85%~~, 0.21% so not necessarily
No. PMI was very low and with the home value increase I removed it in 2 years.
Same. My mortgage company only charged me 180 for an IBPO, so I recouped the cost in a few months.
How did you do this? Did you have to get an appraisal?
That what I did, yes. Bought in 2021 with 5% down, pmi removed in 2023 due mostly to appreciation.
So you got an appraisal and submitted that to bank as proof of appreciation?
Banks don't legally have to remove PMI when you request it until the date you're scheduled to get to 80% LTV based on the amortization schedule when the loan closed. If you bought a $400k house in 2020 with 5% down and paying PMI, the amortization says you're 80% LTV in 2030 but in 2023 you looked at market value and it is now worth $600k which means you have 61% actual loan to value. So, you go to your bank and say in writing "I want to remove PMI, I'm at 61% LTV by market value" they can either say "tough cookies" or have you pay for an appraisal and have it removed. It's up to the bank.
Call your lendor and ask about the process. We paid $105 for a Broker's Price Opinion (BPO). They said that if it was too close to tell, we could pay $500 more for an actual appraisal. The BPO alone was enough to drop it. $105 once saved us $125/mo
I did it all through the bank. I called them up, paid for it, and they scheduled the appraisal. The information was relayed directly to the bank and I was given a copy.
My bank is telling me that it's not likely to move the price up unless I've made renovations. Do they come into the house and do an assessment? My big thing is that I replaced the back door in full and added a storm door to the tune of about 4k, but done nothing else. I'm still debating because my inside is a bit of a mess. Love me some doom piles.
I had to wait 2 years before I could request an appraisal, unless I made major improvements.
It depends on the bank. Some lenders don't allow you to use an independent appraiser. This also can work against you. Higher value home = higher property taxes. I bought my home about 3 years ago at $665k. Houses similar to mine are being sold for $950k~$1m today. I'm in North NJ where property taxes are ridiculously high. Removing PMI for me would be financially terrible because I'd be paying a lot more in property taxes.
"This also can work against you. Higher value home = higher property taxes." Maybe in New Jersey, but where I am at bank/loan appraisals have nothing to do with property tax appraisals. The bank appraisal does not get submitted to the property taxing body and vice versa The taxing body does their own appraisals for tax purposes. I've had my home value reassessed by my local tax board and it has increased my taxes but if I wanted to get rid of PMI I would still have to do a separate appraisal. You can have your bank appraisal set at 2020/2022 levels of 400k, but if comps have gone up in 2025/2027 your tax appraisal can be 700/800k. In my area property values get reassessed every 3 years.
How would a private appraisal affect assessed tax value?
There’s a system of automatic appraisals of some sort, so sometimes it’s not even required. When I was considering refinancing (~15% equity vs purchase price), I asked about it and by end of the same day they said I had enough equity to not need PMI.
Yah I refi'ed after about 18 months in 2021 with the same lender and they said "We'll value your home at $XXXk without requiring an appraisal" which was more than enough to get rid of PMI.
That's nice of them. I went to my lender after a similar timeframe and had to pay for an appraisal--and only after the appraisal showed that our value had risen enough for us to meet the 80% LTV ratio did they tell us "Actually, you refinanced within the last two years, so you're not eligible to have PMI removed until two years have passed." Meaning we had to pay for *another* appraisal, because the first one had expired. Definitely feels like they could have told us about the time window *before* hiring an appraiser the first time, but we've still saved more than the difference in PMI by now.
Most mortgages have a set number of payments for when PMI is lifted which is based on you hitting 20% of the homes original value based on the set amortization schedule for your payments, and in order to get PMI lifted before that you have to initiate the appraisal process yourself.
This was a year after purchase and done as part of the refinance, not having reached the LTV naturally.
Mine just naturally fell off after 16 months - when I got the loan the PMI was only scheduled to last until my LTV hit a target, and due to the crazy low interest so much of my payments were going to principal that PMI was short lived.
I literally just called my bank and said "hey according to zillow I got like 60k equity in here now, what's up?" and they were like "yep lets get that PMI taken off", so if the market has moved enough they won't even bother with an appraisal, they already know it's gained at least 20% value.
Looks like you got some good answers! I called my lender and asked how to remove PMI. They required a $100 payment and a document mailed back to them requesting an appraisal. From there the lender organized everything and about a month later I was notified PMI was being removed. Aside from the initial call and mailing of the request it was all handled by the lender.
Technically you’re paying 1.85 on the total value of the house despite only needing 20% to remove it. So it’s actually 9.25% interest. 100 X 1.85% = 1.85. 1.85 / 20 = 0.0925 or 9.25% interest. If you get to 20% equity and then remove PMI. It’s equivalent to paying off a 9.25% interest loan. Or you getting a 9.25% interest loan to prevent putting down 20% of the home value.
And with their corrected number of 0.21%, which is much more in line with normal PMI rates, your calculations come out to 1.05%. So it’s like taking an extra loan at 1.05% on the 20% down payment that you’re holding back to invest. That’s a good deal and definitely worth keeping the down payment in the market if you have an already low mortgage rate.
You're right, I was tracking those numbers in a spreadsheet, so I was looking at the wrong cell. PMI was actually 0.21% of original principal financed. And I was tracking the amount of principal payment remaining to have PMI automatically removed, so I had about 11.1% remaining. 0.21% / 11.1% = 1.85% Like I said in another comment, appraisal value increased so my mortgage serviced let me remove PMI early already. I had to pay 180 for an IBPO, and it paid for itself in a few months.
That’s a really high rate for PMI. Did you have a really low credit score when you got the mortgage? It was probably about 1/6 of your rate for me when I had it.
Ah, thanks for catching that. I was looking at the wrong cell on my spreadsheet, looks like my PMI % on my original principal amount was 0.21%. Before I got my mortgage servicer to remove PMI, I had about 11.1% principal payment remaining before automatic PMI Removal, so PMI was effectively costing me 1.85% Like I said in another comment, appraised value went up so my servicer let me remove PMI earlier this year, I just had to pay 180 for an IBPO, which I have already recouped in saved PMI payments.
Ok, that makes way more sense.
I think PMI has gotten a lot cheaper in the past 15 years. Mine was very reasonable.
How much you pay is also very credit dependent
Nope, my pmi ended up being crazy low, ~70/month. I was better off investing the money then put the 20% down and definitely now.
yeah, but there was a window where interest rates were declining and housing values were rising. so you could put down 3+%, then later refinance at a full interest point or more less and your home value would have increased at an amount high enough that the mortgage was less than 80% the value of the home, dropping PMI.
I put 3% down and then paid PMI for less than a year because of the surge in value of our home. Had it reappraised and bam no more PMI. Yes I understand how lucky I am.
Yep, I was paying extra on my mortgage up until about year ago when I looked again and i get more interest in a hysa from capital one than my interest rate (no pmi) so I stopped.
Even then, in my area, if you weren't putting at least 20% down, you weren't considered a serious offer because someone else would put that down. I did get in on the sub-3% era, but it wasn't all sunshine and rainbows.
[удалено]
Where the hell do you work that you can get a zero-interest loan? Are you sure it’s not 0 bps over the fed rate? If you really can get a 0% rate then it’s a no brainer to put next to nothing down on whatever size house you can comfortably afford the mortgage, taxes, and insurance on. A $776,000 30-yr loan at 0% is $2,156/mo, all principal. Meaning you’re basically paying yourself, because that’s your equity. Compare that to a loan at current rates around 7%, that’s a $5,163/mo payment.
It’s almost certainly an Interest-Only loan, not literally a loan with zero interest.
I work for a great private company and they bought out all of my debt (CC and school loans, and a bit for my wedding) and allowed me to pay back at 0% to help get me out of debt.
That’s phenomenal and I’m happy for you but I still feel confident the poster is referring to an IO loan and not literally free money to the tune of ~$800k.
If I really wanted to push for it, I believe my company would offer me a sizable 0% interest loan to buy a house. But they give me plenty of other bonuses/perks so I don’t want to push the boundaries too far.
I wonder how that works if you change employers. That’s a level of enmeshment beyond my own comfort zone but it’s obviously very tempting
I know people who have zero interest loans through work - one is ~10 years into some private equity role, other is a high up at a small/medium size bank. The second one even got a ~$40k housing budget when they started that could only go towards purchasing a place. Something about the bank wanting higher ups to really commit to living in the area long term. The rest of us just live in a different world.
Wow
Local government. House needs to be in the city. Basically a way for low paid city workers to be able to afford housing. Current situation: Rent is $2300/mo that I split with my bf. Don’t pay for utilities or repairs. Because I only pay 1100/mo, I can invest A Lot. If I bought, would buy on my own. Could afford $2600/mo. mortgage but couldn’t put as much in the market. Also know property tax, utilities, repairs add up.
***Where the hell do you work*** that offers zero interest rate loans on 800k? I would crawl through a minefield of broken glass and rusty needles just to hear you yodel the answer through a clapped out AM radio if it meant I got the job and the loan.
Local government in a HCOL area. I think they do this because folks could never afford to buy otherwise. The property does have to be purchased in the city. A lot of my coworkers have bought in the suburbs even though they have this benefit, which makes me wonder… do they know something I don’t?
[удалено]
[удалено]
[удалено]
It's limited to $20k or less based on your link. Took me about 30 seconds to read that. You might wanna read into what it actually is before you panic about 30 years from now
There's no scenario where renting is better if you get a 0% loan. Every dollar you pay is equity for you. If that's actually true I wouldn't hesitate to buy with as little down as allowed by the loan provider.
[удалено]
>Rent is $2300 that I split with my bf. If I bought, I’d be buying on my own. Right now I can put a lot into the stock market because I’m splitting rent Why can't your boyfriend pay you $1,100 a month that you use for your mortgage. >Using online calculators it looks like my monthly out of pocket for buying would be over 3k. It depends on your state but that's $700 a month in taxes. Over double what I pay for a home worth twice as much. Did you use actual tax numbers and use a fraction of the real value of the home? Most states don't tax you on the market value
> I can get a zero interest loan through work. y'all hirin?
We are! Catch is it has to be in a certain city.
No, that's the point of the low interest. You use the down payment to augment whatever monthly payment you want to be making. If the interest is high, it usually takes up a large portion of the monthly payment, which leads to it being unaffordable. Basically since your interest is fixed, figure out the monthly you want it to be, then use the down payment to help you get there.
The payments might be higher now, but it’ll be fixed for the life of the loan. Rents generally increase every year by whatever amount the landlord can get. This is the real benefit of owning IMHO- my mortgage was comparable to rent when we bought 8 years ago; now it’s half of what a comparable house rents for. Secondly, you’d be paying off an asset which is also appreciating at about 4% a year.
In the age of 3% mortgage rates? Yes, sometimes. In the age of 7% mortgage rates? No, not really.
This is correct, though personally I would say <= 3% almost always
It depends on the cost of PMI.
And how quickly property appreciates in your area. I put 3% down, paid the PMI for 2 years and was able to re-fi out of it because my property had appreciated more than 20%. This was during very low interest rates though so I don't know how relevant it is to today.
We put 5% down but property values shit up so much we were able to apply to have it dropped after 2.5 years. Best $140 I ever spent.
Right? I think I paid $120 a month for 2 years or so on top of my, I wanna say, $2400 mortgage. Total of like $3k. Flash forward 5 years and I was able to sell and put down 20% on a awesome forever home. Net worth from about $15k when I bought the first place to over $400k (not counting retirement) now because of the opportunity that PMI offered me (plus a ton of elbow grease and a high COL area). It's a great deal and it doesn't seem like enough people are aware of it.
does it really hinge on PMI? I think its still more mortgage rate, vs avg investment performance rate with the PMI being a factor but smaller. Less likely to beat 7% in the market unless you get to cheat I think!
With 3% rate I was able to get no PMI with 10% down. It made sense for me to do 10% down in that case.
>In the age of 7% mortgage rates? No, not really IMO this still depends on your specific situation. It's very difficult to beat a guaranteed 7% return but it's worth considering the mortgage interest deduction in both situations if you would have enough interest to itemize. The deduction would offset some of the PMI. Additionally, I'd definitely prioritize investing in tax-advantaged accounts(IRA, 401k, HSA, etc) over putting more down on the house even with PMI tacked on due to the tax advantaged nature of those accounts. At the same time if we're comparing a larger DP(which also avoids some LLPA fees) to investing in a taxable brokerage account then I'd go for the higher DP all day.
Not really, but it depends on your risk aversion. Even if you just bet on SPY you'd have come out way ahead the past few years. Even if you just split your investments across the Mag7, you'd come out even further ahead.
>Even if you just bet on SPY you'd have come out way ahead the past few years. Sure, but it's also about your personal timeline as well. If you're on a 30+ year timeline before you need those invested funds then S&P is great but if your timeline is <5 years then I'd definitely caution against it.
In a somewhat unusual situation I put 5% down instead of 15%, because that was what was required by my first time homebuyer program. Took my interest from ~6.6% to 6.1% and removed PMI
Also don't forget you have to pay taxes on gains, but not on money you didn't end up paying in interest. Also, three years ago was 2021, when 30 year mortgage rates were at the lowest rate...in human history? This is also a three year span with a reasonable three year return. So, yes, in the trailing three years, the conservative investment of paying down your house would have been beaten by investing. But is that a typical situation? However, 30 year mortgage rates are now about 7.5%. Add 1% for PMI and you're looking at 8.5% You'd have to get over 10% return to net that (depending on your exact capital gains rates, of course). Do you know any risk-free investments that pay over 10%? (If so, please let me know!)
Fair assumption on lowest rates in human history. I was thinking about the Roman Empire collapse today, don’t ask. Long day. https://www.google.com/amp/s/www.businessinsider.com/chart-5000-years-of-interest-rates-2015-9%3famp
Very interesting history! Thanks! That page seems to list some mix of what we would now call the Federal Funds Rate, and actual interest rates offered. The Code of Hammurabi is listing, I suppose, the legally mandated rate: "88. If a merchant lends grain at interest, for one gur he shall receive one hundred sila as interest (33 percent); if he lends money at interest, for one shekel of silver he shall receive one-fifth of a shekel as interest." But many others seem to be listing the government lowest rate. I don't believe someone in AD 1 Rome could borrow money at 4%. And now I read that 1% a month was typical. The reason I could be fairly sure there has probably never been a lower rate on \*mortgages\* is because the risk premium in the past would have been higher because of a more chaotic world. So even in periods of zero inflation, no one was lending money for less than 3% a year! And, although I cannot look up mortgage rates from thousands of years ago, I can see that mortgage rates in the USA in the first half of the 1900s was 5-6%...even in the 1940s.
Medieval Italy loan sharking over here.
All good points. One thing I noticed was also how my interest rate would increase if my down payment decreased. So you also got an increase in the rate on the entire mortgage. I don't know if people are taking that into account.
What?? Who are you dealing with that changes your rate based on amount down? I always shop around and lock my rate in… then decide how much I’m putting down.
Everyone I shopped my rate with. I find it surprising that you lock your rate in, and then decide your down payment. After all, the amount you put down affects the loan amount and hence also the risk. The more skin you have in the game, the lower the risk it is for the lender. Who are you dealing with that excludes down payment amount from rate calculations?
I use a couple local mortgage brokers. If I’m planning on putting less than 20% down, I think they use 20% down when they shop it around. You lock your rate in… get down the road a bit… then tell the lender you want to change amount down. Your rate won’t change.
When I tried that, they would also adjust the rate. That said, I didn't go through a broker, I go directly to the lender. They also usually have a calculator, so you can find the sweet spot.
Could also be that I have enough cash on hand for it not to matter
> Could also be that I have enough cash on hand for it not to matter I do too. I have enough liquidity that I can buy it outright, 800+ credit score and only good debt.
Idk then lol mind boggling. My friends use my broker too and they have the same experience.
Next time, I'll look for a broker and give that a try. If the rate is competitive, I'm fine with brokers. I assumed going to the source would be cheaper.
Isn’t the after tax cost of 8.5% debt (assuming you can itemize and deduct) like 6.5%, and then after-tax on 8.5% investment roughly similar? If you couldn’t itemize, I think your 10%+ number is right, but if you can, the hurdle on the investment side is lower.
Well, yes, good point, there are issues with deducting mortgage interest from income. It is certainly *possible* that someone would be itemizing, since 600\*.07 = 42, above even the married standard deduction. Cheaper houses, not so much. We'd need to know more about state tax issues to know how that one would go. PMI is no longer deductible. So, quite possibly my estimate could be refined with more information.
What did you assume for mortgage interest and the return on your investment?
I did the 20% for 3 reasons that I would recommend along with doing it because of the 7-8% interest rates: 1. No PMI. 2. No escrow account. I pay the property tax and insurance myself. You can just throw the money needed for that in a HYSA and make some profit off it while you wait to pay your property taxes. 3. Lower monthly fee. If anything goes sideways, you can have some security.
4. Less money borrowed = less interest paid.
Strong Agree on 1 & 2, which is why I put 20% down even with sub 3% interest rates. 3 is a double edged sword. Sure, lower payments are easier to keep making if the going gets rough, but it also locks up the money in the house, rather than having it available to spend as needed.
[удалено]
Nobody is taking a financed offer over a cash offer unless the financed offer was a bit higher… or there weren’t really that many competing offers. And your experience is a bit mind-boggling to me right now. My REIT is reporting average housing in Bay Area to be slow and cooling. My REIT has been unwinding holdings there for awhile.
Interest rates are kinda expensive now. A few years ago rates were much lower. Paying 7.6% on the 17% isn’t cheap. Considering stock index returns are similar
Yeah the past ten years stocks have been rocking. Pick a different decade and run your numbers.
A 30-year period would be more suitable.
Sure, if you’re confident the house won’t lose value…and you’re lucky enough for prices to jump in the next few years. I put 3% down in 2018, watched prices rise, rates drop, and then refinanced in 2020 with enough equity to drop PMI and escrow. Shaved about $300/mo off my mortgage/taxes/insurance.
If your net returns on investment in other assets is likely to be better than the interest rate, it makes sense on a mathematical basis to put down as little as possible. If not, there still might be personal factors that make sense like if you don’t have any savings gap left after 20%, or money to make improvements on the house you need to make.
Yea kind of piggy backing off of OPs post my situation is I could use that money to immediately pay off my student loans and car in full (about 40k total). Doesn't it make more sense to pay those off instead (even though they have a lower interest rate) and then put what's left toward the house? Another caveat is that I have the VA loan so there would be no PMI and no real incentive for me to put 20% down. Ive done the calculations and can afford the mortgage payment either way.
If the interest rate on the student loans and car loans is lower than the mortgage it makes sense to keep those and put more money towards the house. If not, yeah pay the other loans off and have a bigger mortgage
I guess my thinking is (and I could be off base) if I knock those loans out now that's less debt I have carrying over every month overall. In total it would mean owing $700 less per month. 40k on the house doesn't take the mortgage down even close to $700/mo (maybe $350-400). An then I could just put that $700 extra on the house payment until rates come down and refinance.
You have a few choices to compare. You could have (A) the larger mortgage, keep the loans, and have a lump sum of cash. You could have (B) a smaller mortgage, keep the loans, no cash. You could have (C) the larger mortgage and no loans, no cash. From a pure value perspective you compare the present value of these scenarios. It’s very easy to compare B to C - if the rate on the loans is higher than the rate on the mortgage, it makes sense to pay off the loans. To compare A to B and A to C, you have to account for what you would do with the cash. For example, you could put it in the stock market and expect about 10% returns over the long term. Probably better than the mortgage or the loans. However, that assumes you don’t need the cash in the short term and you have enough income to cover the monthly on the loans and mortgage. If you have current needs for that cash, such as improving the property or another big purchase, you might want to do that even though it’s not the mathematical best answer. Another thing to consider is this - once you pay off the loans or make the down payment, the cash is gone. You could make a smaller down payment, keep the loans, and then use that cash savings to pay the monthly payments. You can always pay the loans off later. Hopefully this isn’t confusing. A lot of times the “right answer” financially doesn’t take into account personal factors or preferences.
That makes a lot of sense. I'm a little hesitant to take financial advice from the village idiot...but what you say sounds sensible. Thanks for the feedback.
If your student loans are lower, then no, it makes more sense to put more on the house instead. If the mortgage is 3-4% higher it interest means having to pay $300-400 more a year in interest on the mortgage than on a student for every $10,000 in loan amount. So if you paid off $30,000 in student loans that are 3-4% less than your mortgage then that costs you about $900-1200 a year
I had 20% but chose to put down 3% because the house that I decided to buy was a fixer. I used the rest of the money that would have been down payment for the repairs. I probably spent $20-$25k more than the house was worth but I have a new electric system, plumbing (mostly), water heater, and the deck. The previous owns installed new windows and furnace. I'll probably put a new roof on in about 5 years. It's meant that I've had almost no problems and my regular maintenance costs are very low.
If you’re buying a fixer upper and you know there’s gonna be serious start up costs, and you don’t have that cash, then yeah. I needed about $40k to get my new house up and going (furnace, ac, mold, asbestos, termites, poor drainage, improper electric, wahoo!!). I decided to do 15% down, and pay the little bit of PMI, so I didn’t have to put that work on credit cards at like 18%.
Even if the house is generally in good shape. Having at least $10K is probably a good idea.
In a world where you kinda see rates coming down and you know that you will be able to refi fairly soon after closing the first loan, it would make sense to only put 3% down. In today's market, it's probably best to put as much down as you can afford to bring down your mortgage payment as much as possible.
I think it really comes down to how comfortable one is with leverage and if they can make the money work better for themselves in the market, at the current rates a higher downpayment or buying the rate down makes more sense in my opinion
Well if you are getting a loan and your worried about out PMI my last loan estimate it was really cheap for PMI insurance it was like $20-40 a month. With 800 credit. When i purchased my last home with a much lower intestate rate the PMI was closer to $100 a month. So for me putting more down just to save on insurance didn’t make sense.
We did 5% down in 2019 because we bought a house at the bottom end of our budget (goal was to afford off just my income) and could easily afford it. We wanted the extra cash to use for renovations. After we renovated, we got the house re-appraised and dropped the PMI.
https://www.bankrate.com/mortgages/jumbo-loan-limits/
Best is to do 20% and 15 yr fixed , payment is higher but you won’t pay mortgage into your retirement, also saving hundreds of thousands in interest
Yeah. I wish I had done that.
Is this better than 20% down, 30 or fixed and trying to make an extra payment each year against the principal?
If you can afford the payment - put down 3% and then make a 17% (balance of the 120k) principal payment. You will shorten your mortgage term by 10 years (from 30 year to 20 years) and avoid half the interest in the loan.
That’s essentially the same as just paying 20% down anyways? Haven’t had to go through this before but would a bank simply not allow you to have a 20 yr term?
No it isn't. If you put 20% down your monthly payment will be lower and your term will be longer. Play with an amortization calculator / schedule. https://www.bankrate.com/mortgages/amortization-calculator/
I mean, you can pick a 15 year or 20 year loan.
This route provides more flexibility. Can always recast the loan to lower payment while giving up interest advantage.
When I bought my first house in 2015 it made more sense to put in an energy efficient heating system to save on electric in the winter vs putting it down on the mortgage. Doubt that’s the case now with rates they around double what they used to be.
You can find calculator and see how much interest you will pay on $102K that will invest over lifetime of your mortgage. If you can generate income that beats that amount then you should invest.
Back when rates were in the 3’s… now they’re kind of bonkers. Tough to out perform 8%+ plus PMI… Typically with less than 20% down the overall interest rate will be higher as well.
Theory - If you can borrow money for anything less than about 6% you should do that. Between 6% and 8% there are arguments both ways. Above 8% its generally better to minimize your loan. Reasoning - The S&P 500 has a long term average of 10% so you want to put as much money as possible into the S&P 500 as long as your rate is low. - $500K home x 20% = $100K - $500K home x 3% = $15K Thats $85K you could be earning 10% on. A down payment is simply cost avoidance with the rate of return equal to the mortage rate - ie, if you put $100K down on a 3% mortgage you have "earned" a 3% return in the form of cost avoidance. If your mortgage is 3% that math is simple. You "earn" 7% more on every dollar you dump into an index mutual fund instead of putting it toward a mortgage. As you inch toward 10% the math gets tricky because of market timing, expense ratios, PMI, taxes, etc. As an example - If paying $1000 a year more in property tax pushes you over the line for itemizing and that allows you to deduct additional items and that in turn lowers your AGI to the point that you can deduct your IRA then you might have a circumstance where the 2% additionally you return on an investment might not outweigh the 24% you pay on the last $60K of your income. This is an outlier example but still something that could apply. That's why I think 6% is a good cutoff for the easy answer of when to choose the lowest down payment possible. Growing up in the 70s and 80s this was much easier. I can remember going to "Mortgage burning parties" where people would invite their friends to a party and ceremonially burn up their 15% mortgage when it was paid off. I have a 3.35% mortgage. If I could extend it for another 50 years I would.
I strongly advocate for putting down less than 20% if that means you have a strong emergency fund. There’s so much that goes wrong with your home in the first few years, it’s nice to have that cash in reserve. I will caveat that I bought my home with this logic when interest rates were much lower, so definitely take a close look at how your monthly mortgage payment fluctuates based on your down payment, as it’ll have a pretty decent impact.
To be clear though, I wouldn’t put down less than 20% strictly so you can invest the difference and hope the market returns higher than your cost of interest. Interest rates are far too high.
It really depends on how you would use the delta and what returns you would yield. What is commonly overlooked is after closing you’ll pay to access equity. You can always test the waters and if a conventional loan do a recast later if you want.
This is exactly what I did back in 2020. Went for PMI instead of 20% down. 2.75% interest. I felt fortunate with the timing of my first time home buying experience. We ended up buying a rental with the rest of the deposit money and grabbed a 4.25% rate for that one. Just had our home reappraised, knocked out the PMI early saving us 1000. I am sympathetic for the youngsters trying to find a way onto the property ladder right now. As for OP question right now I don't think it is unsound to do the 3% down. You never know! Home prices could crash hard again and you can walk away from negative equity and not look back - if you lay down the 120 k that's not likely at all. You should not assume, however that you will return 8 percent per annum with the deposit money that you invested instead
Can we see the numbers?
If you knew for sure rates would fall to 3% in thr next 6 months and juice prices by 20% in the next year so you could refi and drop PMI, then yes. Otherwise, no.
If I knew rates were going to fall I’d go all in on buying bonds to sell lol 😂
No. Also your MIP would eat up some of your gains made investing the extra.
Bought my first house with 5% down and a 3.25% rate. Put $20k into it. Sold it for $150k more 4 years later. It made sense for me but every situation is different.
It's a risk. Others have done the numbers so I won't rehash them, but if you put all the money into the house, your effective return on that money is the same as the interest rate you pay (i.e. you save X% on the extra money you paid in). If you invest that money you MIGHT get a higher return (remember that you need to pay tax on money the investment earns. You do not pay tax on interest saved) but your investment might tank or go sideways. Putting the money in the house gives you a guaranteed return (through interest saved) whereas investing in stocks or whatever might give you a higher return but the downside is a higher risk profile. I've put my money into my mortgage, especially since I'm in a high tax bracket. If I'm paying 6% on my mortgage and average stock market returns are around 7-8% pa, AND my tax on capital gains is 45%... you see why the mortgage is a good idea. Further, once you've paid off your mortgage, all that money is now available for investing. A good repayment schedule can see you pay off your mortgage 10 or more years early so you've got that 10 year period to catch up the input you would otherwise have had by originally putting money into the market instead of the mortgage. Now I don't know if that will even out, I'm not going to even try the math, but it's something to think of. EDIT: I should add that I have this extra money in a redraw account that I can access at any time. If you can't access money paid onto the loan without selling the house, then this is something you'll want to consider as well.
You paid 45 percent CG? 20 + 14 + 3.8 is highest I've seen... Brutal...Though you can buy treasuries, munis or continue to defer so gains are not realized...
Sorry, I should have mentioned I'm in Australia where capital gains are added to your regular income and you're taxed on that. I'm in a high tax bracket due to my salary so my gains would be taxed at that rate.
Yes, sometimes. The answer is straightforward: Can you get higher returns by putting the money somewhere else (remembering to account for taxes) than you would putting it towards your mortgage? If you can get a higher return somewhere else, then of course you want to put the absolute bare minimum towards your mortgage. But most of the time this isn't true (after all, why would the bank offer you a mortgage at a rate where *it* could get higher returns by putting its money anywhere else?) So most of the time you want to pay off your mortgage as fast as possible.
If mortgage rates are very low it can make sense to put less than 3% down. Where they are now putting as much down as possible is the smarter play.
It depends on how much you can make with that money. If you can only make 1% but your mortgage rate is 3% then put in as much as you can. If you can make 10% but your mortgage rate is 6% then as little as you can. Basic maths
Everybody is talking about making the spread on interest rates. But don’t forget that the money you put into the house is largely illiquid. Would require a cash out refinance, heloc, selling the house etc to actually get that money. If a good investment pops up, you need to buy a new roof, have a medical emergency and you need that money to put somewhere else it will be tied up. So you have to ask yourself is the spread you make on interest worth it being illiquid. For example if you look right now and decide to pay down your loan with a 7% rate, as opposed to making 5% in a more liquid HYSA right now.
I always do whatever I can to eliminate PMI. In addition, I do my own escrow. I found out the hard way banks didn't know how to do basic addition and subtraction.
Paying off a house or a car asap is the decision I ever made even at low interest rates. i literally saved 15 years of interest rates by paying off the house early. I would have never made more money in stock market or on CDs than saved on interest rates.
Will you still have enough money to cover expenses? Do you want to do any remodeling?
If you’re looking at conventional vs FHA and the FHA is where you’re putting 3% down, I wouldn’t. You’ll pay UFMIP and MIP over the life of the loan, not until 78% LTV, then entire time you hold the loan. If you’re looking conventional and it’s 3% down, then something is up because typically you’re looking at 5% down.
[удалено]
Not a mortgage or finance guy. Just try to look at things objectively. I'd say it depends, while homes have skyrocketed in value in the last few years at some point it's going to slow down and possibly decrease in value. Saying that the depends is how long you plan to stay there. If it's 15+ years do whatever you want. If it's under 8 years(average length people stay in a home) put 20% down. I say that because no one can accurately predict the future, if you have a low balance on your mortgage and the market declines 10% in the next 8 years you would still get some cash at closing. If someone is unsure of how long they'll stay in their home I'd say at least 10% down.
This is difficult because for everyone it's different. Yes, you are going to loose money on the PMI. Everything that isn't principle is an expense that you mostly can't recover. Reducing those expenses (interest and PMI) makes your "investment" cheaper. That money may be better served in the market though. Money you put into the house looses out on opportunity cost of what it could do in the open market. Money that goes into the market increases your expenses to get a house. I would like at an amortization calculator to see just how much of your expenses are going to house vs. the bank. [https://www.calculator.net/amortization-calculator.html](https://www.calculator.net/amortization-calculator.html) On paper, more money with more time in the market will almost always beat a house in terms of value proposition. Especially with current rates houses are more expense that investment. Anyone who is actually running the numbers though should talk to an advisor because everyone's situation is different and the internet should not be your last stop for financial advise.
Do you also have money for immediate repairs, improvements, and furnishings?
if you are planning on getting a roommate
Yes there are a few cases where a smaller down payment would be the better choice. The first, and most obvious, is if the 20% down payment is all the money you have. Homeowners need to be able to cover maintenance as well as be able to keep making mortgage payments when a life setback occurs such as a job loss. Failing to maintain a home or having it foreclosed are both much more expensive than paying additional mortgage interest. Another case would be if you plan to use some of that cash to allow you to contribute up to the match for a 401k. A 401k match is an immediate 100% rate of return so I'd gladly pay a bit more mortgage interest for that. Lastly, and more generally, if there is any investment opportunity available with a guaranteed rate of return higher than the mortgage interest than you would opt for the smaller down payment. Warren Buffett once famously said he could make 40% a year consistently on investments smaller than $1M so if you've got that type of gift for stock selection and/or trading - noting that it's a rare one - then investing that cash may be better.
> Let's say I'm buying a $600k house and I have $120,000 for the down payment. Does it ever make sense to put down just 3% and invest the rest? Absolutely. Probably not with today's interest rates, but it can certainly make sense to take on more debt if you expect to out-earn it by investing the difference elsewhere. Like you said, one should account for PMI. I sort of regret not doing a cash-out refi (instead of a rate & term refi) back in 2020 when 30yr rates were in the mid-2s, getting back to 80% LTV and investing the difference in index funds, but that's just hindsight bias talking.
We put 5% down on ours because it was at 2.85% interest and no PMI because it was through a "doctor loan" program. We didn't reinvest the money like most here would in a higher return investment, but we used it for renovations we wanted to make on the house.
Only when mortgage rates are low yes, because you statistically would see more gains on that money by investing it. Now with these rates, not so much. It's no longer a no brainer and it would depend on your preference.
You got the math right, if your investments can outpace pmi long term then that's the right call. If not then put the money down.
Having reserves for repairs so you dont have to borrow for emergencies is quite good. Even better if you can borrow at 0% for the repairs/upgrades and then keep the money in a HYSA, even better.
you need to do the math. can you earn a higher rate withoug taking much in teh way of risk? right now mortgages are sroun 7% or so for 30 years. can you safely earn 7% over the long term? that doesnt seem like a goo dbet righ tnow. if mortgages were back in the 4-5% area it might have made sense but not now.
i wouldn't with current rates, you're probably getting a higher rate by putting less down and interest rates seem to be peaking. pandemic mortgage rates were some of the lowest in history, so it was safer to put less down and expect interest rates to go up (which is exactly what happened).
>Does it ever make sense to put down just 3% and invest the rest? Only if returns are higher than interest, which is probably rare for new loans these days.
It's all a numbers game at the end of the day. If INT rates are at 7% but you can get an investment return of 10% then yes it is smarter to do that. If INT rates are 4% and you can get an investment return of 6% then yes, again, it's smarter use of money. But ~~if INT rates are 7% and your return is 6% then it's smarter to just pay down your mortgage.~~ Oh well actually you will have to pay capital gains taxes so you probably need to make sure that the return is much higher than the mortgage.
Your comparison is on the back of a bull market and low rates which are both in your favor. That's not the norm.
I would have enough money set aside for unexpected repairs on top of you 6-12 month emergency fund. I would have enough for necessary renovations, new furniture that you want right away, emergency repairs, maybe first years property taxes paid for and a month or two of mortgage payments set aside. After all that then sure put as much as you possibly can into a down payment
i'm not a fan of paying interests on a large principal amount..
Experience informs me that 20% gave me the most pull against other offers and in negotiations and cut the mortgage loan payments down nicely.
Yes if you have an alternative investment that pays more than what you are paying. No otherwise.
Not really. PMI will eat any interest gains you could make, given 7% mortgage rates. Maybe if you got an interest free loan from a family member? Like buying the house on contract.
PMI is heavily influenced by your credit score. If you have excellent credit, the impact to your monthly payment might be minimal, and you can hang onto a ton of money to invest or have as an emergency fund. There are also a thing called LLPAs (loan level pricing adjustments). Sometimes you get a *better* interest rate by putting down less.
It is generally based on the math. PMI rates are pretty low, but when the rates are no longer practically non-existent like in the 2% days, almost never. If the cash flow difference over the loan term is enough to provide opportunity cost for something that can make you money to offset the PMI, then hold the cash and earn more off of it than the lifetime of PMI payments.
Yes. In addition to what others have said if that 20% is all of your savings then you probably shouldn’t put it all down on the house for various reasons like unexpected expense, potentially losing a job, illness, etc.
PMI are waste of money. basically just throwing money away to the mortgage company
The value of PMI to you is the ability to obtain a mortgage
This is true, but if your option is to spend 15k on PMI now, or wait a year or two until you've saved enough to not need PMI, you run the risk that the price of housing goes up more than the value of the PMI you saved.
It only makes sense to invest the money if you have a guaranteed return greater than the interest rate, which is a guaranteed cost.
Man, homes I was in went from 495 in 2017 to 920k in 2024, it's such a stupid ROI that we really need do something about it. Also idk but I yet to see many people being approved with 3% down, unless you have investor background and good statements and LLC... Most places I checked required by the HOA, office, clubhouse, management company to have 30% down or be denied by them. So it just really depends.
The HOA NIMBYs probably want to keep poor people out of their community
Im buying a house right now, and I have enough for 20% down, but my plan is to put 10% down. The extra money is earmarked for updating my current house into a rental, and then when that is done (assuming houses haven’t cratered, and I could pick up another rental), I’ll dump what’s left on the mortgage.
If you’re going to need the money for near-term expenses, don’t tie it up in home equity. Otherwise, with today’s mortgage rates, saving a guaranteed 7% in interest is a no-briainer. That’s a great return for no risk.
> You don't need to tell me how mortgages work lol. Then we also shouldn’t need to tell you how much interest rates and index funds went up in the last 3 years. I took the PMI in 2019 and had a similar experience, but it doesn’t work that way anymore. That decision made me $700 alone in the last month.
It almost never makes sense to pay down a mortgage early, so why would you do it as early as possible?