So, in a perfect world, is this how much I should have saved up for a house?

[ScrimpAndSave]

Livingalmostlarge,

I never considered a 2nd mortgage. Does this 2nd mortgage be sort of like an 80/20 mortgage?

[LivingAlmostLarge]

Yes, but remember all circumstances are different and it's based on what you can afford and why you are doing it. Our neighbors wanted to get into a house, but didn't have a substantial DP. They could afford the house on just their base salaries, but they are largely bonus based as well, both MBAs.

So they bought with the intention of refinancing after they paid a large chunk off and they have. They went from $500 to $400k in about 2 years. But like she was telling us they have large bonuses, but smaller salaries.

[PrincessPerky]

I will ditto the not needing 20K to furnish, If ou have house fever that bad, skip the furniture save up, I would guess Dad will let you take your bed with you, add in some cheap kitchen 'stuff' and you can survive just fine, while using some of the previous savings for the furniture.

No need to move in and have a display house the next day IMO.

[jIM_Ohio]

If you do not put 20% down, doing an 80-15-5/80-10-10 type loan is probably cheaper than paying PMI. Payments will be slightly higher, but the tax return will get you the money back.

We are in an 80-15-5 right now. 5% DP. We have a plan to pay down the second mortgage soon. Obviously there are risks to this, especially with house prices falling. If you do an 80-15-5 like we did, I suggest you invest significantly- to let the leverage work for you. If you just do an 80-15-5 to get in to the house, but are not saving 20% of your paychecks, I would argue the house is too much.

[noppenbd]

It is my understanding that PMI may be tax-deductible, at least for the next few years: Tax Tip: Deducting private mortgage insurance payments

If this is truly correct, then it makes the 80-10-10 option less attractive.

[jIM_Ohio]

Disagree on the 80-10-10 less attractive. When I read the IRS publication it was temporary and could be removed.

The linked article has this:

At the end of 2007, the PMI deduction was extended to premiums paid in 2008 through 2010.

I would also look at IRS publications for the exact wording- when I looked into this when I refinanced in 2006 it was clearly temporary wording.

If the mortgage interest deduction is removed I could pretty much guarantee that President not getting re-elected and the senators and congress people also not getting re-elected- this would dramatically increases taxes of the working class.

That being said I have control when I own 20% of my house (pay off the second mortgage) and I have a lower interest rate on my first (5.75%) because it is only 80% of my mortgage balance.

Anything higher than 80% on the first and that rate at time I closed was looking to be 6-6.5% plus PMI.

Loans with PMI do not get competitive interest rates is my experience.

[disneysteve]

Loans with PMI do not get competitive interest rates is my experience.

Which is why the standard advice is to put down 20%.

Another reason came into play in the recent bubble.

If you buy with 20% down and after a year, your home is worth 15% less than you paid, you still have positive equity. If you had to sell, you'd lose some money but could still get back enough to pay off the loan.

If you buy with 10% or 5% or less down and after a year, your home is worth 15% less than you paid, you are in trouble. You now owe more than your house is worth. If you had to sell, you wouldn't take in enough to pay off the loan. If you had no other source of funds to make up the difference, you're screwed.

[LivingAlmostLarge]

Although if you were planning on paying off the 10 or 15% quickly it wouldn't matter. Some people have a plan to pay it within a couple of years.

When we bought with 80-10-10 we planned on it being paid in 5 years. It was done in about 2.5 years. Like our neighbors they were planning 2 years of bonuses would knock out the 15%.

[jIM_Ohio]

Although if you were planning on paying off the 10 or 15% quickly it wouldn't matter. Some people have a plan to pay it within a couple of years.

When we bought with 80-10-10 we planned on it being paid in 5 years. It was done in about 2.5 years. Like our neighbors they were planning 2 years of bonuses would knock out the 15%.

I had a 10 year plan for the 2nd mortgage and we are in year 2 of that plan. I think we might have it paid off by year 8.

[noppenbd]

You're right, PMI being deductible doesn't make the 80-10-10 less attractive, but it does make the 90 with PMI option more attractive (more competitive with 80-10-10), especially if you plan to be aggressive in paying down the balance. One would have to run the numbers to compare different loans, also considering paying points to reduce the interest rate. You are assuming the 90 with PMI would have a lower interest rate than the 80-10-10 but I think it is worthwhile to consider all options at that point. No point in closing doors ahead of time, right?

[jIM_Ohio]

You're right, PMI being deductible doesn't make the 80-10-10 less attractive, but it does make the 90 with PMI option more attractive (more competitive with 80-10-10), especially if you plan to be aggressive in paying down the balance. One would have to run the numbers to compare different loans, also considering paying points to reduce the interest rate. You are assuming the 90 with PMI would have a lower interest rate than the 80-10-10 but I think it is worthwhile to consider all options at that point. No point in closing doors ahead of time, right?

noppenbd- do you sell mortgages?

My comment -I am assuming the 90-10 with PMI will have HIGHER interest rate than the 80-10-10. Comparing the 80% chunk to the 90% chunk.

If you are doing 90-10 with PMI and have money to pay points, you are better of going 80-20 IMO- the equity will reduce interest rate more than the points will is my best guess (assuming the money available is close to 10% of home value).

If you will be aggressive paying down the balance, I would argue the 80-10-10 is better.

The 80% will be at a lower interest rate than 90-10.
The 10% can be paid on any schedule and you will get closer to 20% equity faster- this loan value is smaller and can then be paid off sooner.
80-10-10 does have higher closing costs (two loans)

With 90-10 option if you pay down to 20% early, you need to follow up and get PMI removed on your own.

I plugged some numbers into a web site
Amerisave - Great Rates. Low Fees.

Example numbers
400k house
360 purchase (90%)
where I live

30 yr fixed 6.875% $2365 payment PMI was not included in the payment for one reason or another.

400k house
320k purchase (80%)
where I live

30 yr fixed 6.375% $1996 payment

10% second mortgage for 40k
**would not accept inputs as second mortgage**
putting in as first mortgage shows numbers to be
30 yr fixed 7.125% $540 payment

90-10 payment is $2365+PMI
80-10-10 payment is $1996+$540=$2536

difference is $171. PMI is calculated as either a fraction of payment or fraction of loan balance, but even 1% loan balance is $360 in 90-10 situation.

I don't see how PMI comes out ahead. There is a larger deduction on 80-10-10 come tax time (more interest paid than 90-10, even if PMI is included for deduction I believe)

In addition in 80-10-10 case all a person needs to do is apply extra payments to $40k loan. Once that loan is gone they have more than 20% equity. In reality they would get ~1% equity per year on 1st mortgage, so 20% ownership will come slightly sooner.

If a person has the money for 20% down, that simplifies this.
If a person does not put 20% down, the 80-10-10 is better than any PMI option which I have ever ran numbers for.

[LivingAlmostLarge]

Also the rates played a big role. Our HELOC was like 2-3% and so we paid it off a lot faster than expected. I tend to agree with Jim about the PMI, it sounds like the numbers we ran.

[ScrimpAndSave]

Yeah I think when it comes down to it...I should just focus on saving 20%.

[jIM_Ohio]

Yeah I think when it comes down to it...I should just focus on saving 20%.

You will be accumulating 20% over a short period (3 years?) so waiting is a good option.

For some people waiting means 7-10 years, and that is where the 80-10-10 programs tend to come out ahead.