Maybe a much cheaper house is a better idea...

[jIM_Ohio]

Good advice jIM - my only question here is how to account for the mortgage insurance (PMI?) required for downpayments less than 20% - how does that affect the overall cost/benefit analysis?

I own less than 20% of my house, and owned less than 20% of my previous house. Didn't have PMI in either situation.

Took out an 80% loan on the 1st mortgage
put another 5-10% onto a second mortgage.

In our current situation we pay extra on our second to get to 20% equity fast (cannot refinance an 80-15-5 loan these days).

[momof1in150]

I own less than 20% of my house, and owned less than 20% of my previous house. Didn't have PMI in either situation.

Took out an 80% loan on the 1st mortgage
put another 5-10% onto a second mortgage.

In our current situation we pay extra on our second to get to 20% equity fast (cannot refinance an 80-15-5 loan these days).

This is not an easy loan to do anymore. FHA requires a minimum of 3% down and you will pay PMI. The days of a second mortgage to cover the 20% are pretty much gone.

[disneysteve]

I own less than 20% of my house, and owned less than 20% of my previous house. Didn't have PMI in either situation.

Took out an 80% loan on the 1st mortgage
put another 5-10% onto a second mortgage.

I've never understood that. If the PMI is to protect the lender from default, why would they waive PMI is you borrow an additional 5-20% on a second loan. It seems like both lenders would want insurance at that point rather than neither wanting it.

[noppenbd]

I've never understood that. If the PMI is to protect the lender from default, why would they waive PMI is you borrow an additional 5-20% on a second loan. It seems like both lenders would want insurance at that point rather than neither wanting it.

1st is happy because their loan is first in line and is only for 80% of value of house, so they have some room if the value goes down. 2nd is in a more dangerous position if value goes down so the interest rate is usually 1-2 points higher to cover the risk. I don't know if this still holds, but that is how it was a few years ago. Obviously the theory doesn't work if the house goes down more than 20%.

[disneysteve]

1st is happy because their loan is first in line and is only for 80% of value of house, so they have some room if the value goes down. 2nd is in a more dangerous position if value goes down so the interest rate is usually 1-2 points higher to cover the risk. I don't know if this still holds, but that is how it was a few years ago. Obviously the theory doesn't work if the house goes down more than 20%.

That makes sense. Thanks. So the 1st is protected and the 2nd handles the higher risk by charging more rather than requiring insurance.

[LivingAlmostLarge]

I too bought our first place with a second mortgage. Turned it into 20% on the next place and I plan on rolling it into the next home.

But seriously you might be phased out income wise for a Roth IRA soon.

[jIM_Ohio]

This is not an easy loan to do anymore. FHA requires a minimum of 3% down and you will pay PMI. The days of a second mortgage to cover the 20% are pretty much gone.

I do not have an FHA loan.

[jIM_Ohio]

That makes sense. Thanks. So the 1st is protected and the 2nd handles the higher risk by charging more rather than requiring insurance.

yes- my first is 5.75% and second is 7.52%

plus all taxes and insurance are escrowed- meaning we cannot put these in savings and earn interest on them before paying the bills which only come 3X per year.

[ScrimpAndSave]

Wow...I have a lot of reading and absorbing to do. I guess I figured that with a house that is 300k, I wanted to make my monthly payments as low as possible and out down 20%. I really have to weigh what is best for us.

As far as phasing out of the ROTH due to our income...I am not sure how soon that will happen. During the 2012-2013 school year, I will be at $85k...and probably hitting $100k three years after that. My fiance's salary is going to be pretty low coming out of law school ($42k)...and he says it won't be on the rise for about 10 years...at least small increments till then.

Thank you so much for your help.

[jIM_Ohio]

Is the mortgage payment what you want to be low?

Or is it the sum of all debt payments you want to be lowest?
Or is the goal to be completely debt free as soon as possible?
Or is the goal to retire at earliest possible date?
Or is the goal to have a high net worth as soon as possible?
Or is the goal to be financially secure as soon as possible?

Some of those goals overlap. You are evaluating financial decisions and phrasing most responses over a 2-3 year time period. But every now and then I see something in a response which suggests you are looking much longer than the immediate 2-3 years.

You will have bigger bang for the current dollar to reduce the SL than the mortgage. Logic here is that you can probably get an 80-10-10 loan (10% down, 2nd mortgage 10%, 1st mortgage 80%) and use the extra savings (from not putting more down on the house) to remove a student loan from the debt load- then work on reducing all student loans over a 5 or 10 year period, then using that money to apply to extra mortgage payments 10 years down the road.

Goes back to liquidity and cash flow. If you do 80-10-10 you get a slightly higher mortgage payment (guessing $400/month), but have tied up less money in an illiquid asset (house). Use the extra 10% (around 40k) to knock out one of the student loans (that would save you $150/month, maybe??), then send that extra $150 to one of the other student loans (and snowball that debt)- $300 to the next and so on.

My guess is that the student loans on 110k would be around $500 or $1100/month (I had $70-80k and paid ~$800/month for a 10 year repayment). Assuming worst case ($1100/month to student loans), you could free up the $1100/month sooner by paying off the student loans that you could by doing the following
a) putting 20% down on house (might drop mortgage payment down by $400/month relative to 80-10-10)
b) putting 20% down on a smaller house (mentioned by you in other threads)
c) applying the 40k (10% of 400k) to any other financial issue other than the house will probably improve cash flow more than making a larger down payment.

Here is an excercize to think about:
Create a married budget now
Assume the 80-10-10 mortgage, use an ammortization table to find payments for a $320k 1st at 6% and 40k 2nd at 9%.
Assume all student loans are in repayment mode and list minimums (no consolidation).
Add in utilities, car payments and other bills into budget.
My guess is the student loans and mortgage will be the two biggest line items. If they are not, tell us what the other big items are (car payments and wedding expenses would be my guesses for other things which might pop up).

Then realize there is a TIME element to everything. The 9% 2nd mortgage has a cost of $325 over 30 years. If you pay the 40k to 1st mortgage it "saves you" $325/month over 30 years.

I assume 110k of student loan debt...
Apply the 40k to student loans- if student loan payment (remember no consolidation) is a payment of $200/month on a 15k loan (for 10 years), the 40k takes the $200/month away on almost 3 loans like this.

Saved you $600/month which you have access to NOW.
Then apply that $600/month to the remaining 70k of student loans and if that payment was around $800/month and the $600 freed up the $800 in 6 years (guessing at early repayment payoff- you need to run that math), then in 6 years you have $1400.
Now apply that $1400 to the 2nd mortgage of 40k and see it is paid off in another 2 years (another guess, you need to run that math).

If you tied the initial 40k up in house it is not liquid.
You would get the $1300 in student loans freed up on a 10 year repayment plan. You would have 20% equity and maybe a slightly better interest rate (.125 or .25%) on the first with 20% down.

If you used the 40k to pay down the loans you freed up the same $1300 of the loans, and freed it up probably 3-4 years earlier than you would have otherwise.

I am guessing at the payoff timelines, but your fiance's numbers in many ways looked eerily similar to mine when I graduated. I don't know his loan terms (repayment length) to know for sure though.

But this is a risk thing.
The current economy has shown less than 20% down can be tough. I owe more than my house would sell for- but this is only a problem if I sell.
If you get the big house, and do not plan to move, then that risk is "only on paper"- because you do not intend to sell.
It might be your risk profile to do 20% because that is what is common... and you might be content to have the student loan debt for 10 years with 20% down. If the tradeoff is you get student loan debt paid off sooner (6 years, not 10) and then get 2nd mortgage paid off 2 years later, you have reached a better financial situation (more liquid cash flow sooner- about $1500-$1800) 2 years sooner than the "nominal plan".

If you need to weigh decisions you should start with the minumums on everything. Put lowest down payment on house (10%), not consolidate the student loans, and do not incorporate any extra payments to principal on anything. Make sure you know the timing of when each debt would be paid off on the minimum plan.

Look at what cash you have which is extra.

Apply it to loan A and look at the timeline change
Apply it to loan B and then look at the timeline change
and continue this through with each debt ("time value of money").

A then B then C
B then A then C
B then C then A
and so on

ask yourself what the risks are in each situation.

for example in the example I am using here (80-10-10) you have more debt in year 1 and less debt in year 8. Comparing this to 80-20, you have less debt in year 1, but when comparing year 8, you actually have more debt in the 80-20 plan at year 8.

Is goal to enter situation with as little debt as possible?
Is the goal to be debt free as soon as possible?
Are you comfortable with the risks of one vs the other?

[ScrimpAndSave]

Jim - I can't thank you enough for bringing up all these points for me today...I need to reread it and weigh everything.

Just to be more specific...when we get married:

My salary: $60,000
Fiance's : $42,000
Gov't loans: $65,000 at 6.8%
Private loans:$65,000 at 8.2%

It is estimated that he will be paying $800-$900 a month for 30 years.

Cars are paid off. No credit card debt. Wedding is paid for in cash. No other "big ticket" bills.

I guess when you mentioned all of the possible goals...I just want to do what is really smart and live within our means. The current plan is to stay with my dad for two years and then buy a house. If we max out our ROTH and save at the same time...I will have about $65,000 saved...


Oh...and the forever home is $300,000...not $400,000...which helps a little.

[jIM_Ohio]

Jim - I can't thank you enough for bringing up all these points for me today...I need to reread it and weigh everything.

Just to be more specific...when we get married:

My salary: $60,000
Fiance's : $42,000
Gov't loans: $65,000 at 6.8%
Private loans:$65,000 at 8.2%

It is estimated that he will be paying $800-$900 a month for 30 years.

Cars are paid off. No credit card debt. Wedding is paid for in cash. No other "big ticket" bills.

I guess when you mentioned all of the possible goals...I just want to do what is really smart and live within our means. The current plan is to stay with my dad for two years and then buy a house. If we max out our ROTH and save at the same time...I will have about $65,000 saved...


Oh...and the forever home is $300,000...not $400,000...which helps a little.

Here are steps to do (from where I sit as an amateur financial planner)

1a) 102k gross income- calculate take home using a paycheck calculator PaycheckCity.com | Paycheck Calculator
1b) establish a plan to save 15% for retirement (16k per year) and put dollar amount in monthly budget
1c) establish a plan to set aside 5% for short term financial needs (5k per year) and put dollar amount in monthly budget.
--
2a) create a budget based on house with 80-10-10, and $800/month student loan payments- make sure the 80% payment number, the 10% payment number are on different lines
2b) outline how much is saved now
2c) outline how much is saved at end of each year (2008, 2009, 2010 and so on)
2d) add a line item to budget to "save for house"- do not use the 5% number above as earmarked for house
2e) calculate total savings- sum house savings (2d) and short term savings (adding 5% from 1c) into the 2d total
--
3a) Create an ammortization table of 3 scenarios- 80% payment plan, 10% payment plan and a sheet which combines 80 and 10 so you can see when you will own 20% (this would be soonest point to refinance out of two loans into one loan)
3b) create an ammortization table for the student loan payments (each loan seperate table)
3c) if consolidation is an option create that ammortization table seperately
--
4) look at budget vs income. Your budget should have the savings (15% for retirement) accounted for already. It should have the 80-10-10 accounted for and you should see each student loan payment as it's own line item. Calculate FREE CASH FLOW- this is the amount your income allows you to "save" or "apply extra principal" to the various loans.
--
5) Take the free cash flow to one ammortization table and plug it into the "extra payments" column. See when the payment goes to zero. At the next month go to another loan and plug the amount of old loan plus paydown and see when that zeros out. Carry this through all loans.

**my take is sooner or later the extra $100 or $500 I squeeze out of something no longer gives me the result I want- for example if $100 over 2 years results in a loan being paid off 2 months sooner than the "original date", I tend to want that $2400 for something else (2 months not worth it). You will probably see this on 30 year loans if payment is applied at end ($100 month now is worth more than $500/month in 20 years as far as early payoff). You need to run the numbers to know what makes sense.

I am engineer, so flow chart I create would be

loan 1 (payoff date month A /year X)--> apply to loan 2 on A+1/X and see when paid off.
loan 2 (payoff month B/year Y)--> apply to loan 3 on B+1/Y and see when paid off.

loan 1 and loan 2 and loan 3 are student loans
you would need to do another run on the consolidated loans and see which gives earliest payoff date (should be with loans seperate, but if interest rate on consolidation is low, maybe not).

If you are good at math and follow this, forgive my gory detail
If you despise math but can run a spread sheet, I could probably set up the spreadsheet (I have done this for our debts already).

You could re-read the posts 30 times and it might get foggier each time. If you spend 8 hours with a spreadsheet you will have a black and white timeline.
Money decisions are time bound (to me)- it is about how much money is available when or what debt is paid off when. Make sure you look at this from 3 sides:

1) what gives the initial budget the most "free cash flow"
2) what gives you freedom from all debt except mortgage the soonest?
3) what pays the least amount of interest to banks over the life of the plan?

[gamecock43]

Holy cow jim! You got some mad skills! I have a lot to learn!

[ScrimpAndSave]

I know...isn't he amazing?

[GrimJack]

jIM, thanks! Will that still work in the current contraction/recession/depression? (sorry this reply is so late - I left it open on a computer in the back room and just now noticed that I had not sent it, sigh!)

This is in regards to the 80/20% mortgage.