Is an 80/20 loan a good idea? with a 10% discount right off the bat

[TheSiege]

The neighborhood housing place around here has the mortgage option like this

150,000 dollar house
120,000 for the first loan/ 80
19,000 for the 2nd loan/ 20 + closing costs
15,000 0% deferred loan if you live in house for 15 years/ 10% discount

the rate for the 19,000 is 8% and add about 178 to you monthly payment, as soon as you pay this off the 178 is off forever, as opposed to paying mortgage insurance.
bringing the total monthly payment to about 1055


the 120,000 is going to be around 6.5%

does this seem ok?

my bank is offering 6% on 150,000

which would be better?

 

[dullard]

I edited with newer clarification of the OP numbers. Thus, this post is deleted since it was no longer valid.

 

[tfinch2]

6% on 150k for 15 or 30 years?

 

[TheSiege]

Originally posted by: tfinch2
6% on 150k for 15 or 30 years?

these are all based on 30 year loans, and its 6% after all is said and done
you know how most loans are like 6% but end up being like 6.13
it would be 5.88 and when all is said and done 6%

 

[imported_griffis]

its always best to do 100% financing if you can

 

[kyparrish]

We purchased our home with 100% financing. We paid closing costs, so didn't have to worry about that.

It ended up being a significantly cheaper monthly payment to finance 100% on the first mortgage, and pay PMI every month, even with the mortgage interest deduction we would have at the end of the year with an 80/20 loan.

I guess just see what the difference would be in your case. It made sense for us 1) because the payments were significantly cheaper and 2) We bought THE cheapest house in the neighborhood that needed some TLC. I'm sure we'll be able to have the house reappraised in a couple of years to get the PMI dropped after all of the work we've done to it.

 

[TheSiege]

Originally posted by: griffis
its always best to do 100% financing if you can

but then i would be paying ~75 bucks a month for the entire length of the loan for mortgage insurance.

with the 80/20 im paying like 178 for 30 years toward equity or if i pay it off sooner, and i will, im only paying like 178 for 2 years with only 1600 in interest for that amount of time


and lets not forget that i will be getting a 15k discount
and if i get it approved first, i can take off up to 10k from the deffered loan of the 15k if i do home improvements. so if i move before the 15 years i would only need to pay back 5k total

 

[kyparrish]

Originally posted by: TheSiege

Originally posted by: griffis
its always best to do 100% financing if you can

but then i would be paying ~75 bucks a month for the entire length of the loan for mortgage insurance.

with the 80/20 im paying like 178 for 30 years toward equity or if i pay it off sooner, and i will, im only paying like 178 for 2 years with only 1600 in interest for that amount of time

You don't pay PMI for the entire 30 years. When you owe 80% of your homes value, you can petition to have your lender drop PMI. At least that's what I assume/was told.

 

[vi edit]

Originally posted by: griffis
its always best to do 100% financing if you can

If you are saying 100% in one loan, I disagree. You can get out of sizeable PMI amounts breaking it up 80/20. These can be anwhere from $50-$200(or more) a month. And it's not tax deductible. At least with the higher interest on the second loan you can deduct it.

Plus at least for me, there is some feeling of managibility having a smaller loan out there that I can easily whittle away at instead of single giant one. I can always knock out the smaller one in a fairly quick manner if I want.

 

[TheSiege]

Originally posted by: vi_edit

Originally posted by: griffis
its always best to do 100% financing if you can

If you are saying 100% in one loan, I disagree. You can get out of sizeable PMI amounts breaking it up 80/20. These can be anwhere from $50-$200(or more) a month. And it's not tax deductible. At least with the higher interest on the second loan you can deduct it.

Plus at least for me, there is some feeling of managibility having a smaller loan out there that I can easily whittle away at instead of single giant one. I can always knock out the smaller one in a fairly quick manner if I want.

this was my thinking, i can take care of this 19k loan, which would really be closer to 13k in about a year. right now i am saving 2k a month, after i get the house that will drop to about 1k a month, with tax return and company stock options, i should be able to pay this off in 12 months

 

[dullard]

Ok, here are the cold, hard numbers.

Assumptions (if you want me to change assumptions, let me know):
[*]Assume those were all 30 year mortgages and the 20% loan was 15 years.
[*]Assume you don't pay extra principal on any mortgage/loan.
[*]Assume $4000 closing costs.
[*]Assume $75/month PMI if you get a 30-year mortgage that ends when you pay off 20% of the house (it is normal for PMI to end when you pay 20%).
[*]Assume the house value is constant.
[*]Ignoring other house costs which are the same for either option (taxes, insurance, realtors to sell the house, maintanence, etc.)
[*]Assume you never pay interest on that $15,000 loan no matter what happens.
[*]Assume that $15,000 loan is not forgiven and is not really a discount as stated in the OP.
[*]Ignoring income tax complications.

Fancy loan that you suggest
[*]Monthly payment on mortgage: $758.48.
[*]Monthly payment on loan: $181.57.
[*]Total monthly payment excluding escrow and other costs: $940.06. This is still off from the OP's numbers, he is still wrong somewhere.

Normal 30-year loan
[*]Monthly payment on mortgage: $923.31.
[*]Monthly payment on PMI: $75 for the first 12.5 years.
[*]Total monthly payment excluding escrow and other costs: $998.31 for first 12.5 years, $923.31 for remaining years.

Net gain by going fancy:
[*]Year 1: $565.30
[*]Year 2: $1,100.68
[*]Year 3: $1,602.61
[*]Year 4: $2,067.20
[*]Year 5: $2,490.19
[*]Year 6: $2,866.90
[*]Year 7: $3,192.20
[*]Year 8: $3,460.45
[*]Year 9: $3,665.49
[*]Year 10: $3,800.55
[*]Year 11: $3,858.23
[*]Year 12: $3,830.41
[*]Year 13: $3,258.25
[*]Year 14: $2,132.03
[*]Year 15: $891.16
[*]Year 16: $1,784.63
[*]Year 17: $2,726.82
[*]Year 18: $3,719.49
[*]Year 19: $4,764.41
[*]Year 20: $5,863.36
[*]Year 21: $7,018.16
[*]Year 22: $8,230.62
[*]Year 23: $9,502.54
[*]Year 24: $10,835.76
[*]Year 25: $12,232.07
[*]Year 26: $13,693.24
[*]Year 27: $15,221.03
[*]Year 28: $16,817.13
[*]Year 29: $18,483.20
[*]Year 30: $20,220.82

With these fixed OP numbers, fancy is slightly better. However, one issue remains, why does the OP think he would pay nearly $1055/month with the fancy route?

 

[TheSiege]

just for the record on the "fancy" loan its 880 for the 80 loan and 178 for the 20

and total of about 1058 monthly payments.

the lady showed me someone elses loan that was almost identical to mine
assuming i dont pay closing costs, which i will

 

[xgsound]

My understanding is that PMI is dropped (as in not forever) when the owed balance goes to 80% of the purchase price. Some banks (not required) will allow you to count equity if the value goes up or significant dollar investment was made to increase property value.

That 15 year discount sounds strange to me. Do they charge interest on it for 15 years or is it a penalty if you sell before 15 years? I'd take whatever lower price I could get now instead with no strings.


Jim

 

[dullard]

I edited with newer clarification of the OP numbers. Thus, this post is deleted since it was no longer valid.

 

[TheSiege]

Originally posted by: xgsound
My understanding is that PMI is dropped (as in not forever) when the owed balance goes to 80% of the purchase price. Some banks (not required) will allow you to count equity if the value goes up or significant dollar investment was made to increase property value.

That 15 year discount sounds strange to me. Do they charge interest on it for 15 years or is it a penalty if you sell before 15 years? I'd take whatever lower price I could get now instead with no strings.


Jim

yeah the 10% off is deferred and interest free if you are the primary occupant for 15 years.

here is the info

 

[vi edit]

Originally posted by: dullard
Sorry about the delay, but I posted the numbers above.

As you can see, the fancy loan is better ONLY if you sell the house between year 15 and 18. Otherwise the normal loan is better in all other cases. The odds are the normal loan will be better.

Since most people sell their first home after 5 years, in your case, at the 5 year mark, the fancy loan will cost and extra $568.08. Why do it? Take the normal loan.

In five years he also pissed away $10,680 in PMI that he can't claim back. At least with the interest he paid out he'll get a little more back at tax time.

Cold hard numbers don't translate to cold hard cash back into your pocket.

 

[dullard]

I edited with newer clarification of the OP numbers. Thus, this post is deleted since it was no longer valid.

 

[TheSiege]

Originally posted by: vi_edit

Originally posted by: dullard
Sorry about the delay, but I posted the numbers above.

As you can see, the fancy loan is better ONLY if you sell the house between year 15 and 18. Otherwise the normal loan is better in all other cases. The odds are the normal loan will be better.

Since most people sell their first home after 5 years, in your case, at the 5 year mark, the fancy loan will cost and extra $568.08. Why do it? Take the normal loan.

In five years he also pissed away $10,680 in PMI that he can't claim back. At least with the interest he paid out he'll get a little more back at tax time.

Cold hard numbers don't translate to cold hard cash back into your pocket.

the thing i like about the 80/20 is that the only money i am wasting is the interest on 20, which would only be around 1600 for 2 years. and after that, my house payment is dropped significantly 178 dollars.

PMI @ $75 x 12months x 12.5 years = 10800 with no equity from it or
~19,000 x 8% x 12 x 2 = $1600 interest and 15,000 equity

the only way the PMI would be decent is if i could have it removed in less then 5 years, but all i would end up with would be a lower house payment of about 75 bucks and nothing else

the thing that makes the 80/20 better is if i pay off the 20 quicker then normal, which i will, im hoping to do it in 1 year, which would be 800 interest and ~15k in equity

 

[vi edit]

Originally posted by: dullard

Originally posted by: vi_edit
In five years he also pissed away $10,680 in PMI that he can't claim back. At least with the interest he paid out he'll get a little more back at tax time.

Cold hard numbers don't translate to cold hard cash back into your pocket.

My numbers all include PMI. Thus, in 5 years, the fancy loan cost far more, but with PMI, the fancy loan only costs a little more (as shown in my post).

Although, I didn't include taxes in this post.

I think you have to factor taxes in to really make a true assessment. Yeh you might only get back about $.10 on a $1.00 paid in interest, but at least it's better than $.00 on a $1.00 with PMI.

 

[dullard]

Originally posted by: TheSiege
the thing that makes the 80/20 better is if i pay off the 20 quicker then normal, which i will, im hoping to do it in 1 year, which would be 800 interest and ~15k in equity

Remember to make the comparison fair. If you are going to pay off the 20 quicker than 30 years, then in the other case you must also pay off the mortgage quicker than normal. That way PMI will drop off too. You save both ways if you pay it off quicker. Don't pretend you only save one way and not the other way. That isn't a fair comparison.

 

[Vic]

I think the confusion here is that NHS Provo deal is somewhat unique, being a subsidized community homebuyers program, and not a typical 80/20 mortgage. It is legitimate however and I suggest you take it if you meet their qualifications and are willing to meet the requirement/stipulations.
Their interest rate is a touch high though and you should ask them about that.

 

[TheSiege]

is there a way to refinace just to get lower payments and not affect your interest, could i go to my bank that is doing the 100% financing in 2 years and drop down 15k for my principle and get my monthly payments lowered? and maybe at the same time get the PMI taken off? and not have to add those 2 years back on to the loan?

and also the 80/20 is giving me 15k off the house, or at worse 10k because i will be doing some improvements, tileing, carpeting, central air, and such

 

[dullard]

Originally posted by: vi_edit
I think you have to factor taxes in to really make a true assessment. Yeh you might only get back about $.10 on a $1.00 paid in interest, but at least it's better than $.00 on a $1.00 with PMI.

It makes it hard to do on a public forum. What income does he have and is he married? What state does he live in? Heck, what country are we talking about? Are there other deductions such as massive medical bills? All of these are important questions that we don't know and I can see reasons that posters won't post them. And I certainly won't ask them. Thus, I can't reliably factor in taxes without this info.

The true comparison is:
(A) Pay in $1.00 in interest, which is tax deductable (net cost of maybe $0.75 in the 25% tax bracket).

vs.

(B) Pay in $0.70 in PMI, which is not tax deductable.

Clearly, in this case, (B) may likely be better.


That is, unless his numbers are incorrect in the original post.

 

[dullard]

Originally posted by: Vic
Their interest rate is a touch high though and you should ask them about that.

Bingo. That is the whole problem, if I understand the OP numbers correctly. Its an otherwise good deal that is ruined with high interest rates.

 

[CU]

Originally posted by: dullard
Ok, here are the cold, hard numbers.

Assumptions (if you want me to change assumptions, let me know):
[*]Assume those were all 30 year mortgages/loans.
[*]Assume you don't pay extra principal on any mortgage/loan.
[*]Assume $4000 closing costs.
[*]Assume $178/month PMI if you get a 30-year mortgage that ends when you pay off 20% of the house (it is normal for PMI to end when you pay 20%).
[*]Assume the house value is constant.
[*]Ignoring other house costs which are the same for either option (taxes, insurance, realtors to sell the house, maintanence, etc.)
[*]Assume you never pay interest on that $15,000 loan no matter what happens.
[*]Assume that $15,000 loan is forgiven without payment at the 15-year mark.
[*]Ignoring income tax complications.

Fancy loan that you suggest
[*]Monthly payment on mortgage: $758.48.
[*]Monthly payment on loan: $139.42 + $178 = $317.42.
[*]Total monthly payment excluding escrow and other costs: $1075.90.

Normal 30-year loan
[*]Monthly payment on mortgage: $923.31.
[*]Monthly payment on PMI: $178 for the first 12.5 years.
[*]Total monthly payment excluding escrow and other costs: $1101.31 for first 12.5 years, $923.31 for remaining years.

Why did you include the PMI in the fancy loan? With a 80/20 loan you do not pay PMI. That is the point of a 80/20 loan. Over on ChubbyWallets financial forum everyone says avoid PMI and do 80/20 loans.