Hello all at BiggerPockets!
I am new to the site and I am looking to pick some brains. My girlfriend and I are looking at buying our first home in the Pensacola, Florida area and I have a series of questions that I can't simply plug into Google. I recognize that though these questions will vary from case to case, some of you may have general principles that you follow and us being first-time home buyers, I'm hoping to get into the mind of experienced real estate buyers and possibly mortgage brokers. First off, should we spend more on buying down the interest rate or buying down the principal? Right now we have enough to cover 20% down on a $200,000 mortgage at about 4.1%. I know we would have PMI to pay if we went below 20% down but my question is, would we save more money with a reduced interest rate than we would spend on PMI? Second, should we go with a 20 year mortgage or a 30-year and pay down principal with the difference between the two? I understand there will be considerations and caveat to every single question I can have but I have so many of them and I don't know where else to get a straight answer. Thank you all in advance!
You may be over thinking here. 4.1% fixed 30 year mortgage is never going to happen again in your lifetime. Personally I would take as much as I could afford and spread it as long as I could. Yes you are paying more interest in the long run but you are also reducing your monthly cash outlay. The question is can you earn more than 4.1% with the freed up cash by investing. I generally earn 35% to 70% on my cash by investing in rentals or flips. Buying down interest is pretty much paying the interest up front. I would not do that to 4.1% interest rate.
PMI is money wasted in my opinion. It doesn't go towards anything except the bank and I would avoid it, especially for your home. You could pay the 20% and then put the PMI towards your principle.
20 vs 30 year should come down to cash flow. The way amortization work, the shorter note will always cost less over the duration and forces you to pay down the note faster.
I calculated mine and I save 35k if I refi from our 30 year to a 15. However our cash flow right now would be squeezed since the monthly payment would increase roughly $200.
I would say go for the 20 if this is where you will live and if you have the room in your budget to easily cover the difference.
Amortization calculators are your friend.
@Gabriel Parker I would look into saving some of your cash and using a lender paid option with less down. If you credit is good there are plenty of options with competitive rates that only require 3 to 5% down if you speak to the right lender. My general rule is cash is king so if you have it keep as much as you can.
I would also recommend the 4.1% 30 year fixed. There is no point in paying down a mortgage in a rush since all that does is create dead equity, cash that could be better used to invest. If you are going to pay it down in a hurry do so from the perspective of forced savings that you then re mortgage or pull out with a HELOC in the future. Having dead equity is a terrible waste of good money.
Hey @Gabriel Parker ,
I can put you in touch with a couple local mortgage lenders if you are want to have them run the numbers for you. The answer, in large part, will depend on how long you plan to own the home. I personally agree with the poster that said PMI is a waste of money, particularly on your primary residence. I am local real estate agent here in Pensacola so if I can help you with finding a lender or finding a great home please let me know. -Matt
@Gabriel Parker Congrats on buying your first home! You are asking the right questions. Here's my "2 cents"...
1) Avoid the PMI if at all possible. While it can make sense to preserve cash and pay the PMI in an investment situation (where you can potentially earn more leveraging that money) this is your first home purchase.
At this point in time it doesn't sound like you are asking about becoming an investor (maybe we will lure you to the dark side later)! There are ways to get access to that equity later should you need it.
2) To answer this question: "Should we go with a 20 year mortgage or a 30-year and pay down principal with the difference between the two?" I'd like to know....
Is there is any difference in the interest rate or costs between a 20 year and a 30 year mortgage?
If not then get the 30 year and you can always make the payment as if it was a 20 year. Then you have the option of not paying more should circumstances change. As @Nuhan Demirkan mentioned, a 4.1% fixed rate is a historically low interest rate.
3) What's your credit card debt look like? If you are paying more than 4.1% interest then put the extra money there every month before paying down more principal to save interest on your home (back to the 20 vs 30 year question).
4) Play with an amortization schedule as mentioned by @Kyle Eckert and you will be able to compare the interest savings to the costs (and the investment potential)!
When you are done with your purchase please update us with a photo of your new home!
Thanks for the input guys! @Nuhan Demirkan that is a good point about the opportunity cost of the money used for paying down the interest.
@Kyle Eckert those are pretty drastic savings. Is that all from the shorter term of the loan? Or is some of that attributed to a lower interest rate as well? I will definitely utilize an amortization calculator though.
@Melvin List if the bulk of the down payment wasn't coming via gift money from in-laws I would consider that more heavily.
@Thomas S dead Equity is a term I'm hearing for the first time but it seems a good one to know. My Hope Is, in the future we will be able to refi or pull out a HELOC to have access to some investment capital.