3% vs 5% Conventional Loan Options

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3% vs 5% Conventional Loan Options

Huy Vo
New to Real Estate · Winston-Salem · Member since 2023 · 6 posts · 0 votes

Hi BiggerPockets, I'm trying to get a pre-approval to purchase my first home and getting quotes from several lenders for both 3% and 5% down options. The overall estimates are I'll be getting the same rate on either scenario but I'll pay about $55 (50%) more on PMI with 3% down but I'll be saving $5000+ in total money invested with this option.

Doing a quick calculation for 3% down:
- my monthly PITI is more because I owe more.

- I pay more PMI, at $55*12=$660 per year.

And if I was to put invest $5000 into something else, on average I could get probably ~10% growth which earns $500 a year which is much less than $660. This makes paying 5% much more attractive. Am I missing anything here? Is it in general better to just pay 5% instead of 3% for a conventional loan?
Would appreciate your advice. Attaching the quote here for better referencing.

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Mark Fein
Member since 2022 · 91 posts · 38 votes
3y

Do you qualify for one of the Conventional Home Ready or HomePossible products?    They are 3% down conventional loans and have reduced PMi costs.

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  • Huy Vo
    OP
    New to Real Estate · Winston-Salem · Member since 2023 · 6 posts · 0 votes
    3y

    Thanks for the reply, @Charles Lomolino III. I think I'll go with 5% as well. Also didn't know about that insurance prepay discount, have to message my lender and see if they offer that.

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  • Nick Conley
    Lender · Dallas, TX · Member since 2023 · 71 posts · 19 votes
    3y

    @Huy Vo, 3% can be a much better option for many buyers. The question to know how good of an option would be is would your income qualify for HomePossible or Home Ready through Freddie Mac or Fannie Mae respectively. 

    Is your lender offering the same rate at both? Some scenarios 3% down can yield better interest rate pricing.

    1Reply
  • Huy Vo
    OP
    New to Real Estate · Winston-Salem · Member since 2023 · 6 posts · 0 votes
    3y
    Quote from @Charles Lomolino III:

    @Huy Vo do you want me to send you a quote so you can see what I can offer? 

    Check out my Zillow Reviews


     Sure thing, I'll message you my email

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  • Huy Vo
    OP
    New to Real Estate · Winston-Salem · Member since 2023 · 6 posts · 0 votes
    3y
    Quote from @Nick Conley:

    @Huy Vo, 3% can be a much better option for many buyers. The question to know how good of an option would be is would your income qualify for HomePossible or Home Ready through Freddie Mac or Fannie Mae respectively. 

    Is your lender offering the same rate at both? Some scenarios 3% down can yield better interest rate pricing.

    Thanks for the response Nick. I've just checked and I'm disqualified for both. What does that tell you?

    Yes my lender offering the same rate at both. That's interesting to know. Maybe I should try to shop for more options at 3% down with better rates?



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  • Mike Scaccia
    Member since 2022 · 33 posts · 31 votes
    3y

    Good afternoon Huy,

    After fannie and freddie released updates regarding loan level pricing adjustments for credit score and LTV earlier this year.


    We are seeing that in alot of cases putting down less money is yielding people better rates. I always like to show people here is a 3% down, and 5% down and looking at both borrower paid monthly premiums on the insurance as well as a single premium where we are buying out the mortgage insurance upfront. You'll want to consider both your short and long term financial goals for the property. If you are shopping rates, i'd love to toss my hat in the ring! Feel free to send me over your email or send me a message! Thanks!

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  • Mark Fein
    Member since 2022 · 91 posts · 38 votes
    3y

    Do you qualify for one of the Conventional Home Ready or HomePossible products?    They are 3% down conventional loans and have reduced PMi costs.

    1Reply
  • Account Closed
    Lender · Charlotte, NC · Member since 2023 · 3 posts · 1 vote
    3y

    Hey Huy! Since you are on this site, I would suggest 3% down. The number 1 reason most investors do not purchase their next home is they do not have the capital. You often times cannot get back the extra money that you put down, but you can drop your PMI cost in the future.

    Almost all loans that we do this year will likely be refinanced in the next 6-12 months as most major institutions are predicting rates to go down (no crystal ball here, so anything can happen, but Morningstar came out a few weeks ago suggesting we could be in the low 5s by end of next year). Once you refinance, we will look at the new value, if your home has increased in value by only a couple of percentage points, your PMI will be cheaper likely on the refi. The extra $55/month may only last you 6-12 months or until you refinance. I would rather have the net $4500 in my bank account after 12 months.

    Also, if you look at ROI when you sell your home, typically the less you put down the higher return on your cash you get.

    Also, look at future closing costs on a refi. Many lenders will waive lender fees when they refinance their own loan as it is in our best interest to help you save money and help keep servicing in house as well. 

    Last, look into getting a 1-0 buy down on your rate for the first 12 months. This gives you a payment that is about $160/month cheaper, so put less down AND pay less per month. 

    Cheapest lender is not always the best lender.  You may save money with better advise from the get go  ;)

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