which rate/terms should I go with?

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Hi @ Andy. I say 15% for the same reasons that you stated.

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Your payment at 4.125% on 160k is also lower by $50 a month than at 4.50%..so your net savings is $110 per month with the expense of the additional $8000. Even if your PMI goes away after 3 years in the higher rate loan...the $60 a month payment difference goes on for as long as you have the loan.

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@Account Closed

It seems like you're leaning towards the lower down payment option.

Yes, you can write-off the PMI for tax purposes so this will save you a chunk of money.

My question would be, do you think that there is another deal out there that you can get with your $8k down payment where the ROI is sufficient enough to pay the extra interest and the PMI? I think in that analysis is where your answer lies. If there are other deals out there that you're dying to get after, then do the lower down payment and acquire another asset. Money is fairly cheap (by historical standards) so get it while you can.

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Hi @Account Closed .

MATH TIME!

The choice amounts to paying $122 extra each month to keep $8,000 in your checking account today.

You know what we call it when someone charges you an amount of money in exchange for you being allowed to put money in your checking account? We call it a loan, and we can do our math here like it was an $8,000 loan. 

$122 * 12 / $8000 = 18.3%!

In your scenario, given those two estimated settlement statements you posted, 20% down and then doing a cash advance from your credit card for $8,000 at 18.3%, is identical to doing 15% down w/ PMI and the higher rate.

So, the question really is: If you keep that $8k in your checking account, are you going to put it to work somewhere guaranteed to earn you greater than 18.3% ROI? If so, awesome, do 15% down. If not, put 20% down and skip the PMI/credit-card-cash-advance.

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Chill with the fancy math, @Account Closed .

I, being the nice fellow that I am, offer to write you a check for $8,000. All I ask in return is that you pay me $122 per month, each month, until you write me an $8,000 check in return. Oh, and if you don't write me that $8,000 check, or pay me my monthly $122, I get to take the house. 

Do you want my $8,000?

The way you would (should?) approach this is just to multiply $122 by 12, divide by $8,000, and ask yourself if you can put that $8k to work earning more than that, in which case you'd come out ahead via arbitrage. 

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I also agree with Charlie and Chris.

The 8k additional down is going to save you quite a bit of money and you still have that 8k in equity (which your posts seems to forget about). In my opinion, any PMI is a waste of your money and should be avoided unless absolutely necessary.

For your next investment, I'm sure you can raise 8k in private funds at a rate lower than you'll pay for the PMI. I wouldn't put so much importance on 8k in funds - most seasoned investors would view 8k as a rounding error.

-Christopher

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@Account Closed What do your reserves look like without the extra $8k? You've thought it all out, so maybe the 15% down will help you sleep better?

The problem is...statistically, the chances of you keeping this loan longer than 3-5 years are very low...the only one that makes money here if you put down 15% instead of 20% is the lender...you save nothing and the $8000 will be consumed into another expenditure that will bring you less than it will if you put it into this transaction.  So keep analyzing it to death...meanwhile, investors are investing...and making money.  You are consuming the one thing you can never replace...

@Account Closed

I understand what you're saying and I also understand the CoC ROI Calculation, but I don't think that is the issue that you are struggling with. Fifteen years ago, I might have agreed with you because when I was first getting started, $8,000 seemed like a lot of money and I had no idea if I would be able to raise that much if I needed to. Basically, you're going to be paying an additional $24,000 or so over the life of the loan to keep that $8,000 in your pocket now. If you're content doing that, then do it. In the long run, you need to be able to sleep at night with the decisions you make. I'm just not a fan of giving away free money to banks :)

-Christopher

Originally posted by @Account Closed

I finally had a chance to run some numbers after the kids went down... I was trying to stay engaged while having 2 kids under 2.5 running/crawling around...phew that was not happening!

Based on my projections at year 4 after the PMI is done the 15% down will perform the same as the 20% on a CASH ROI analysis. From that point on (years 5-30) the 15% down will out perform on a cash ROI against the 20%.  The smaller down payment will continue provide a higher return every year there after, meaning the advantage gets greater each year.

Interestingly enough when you figure in the equity pay down to the equation the 15% down provides a higher return than the 20% down does from the very beginning.

The only flaw to the 15% down is the smaller cash flow each year... which certainly matters. I guess it's deciding if the cash flow is king or if the total return on investment as well as COC ROI is better?

I think putting less money down up front ($8k) paired with a better COC and total ROI may exceed the benefit of cash flowing $720/year more with 20% down. $720/yr cash flow isn't going to change my life. That way I'm $8k closer to my next purchase and using more leverage.

Thanks again for the feedback and making me really get into it and crunch the numbers!

What do you think @Ben Leybovich

The "Total return" you are referring to is the IRR, and yes - the higher the down-payment the more difficult it is to drive the IRR. This is pretty intuitive - value of cash is greater today than at any point in the future. So, since the NPV of future cash flows gets pinalized more the further out you go, making a large DP puts you behind before

I am all for low down. But, it has to make sense

All excellent insight. Yes, @Account Closed , everything hinges on the magic $8k. Personally, I'd hang on to it for that 'next' house you mentioned. If it's in the near future & that 8k is the difference between you and the house, losing out on that house could cost you more than the saved $120.

Great dialog above for evaluating every penny. The only thing not factored in is "lost opportunity" & how do you put a value on that?

Things that make you go "Hmmm".

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