0% down higher interest vs 5% down + PMI lower interest

5 Replies

Hi everyone!

I am currently purchasing a single family home to occupy and eventually rent out. 

The main reason behind purchasing a single family was the ability to get a first time home-buyer loan for 30 years fixed.

The bank I am working with offers 0% down with no PMI but a 4.875% interest rate.

Another option I am entertaining is going with a conventional 4% rate with 5% down and PMI. (The funds are available for 5% down)

1st option end up with high monthly payments but more cash left in my pocket. 

2nd option leaves me with a lower monthly payment but less cash in my pocket. The difference between the two is about $40 a month. (5% down being the lower payment)

The trouble I am having is which one would benefit me more as a rental when I decide to move on (and potentially invest into more RE). 

Thought I would reach out to the wise folks down at bigger pockets and pick your brains!

Thanks!

@Olga B. That depends on your timeline.  If you plan on moving on to something else rather soon, then money in your pocket today is good.  If you are going to wait, then money in your pocket today is less important.  I would look at an amoratization table and figure out where your "break even" point is.  That should give you a good picture of you timeline, and should help you decide.

Greetings Olga B, If you could give me some numbers to work with I can definitely provide a better analysis of your situation like how much your PMI going to be monthly, how long are you going to wait before you buy another house, and your financial situation currently.

Base on assumption  I would pick 2nd option because you would have better cash flow when you rent it out.    

How long will it take you to save the 5 percent down payment ?
If the house was (hypothetically) 100k. The 5 percent was 5k. How long would it take you to save the 5k ? If it would take a while then go with the 0 down payment option. In all reality, I think the higher interest compensated for the PMI.
Also look at how long you are keeping the house for. If it’s a conventional loan, the pmi goes away after you hit 20 or 25 percent equity on the loan.

Oh jeeze, we are doing 0% down loans again???

@Olga B. , you came up with "$40 a month" saving, but that assumes you already know how much you would be borrowing to begin with, right? (Which you inconveniently neglected to specify in your post).

Are both options only available as a first time owner-occupier buyer?

Are either of those options the same a normal FHA-approved loan (which asks for 3.5% down)?

Or, would that be a third option, which you haven't compared yet? [Which, by the way, is not just for first timers!]

As you can see from the earlier responses, there's a lot of "it depends" scenarios.

We simply don't know enough about your goals, or, your foregone opportunities if/when you spend that 5%.

[In general, I agree with Joe, above. Zero deposit should probably be for VA only]. Welcome to BP. All the best...

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