| Pay PMI in a special scenario? |
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Kiaser
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| Pay PMI in a special scenario? |
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Looking for ideas on a special case.
You find a property for $200k. You have the $40k + closing costs to pay down (to avoid PMI and the 80/20 loan). Do you pay the 20% down, or do you finance the full 100% and pay PMI? Pretty easy decision to me, put down the 20%, and in turn you get a smaller monthly payment, avoid paying PMI (which is a waste of money, IMO), and get better interest rates.
Now, let's add to the mix. You will live in the property, but will have roommates that will cover the entire monthly payment (even if it was financed at the full 100%). Not one penny comes from you towards the monthly payment (principal, interest, homeowner insurance, PMI, or property taxes).
Sure PMI would add higher interest rate, more to the monthly payment, and more paperwork but if you won't be paying any money towards this in the first place then why try to avoid it?
In this scenario, do you keep the down payment and use it elsewhere, or do you pay it to have a better mortgage setup? Assuming you charge the roommates the same amount in either situation, you would get more money each month from the roommates than is needed to cover the mortgage payment by putting 20% down. On the other hand, you could keep the 20% down, while still having the roommates cover the mortgage payment in entirety, and use that equity on other investments ($40k in this scenario, which is no small chunk of change and can cover/jump start IRA's, emergency funds, mutual funds, other real estate, etc).
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Wed Apr 26, 2006 11:29 pm |
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Kiaser
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Roommates aren't an issue. And any periods of vacancy can be covered solely without any harm to personal finances.
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Thu Apr 27, 2006 12:42 am |
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Rolo
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Not enough data: What is the interest rate of the 20 loan? Having the cash makes you less of a risk and therefore should get a decent interest rate. You can borrow the money more cheaply than you can get you cash to generate income.
"Expect me when you see me."
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Thu Apr 27, 2006 12:33 pm |
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Kiaser
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quote:
Originally posted by Rolo
Not enough data: What is the interest rate of the 20 loan? Having the cash makes you less of a risk and therefore should get a decent interest rate. You can borrow the money more cheaply than you can get you cash to generate income.
With a 20% down I would be looking at low 6% interest, wiithout 20% I'm not so sure.
But, within reason, a higher interest rate may not big a big issue if the monthly payment would be covered by the renters in either situation would it?
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Thu Apr 27, 2006 2:56 pm |
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Kiaser
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quote:
Originally posted by muneepenee
1. renters pae market rates. Yu kant tell em yu need 800$ & theers 3 av yu so eech pae 800/3.
Unless yu tell em the more bodees em find, eech split kost, so eech pae less.
2. wot cha meen "renters not an issue"
R yu renting tu famlee?
3. R yu kolleej students? Em R notoreeus bad.
R yu renting tu "freends"? Tri it & in a fyu months yu mae not hav NE freends NE-more.
4. du yu plan tu duit 30 yeers?
5. "any periods of vacancy can be covered solely without any harm to personal finances."
yu tri tu sae yu hav nuff munee, yu dont kare if yu rent or not?
6. wi du yu wanna duit?
want a plaes tu liv?
want a biz?
just like tu partee & the more the meereeer?
The market rates in my area currently would be enough to cover the entire monthly payment plus bills if I had 3 renters.
What I meant by renters not an issue is that finding good renters in a moments notice isn't a problem with all the people in my area that I could offer a room to.
I wouldn't be renting to family, no. No college students, I'm still young but not too much into being around that lifestyle anymore. The renters in question already have their own careers. Most of the renters are friends or acquaintences, two of which I've lived with for a few years and we get along fine.
The 30 year vs. 15 year as well as 20% down or fully fully finance is the options I really can't make a decision on since either choice won't be money from my pocket.
5. "any periods of vacancy can be covered solely without any harm to personal finances."
I'm just pointing this out as I'm not purchasing a home unless I could support it fully myself without renters (which I could), as I know that life can happen and all the planning in the world sometimes still won't work the way I thought it would. But if I can make extra money/equity by renting out rooms then why pass up the opportunity. I'll be buying a home within a year - year and a half regardless of if I rent or not. But if I do decide to rent out rooms, then I ahve lots of other options to choose from (as far as 15 vs 30, down payment vs fully financed, etc). If I was gonna buy the house and pay for it solely myself, I'd easily pay the 20% down and take a 15 year loan over a 30 year anyday (since both those choices are in my current budget).
The reason I want a house is to finally start putting money into some sort of large long-term investment, instead of paying rent. It'd be nice to have at least some sort of equity for the money I pay each month to live in a place.
The reason I'd like to rent besides the financial benefits is because I'm in a situation where it doesn't affect my like others. I'm young (25), not married, no kids, very little obligations, and I don't have a lot of "stuff" to get messed up or worry about at home.
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Thu Apr 27, 2006 3:38 pm |
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Rolo
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quote:
Originally posted by Kiaser
With a 20% down I would be looking at low 6% interest, wiithout 20% I'm not so sure.
Nono..I mean...what interest rate would you get on the second mortgage (the "20" in an 80/20 loan)?
"Expect me when you see me."
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Fri Apr 28, 2006 12:48 am |
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MattL
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I would do the 20% down and avoid the PMI with or without renters.
Debt Elimination
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Fri Apr 28, 2006 4:21 pm |
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Kiaser
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quote:
Originally posted by Rolo
quote:
Originally posted by Kiaser
With a 20% down I would be looking at low 6% interest, wiithout 20% I'm not so sure.
Nono..I mean...what interest rate would you get on the second mortgage (the "20" in an 80/20 loan)?
Oh, I misunderstood.
Not exactly sure but I'm guessing fair market rates since everything else would be in perfect order (credit score, zero debt to income ratio, etc).
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Fri Apr 28, 2006 4:29 pm |
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bong12187
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| Re: Pay PMI in a special scenario? |
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quote:
Originally posted by Kiaser
Looking for ideas on a special case.
You find a property for $200k. You have the $40k + closing costs to pay down (to avoid PMI and the 80/20 loan). Do you pay the 20% down, or do you finance the full 100% and pay PMI? Pretty easy decision to me, put down the 20%, and in turn you get a smaller monthly payment, avoid paying PMI (which is a waste of money, IMO), and get better interest rates.
Now, let's add to the mix. You will live in the property, but will have roommates that will cover the entire monthly payment (even if it was financed at the full 100%). Not one penny comes from you towards the monthly payment (principal, interest, homeowner insurance, PMI, or property taxes).
Sure PMI would add higher interest rate, more to the monthly payment, and more paperwork but if you won't be paying any money towards this in the first place then why try to avoid it?
In this scenario, do you keep the down payment and use it elsewhere, or do you pay it to have a better mortgage setup? Assuming you charge the roommates the same amount in either situation, you would get more money each month from the roommates than is needed to cover the mortgage payment by putting 20% down. On the other hand, you could keep the 20% down, while still having the roommates cover the mortgage payment in entirety, and use that equity on other investments ($40k in this scenario, which is no small chunk of change and can cover/jump start IRA's, emergency funds, mutual funds, other real estate, etc).
I just bought a single house residential which i plan to rent out. I was faced with the same scenario but I wasn't looking for a roommate. This question is about cash on cash return on investment. If the property is 200k and you have to put 40k to sidestep PMI, then your investment will be 40k because this is what came out of your pocket, the other 160k is derived from OPM. Now, how long will it take for you get back that 40k? With 100 financing, you don't have to get it back because you never invested anything. So all that principal payment and left over from the rental, you will actually get exponential returns(provided you continue to get a renter). With 80% financing you, it will take you many, many years before you can get your investment of 40k.
Back with my rental house... I bought it for 100k which the bank financed 100% and the monthly came out to $875 (to include insurance and property tax). Other similar rental house I have is renting for $1100. It cost me $10k to fix it up. So my investment is 10k vs. the possible 30k (with 20% down). It would have taken me 7 years and 7 months to get my money back with 20% down vs. 3 years and 1 month with 0 down. Hope this helps...
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Sat May 06, 2006 10:03 pm |
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pandashark
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I think the fact that you will be renting, and generating enough of a revenue stream to offset monthly payments, should not affect the decision if you're trying to figure which route will maximize your assets. This is probably somewhat obvious, but if you can invest your money at high enough returns to offset the PMI and higher rates, then that's the best route regardless of whether or not you're renting. And if you can't invest it at that rate, then you should put down the 40k as a downpayment.
I would probably lean on the more conservative side when it comes to a house, so I would put the down payment. I'm aware it probably isn't "profit-maximizing", but I can live with that. But the fact that you have renters shouldn't alter your decision. If you put down the 20% down payment, you'll just be able to pocket some of the rent every month and invest that, or whatever you wish to do with it.
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Mon May 22, 2006 11:24 pm |
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oldguy
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Over the years I made minimal down payments on my rentals. I have used IO loans, seconds, and paid PMI. In every case the leverage has worked for me. After the value of the houses grew, I took out the equity and invested it elsewhere. After many years the other investments were worth more than the houses. BTW, I often had negative cash-flow on purpose - why add taxable income to your salary during your working years?
Grind thru this example just to get the concept - refi a rental & take out $50k. Your additional payment will be $300/m for 30 years, ie $108k. Put the $50k into an index fund for 30 years @11%, it will be $1.1M. (Over the past 30 years the indices were over 12%). That's a pretty good return for $58k spent on interest.
I have one house that has had 4 loans, the first loan was an IO with reverse amortization AND PMI for 6 years. Refi'd it in 2003, it has 2X'd since then, I need to refi again because I own way too much of the house, my leverage is too low. I may do either an IO or a new 40 or 50 year loan - one certainty, I ALWAYS get fixed rate loans. Investing requires risks, no need to assume the unnecessary risk of variable rate seed money. FR costs a little extra but it's good insurance against future high rates - it's important that your plan gets you thru the bad markets as well as the good.
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Tue May 23, 2006 12:48 am |
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bong12187
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quote:
Originally posted by MattL
I would do the 20% down and avoid the PMI with or without renters.
What would be your cash on cash return on your investment if you were to put 20% down? What about 0 down?
Scenario provided indicates the following:
1. Getting tenants are no problem
2. Even if there is a vacancy, individual is able to carry the burden of monthly payment
3. Individual wil be living in the house.
4. If 20% down, able to get 6.5% financing for 20 years
If 20% down, monthly will be $1193 (not including insurance and property tax). $40k downpayment (lets not include closing here) will provide you 10% return on your $40k investment. How? $4034 for principal paid after a year / 40k of cash investment will give you 10% return on investment.
What about 0 down? Well if the scenario remains constant, your monthly will $1611 per month with 20 yrs & 7.5% interest rate loan (just to make it more interesting). If he is able to get tenants to pay for everything, his return will be $4486 or 4486% return on his investment since no money came out of his pocket.
Now, this is only return on investment deriving the numbers through LOAN REDUCTION. What about following:
1. CASH FLOW RETURN
2. APPRECIATION GROWTH
3. DEPRECIATION TAX BREAK
Now, lets analyze which is more risky? 20% down or 0 down? with 0 percent down, even if he loses the property within 2 years (which i don't think will happen because he said that he can afford it without a tenant), he has nothing to lose since nothing came out of his pocket.
Now, im not an advocate of 0% down. What I am advocating here is looking at the risk and run your own numbers so that you can get the big picture. As for me, I did the numbers with this property and the numbers are screaming "0% DOWN."
If 0 down, monthly will be $1611.
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Sun Jul 02, 2006 4:06 am |
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Kiaser
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Excellent thoughts, bong12187. Definetely gave me more food for thought!
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Thu Jul 06, 2006 5:02 am |
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