What's worse: PMI now or 20% down in 18 mths but higher interest rates?

Asked by MeghanCambridge, Cambridge, MA Thu Mar 21, 2013

My husband and I have always planned to put 20% down to avoid a PMI, but lately I have gotten nervous about interest rates rising in 2014-2015. If we've got 15% down payment for a $400K house now, but choose to wait until we hit 20% in 18 months or so, will the heightened interest rates undermine our plan? would it be wiser to pay the short term PMI to avoid long-term higher interest?

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James Daniel, Agent, Cambridge, MA
Thu Mar 21, 2013
Hi Meghan,

That's a great question. There are some other different variables to consider in order to determine what is the best course of action for you.

First, if you put down 20% now will that empty your nest egg? The reason I ask is that suppose once you move into your new home something comes up that needs repairing. Will you have the money to get the work done? If not than it may be better to go with PMI. It might add $100 to your monthly payment but that way you won't be strapped for cash if something happens. Something to be aware of is that banks are supposed to remove PMI automatically once you have reached 22% equity in your home. You will have to pay close attention to that because banks rarely do this without some pushing by the owner,

The other thing to consider is that prices in the in Cambridge are going up. If you wait you will most likely be paying more for a home as well as higher interest rates. If you buy now and put 15% down you can always make extra payments to the principal of your loan without penalty. This way you will have money in case of an emergency and perhaps a little more peace of mind!

Hope this helps.

2 votes
Donald Mituz…, Agent, Chappaqua, NY
Sat Mar 23, 2013
If you can get a VA mortgage or a USDA loan your PMI may be little or none. A number of answers before mine gave some good advice and crunched the numbers. Let me add a bit more, suppose the price of the house goes up 5%. Than what? It seems to me that the market has bottomed in "almost" all areas of the country. MA has a year over year increase in prices of 4.6%. Buy now. Can you see interest rates getting lower next year? I can't. I also can't see home prices going down in MA, but I can see them going up.

Good luck!

Don Mituzas
Licensed Associate Broker
Douglas Elliman Real Estate
1 vote
Lilia Gouari…, Agent, Cambridge, MA
Sat Mar 23, 2013
Dear Meghan, I did a little calculation for you, if you buy a home for $400K, put 15% down and get 4% interest rate, your mortgage will be $1841/mth. But if you put 20% and get 4% interest rate, your mortgage payments will be $1745 ($100 less). Let's say if you wait until you save enough money to put 20% down, the interest rate will go up by the time you get enough downpayment. If the interest rate went up and you get 4.5%, your mortgage payment will be $1839. So, why to wait and risk to pay more interest to the bank? You'll be even though but will pay rent in the mean time to make someone else richer? If you have any questions, I'd be happy to talk to you in person. Feel free to call my cell or email me, 617-901-7413, lilia@eplacehomes.com
1 vote
MaryBeth Mil…, Agent, Pembroke, MA
Mon Feb 9, 2015
This is a question which comes up frequently. Most interest rates are credit driven and sometimes another alternative is to pay down your existing debt to make better ratios and improve a credit score.
Have you spoken with a trusted mortgage officer. They should be able to give you different scenarios based upon what you and your husband bring to the table. There are lenders who provide a 80% 15% with 5% down, you always need to check with a licensed mortgage officer for details and specifics but with this program I am told you have the majority of the loan - the 80% at a most attractive rate and the 15% is at a slightly higher rate - which can be addressed to goal to payoff in the future and NO PMI!
That is my favorite program, if you need a name and number of my trusted lender for that program just let me know. My most favorite loan program in Massachusetts is the no PMI MASSHOUSING loan - attractive rates, no PMI, added benefits of assistance for a period of time should you be unemployed. All benefits you can find on the MassHousing website https://www.masshousing.com/portal/server.pt/community/home_… this is the webpage for the NO PMI loan program.
I would be most happy to assist you with your goals if needed my office is 781-826-9300 and my email is MaryBeth@TradeWindsRealtyGroup.com and I assist Buyers and Sellers and Rental Clients in all of Eastern Massachusetts so If I can help just reach out. Good luck achieving your goals, I commend you for your self discipline in saving the 15% already, great job!
0 votes
The Graveline…, Agent, Longmeadow, MA
Sat Jan 10, 2015
Meghan, If you qualify for Mass Housing Loan, there is no PMI and low down payment. Contact a local lender. If you need referral, contact a local Realtor you're comfortable with and let them do the leg work.
0 votes
James Daniel, Agent, Cambridge, MA
Mon Mar 25, 2013
Hi Meghan,

I just thought of something. Mass Housing offers no PMI loans through many area banks. Mass Housing is a self supported, non-profit. It's a great program. Check the link below for more information.

0 votes
Kevin McDerm…, Agent, reading, MA
Fri Mar 22, 2013
Hi Meghan,

An old guy told me years ago, "Buy a house as soon as you are able". I followed that advice myself, and persuaded friends and family to do so too. Therefore, my advice to you is the same- if you're ready to buy now, go ahead.

The nice thing about your situation is that you don't have to rush into buying. You can take your time and find the right home for you. If you find the right home, then PMI is probably a minor detail, assuming you can afford to pay it.

If you decide to wait, an increase of about 0.5% in interest rates will eliminate any gain you may make by avoiding PMI. The one thing we can be certain of is rates will rise. I do think they'll remain low for the next year or two, but when you're already at bottom, the only way to go is up. What would you do if 18 months from now rates have jumped to 6% (6% used to be considered incredibly low, by the way)?

One thing I will say, depending on where you're looking, the market is tight and inventory in many areas is lower than it's been in decades. This means prices are high, and there is competition for good homes. All the more reason for you to be patient and wait for the right home to come along, but go for it when it does.

Good luck!

Kevin McDermott
0 votes
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