Should I pay the 20% down to avoid a fha loan or should I hope my $ grows to offset the extra fha fees?

Asked by Andrew, San Francisco, CA Thu May 21, 2009

I'm a first time buyer, wondering if anyone has an opinion on if I should put the 20% down to avoid the fha loan and extra fees or if I should get into the fha loan, pay the extra amount and hope my $ does better in the market.

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Mike Ackerman…, Agent, San Francisco, CA
Fri Nov 13, 2009

If you haven't yet purchased - as I note your post is from May 2009 then YES, GO FHA!

Put you money into refurbishing, remodelling and improving your property!

There may be a few additional costs, however in the grand scheme of things - the ability to leverage your down payment and have reserves for emergencies is a great thing.

Sue Florence of Guarantee Mortgage and I have just closed a beautiful two unit property with the help of an FHA loan for our clients. The amount of money they saved will allow them to upgrade and refurbish their units. It's really a fantastic program and our clients would be happy to tell you more if you should wish to ask. I'd be happy to forward you their direct emails to interview them yourself! Go FHA, Go FHA!!!

This is truly some good news in the light of all the negative news we hear in the San Francisco housing market!

All my best,

Mike Ackerman, CRS, e-Pro
Zephyr Real Estate
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Sue Florence, , San Francisco, CA
Thu May 21, 2009
Good question Andrew, There are some variables to consider. The first question I would ask you is what purchase range are you looking at and what type of property are you considering. If your are purchasing in the range between $417,000 and $729,750 you will find that FHA interest rates are much lower than conventional rates, for example 5.25% vs 5.875% on a 30-yr fixed with no points. If you're looking at condo's, the spread could be even bigger. FHA does have a 1.75% upfront mortgage insurance premium that you can finance where as conventional loans have none. FHA also has monthly mortgage insurance which a conventional loan may or may not (even with 20% down). In this economy I find the majority of my clients, as long as they are comfortable with the monthly payment, elect to minimize their down payment and save their cash for reserves or other investments. Once you've got your cash into the transactions, it is very difficult to pull money out unless you've got a lot of equity. Whichever route you choose, remember, you can always refinance into a coventional loan or from a conventional loan into an FHA loan.

Sue Florence, Mortgage Broker
Guarantee Mortgage, San Francisco
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Steven Ornel…, Agent, Fremont, CA
Thu May 21, 2009
Hi Andrew, I'm going to side with Luke's slant on this one. Namely, keep control of your own money – dollars invested in a mortgage return 0%. See:

A clarification on FHA MI:
With FHA you will have to pay Mortgage Insurance for a MINIMUM of 5 years, and until you have paid your original LOAN AMOUNT down to 78% (not that the loan amount is 80% of current market value, which is typical for non-FHA MI removal). For all but 15-year term mortgages, you will pay MI premiums for the GREATER of five years or until the amortized loan-to-value reaches 78 percent.

This "78% or 5-year Rule" before Mortgage insurance can be terminated is covered here:…

Now, to financing strategy...
Assuming you have to buy right now and are not in a position to wait, I would personally consider a mixed financing strategy of starting with an FHA loan (at a min down of 3.5%), and then possibly refinancing at a later time. Here's why:

If housing trends continue (downward as I suspect they will at least until Q309 and probably longer), the market will evaporate any additional equity you pay in over the 3.5% down. With California's unemployment rate topping 10% and the global economy contracting, cash reserves are important from a financial security perspective these days. This situation will come to pass. When the market improves, and you are able to benefit from market-based equity appreciation, you can look to refinance out of the FHA loan into a non-FHA loan product that recognizes market equity in calculating whether MI is required) thus removing the MI cost. There is some “rate escalation risk” associated with this strategy of refinancing out of the FHA loan, and moving out of the FHA loan has to make financial sense; however, assuming the minimum down of 3.5% is used you have 16.5% sitting safely in the bank using the FHA loan (of course you kept this unscathed in an interest bearing account). These protected dollars can now be employed to buy down the interest rate of any subsequent non-FHA loan product or used to pay down your original loan amount to the 78% level! By the way, FHA refinances (appropriately termed “Streamline refinances”) are very easy.

Is MI a cost? Sure it is; however, it's also important to know that Mortgage Insurance Premiums are tax deductible on Federal Income Tax Returns. This deduction is for both government and private mortgage insurance premiums. In order to qualify, the mortgage has to have been originated between 2007 and 2010. Originally, it was put in place only for 2007 but an extension was granted as part of the Mortgage Forgiveness Debt Relief Act of 2007. In order to qualify for the full tax deduction, a family's adjusted gross income must be $100,000 or less; there is a partial deduction allowed for families with gross incomes up to $109,000.

Best, Steve
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Robert Chome…, , San Diego, CA
Thu May 21, 2009
You will save a LOT of money on mortgage insurance and additional interest if you put 20% down. On an FHA loan the up front MI is 1.75% of the loan amount and then .55 of the loan amount as monthly MI. You need to have the monthly MI for at least 5 years and the loan balance has to be 80% or less of the property value to get rid of the monthly MI. Not easy to prove the loan balance is
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David Tapper, Agent, Burlingame, CA
Thu May 21, 2009
There are always two sides to everything, but since you have the money, I would put down the 20%, save a ton of money on fees, rate, and mortgage insurance.

Get the break down from you mortgage person and see exactly where your money is going. The amount you will save on mortgage insurance each month can be put into a seperate savings account.

Also see how much you will save in payments from putting the extra 10% down and save that amount as well. For even a small loan I'm sure you will save over $500 per month adding both of those savings each month.

Once you have private mortgage insurance, it's not so easy to get rid of it.


Cashin Company
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Luke Allison, , Asheville, NC
Thu May 21, 2009
Ouch. Tough Question. I will tell you honestly that I have seen more borrowers pull back on the amount that they wish to put down than I have seen borrowers put more (or wish they had put more) down on a home. The main factor that you should consider is that once you put the money down into the home, you will have a difficult (if not impossible) time pulling the equity ever back out - especially in this market. Now you can always make your payments at an accelerated pace and get the principle on the loan quicker.

IF I were trying to help you make a decision, I would say to borrow more, put down less, retain your cash as you weigh your other options and see what happens over the next 6 months. That option, at the very least, gives you future flexibility to make a purposeful decision with your cash. That FHA funding fee would be well worth it in that case. It also gives you less likelihood of regret down the line.

I hope that helps. I know conventional wisdom says to put more down, lower your payments and avoid MI (which would by no means be an unwise decision) but I have to go on personal experience in today's market to give you my best advice.

Best of luck in whatever you choose. If you have any questions, please let me know.
Luke Allison
Bank of America Home Loans
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