Hi Andrew, I'm going to side with Luke's slant on this one. Namely, keep control of your own money â€“ dollars invested in a mortgage return 0%. See: http://docs.Steven-Anthony.com/HowToSafelyManageHomeEquity.pdf
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: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/fi
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 â€œrate escalation riskâ€ 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 â€œStreamline refinancesâ€) 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.