Friday, August 11, 2006

Opposing Counsel (About Getting A Mortgage)

The comments I get are always very interesting. (Except the ones that say "Here are some links that I believe will be interested".) On my recent post about whether I should save up for a down payment, or pay down debt, I got two somewhat opposing views about what I should do about my future in real estate.

Here is the first, from the owner of No Limits Ladies, a women's investment blog:

I know you want to be debt free, and I admire that. I know everyone's risk tolerance is different. (Plus your a numbers girl!lol) Consider this- your credit score is fabulous. I bet you could get a 100% loan if you shop around. Find a house that is undervalued, buy it no money down, and then immediately do a heloc and pull out the equity that is there. You can use it to pay down you other debts, or use it to hold the property so you can pay down your other debts. A house is a great way to make your money work for you, and help you get where you want to go a little faster.

Then here's the second, from Jessica at Debt Has Made Me Its Bitch:

be careful of this if you decide for no down payment...

Private Mortgage Insurance (PMI)

If your down payment on a home is less than 20 percent of the appraised value or sale price, you must obtain private mortgage insurance, known as PMI, with your lender. This will enable you to obtain a mortgage with a lower down payment because your lender is now protected against any default on the loan.

PMI charges vary depending on the size of the down payment and the loan, but they typically amount to about one-half of one percent of the loan, according to the Mortgage Bankers Association of America. Mortgage insurance premiums are not tax deductible.

Let's say you put down 10 percent or $10,000 on a $100,000 house. The lender multiplies the 90 percent loan, or $90,000, by .005 percent. The result is an annual PMI of $450, which is divided into monthly payments of $37.50.

Most homebuyers need PMI because 20 percent of the sale price on a home is a lot of money; for instance, that's $20,000 on a $100,000 home. Homebuyers must maintain the PMI premiums until they cross that one-fifth-of-principal threshold, a process that can take years in longer-term mortgages.

Good luck!

My comments to the commenters:

Commenter 1: My debt is all at below-HELOC interest rates, and I might be moving in a year. I don't think it makes much sense for me. I don't really want to get into investing in real estate (considering that I won't think of the place I live as part of my portfolio) mostly because it seems like a huge pain in the ass. I'd rather just invest in mutual funds. For my part, I'm definitely the sort of person who wants to go to work, come home at 5, and have my "work" be over. Real estate investing is work that follows you everywhere and must be tended to at all times. But what this commenter is primarily trying to do is to encourage me to try to make money.

Commenter 2: I originally said that I was willing to accept paying PMI because it would take a lot longer to save up the 20%, than it would to pay down the mortgage enough to get rid of it, since I could be putting both my current rent money and the money I'm currently saving for the downpayment towards the mortgage, whereas if I wait and save up 20% I still have to pay rent. But Jessica is in a similar situation to me (lots o' debt, trying to get established) and her primary goal is to save me some money.

This is also kind of how I view the divide between the personal finance bloggers and the real estate bloggers. I'm not hugely interested in starting a side real estate investment business because I, like most personal finance bloggers, just want to do better with what I have, instead of spending my free time out getting more. We're "savers" versus "makers" of money.

And last, a commenter called padraic says:

Since you're planing on making a purchase sooner rather than later, I would recommend against paying down your credit card while saving as much cash as you possibly can. Obviously don't increase your debt. Cash is King and lending institutions like to see lots of cash, rather than less debt. Once you've closed on the house, if you have extra cash you'll have a lot more options.

To avoid PMI you may wish to consider a home equity line of credit. The HELOC will have a higher interest rate, but is deductible and you're building equity rather than paying insurance premiums.

padraic is more along the lines of an "investor" type blogger - he's looking beyond just keeping more of the money I make, to try and take advantage of the game. This actually is a route I may end up taking, depending on where interest rates are, and whether my income has risen any and allowed me to save more money. Ultimately what I'm doing is to do a little of both - try to get together as much money as possible while paying down the debt as much as possible too. I may adjust this strategy over time, especially if I do a 0% balance transfer, but his advice is kind of in the middle.


Jessica said...

i feel kinda of famous now being mentioned in a post! haha

really though, i understand your situation (from what ive read) and basically PMI blows, but it allows for us to be able to buy a home without having to come up with that kind of cash. surely wasnt trying to discourage you (although i dont think you interpreted it that way)!

im wanting to buy a home myself end of 07 - early 08 so i have been pumping people for information. just wanted to bring up the PMI because it seemed relevant to your question.

found this site helpful:

anyway, you brought up a lot of good points, especially about paying plan is to pay down the debt. much fasterrrr

Kira said...

you ARE famous.. you're on the Internet!

Yeah, the PMI sucks but I understand why it's there.. with home equity loan piggybacks it's probably getting a lot rarer though.

The Money Munker said...

You might want to do some research into first-time home buyer initiatives in your area, too. I recently bought a house, and even though I had money available for a downpayment (not 20%, but still a good amount), I ended up financing 100% because my lender had a program that basically waived PMI; the only catch was that I had to make under 80% of the area median income. (Federal law encourages banks, especially bigger ones, to offer programs that specifically target low to moderate income applicants, so it's likely there's something around you.) By doing that, I had a lot of cash available to do some repairs and updates on the house.

Jessica said...

yeah - to echo what munker the pittsburgh area we have a program that is provided for low-income first time home buyers that gives you a low interest 30 year fixed mortgage and also a grant to cover closing costs and what not...that might definitely be worth looking into in your area

prlinkbiz said...

What I love so much about personal finance is that it is just that...personal! I just happen to run with a crew of more aggressive investors, in both business and real estate. I love hearing all sides. I think life requires different strategies at different times to accomplish different things. I'd rather see people being wise with their money more than anything!