Our Home Financing Options

Posted on November 12, 2007 by Eric
Filed Under Mortgage

Now, if I can only find 6 roommates… Once our builder told us there were only 30 days until closing, we had to jump to it and find ourselves a mortgage.

Because a mortgage is such a large amount of money, we had to shop around to find the best deal we could find. Let me tell you, that was no easy task. I’ll write a post in the future giving a lot more detail to the process we used, but I wanted to cover just one aspect of it now.

We only had enough money to cover a 10% down payment on our house. On top of that, we don’t want to be too heavily invested in just our house as we would prefer to invest any extra money we have in the stock market. We want to pay down the house early, but putting too much money up front was going to hurt us more financially than what it was worth. 10% is the number we agreed to some time back, and was the goal we met with our savings.

The problem is, you have to have 20% equity in your home to avoid paying for Private Mortgage Insurance (PMI). This is essentially another fee you have to pay that, at least in the past, you didn’t get any sort of tax deduction for. It adds up to quite a bit extra each month. We wanted to avoid going to pay PMI.

That left us with two choices - pay 20% down (we couldn’t afford this, and even if we could, it would put too much of our current finances into the house), or get two loans for the house (what is commonly referred to as an 80-10-10 loan). When you get an 80-10-10 loan, you generally have the bulk of the loan (the 80) financed at the going rate for mortgages (which varies from lender to lender). The second loan is normally higher - sometimes 1-2% higher, and is frequently a 15 year loan instead of a 30 year. This makes your monthly payments that much higher (because of the higher rate and the shorter term). You can also ask for the secondary loan to be amoritized over 30 years. This means that you will have lower monthly payments, but will have a “balloon” payment at the end of the loan that will be due all at once. That means you’ll have to be prepared with a wad of cash before the end of the term of the loan.

We thought an 80-10-10 was going to be our only option. However, upon investigating, we found that there were a couple more alternatives.

Some loan companies would let us pay a fee up front to get out of PMI. This wasn’t cheap, but would be cheaper than having to pay PMI for years. We also found a lender that would let us get out of PMI and finance 90% of the loan. We didn’t think this would have been an option, but there it was being offered to us. At a decent rate, too!

I’ll get into the details on the math we did to determine which loan met our needs the best in another post, but I thought this information might be useful to those that are looking to buy a house. If you can afford 20% down that’s great, and a very good way to go. If not, or if you would prefer to have more of your money in investments instead of your house, then financing more of the loan might be a good option. It won’t be right for everyone, but it fits our needs quite well.

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Comments

3 Responses to “Our Home Financing Options”

Jennifer on November 12th, 2007 10:15 pm

We did the up front fee thing on the house we just sold. After living there for 4 years, we just about broke even on what we would have paid for PMI. When making this decision, its good to consider how long you plan to be in the home, or whether the market is appreciating (for some people in a quickly appreciating market you can go with the PMI, then refinance once you have 20% equity).
Eric on November 14th, 2007 7:54 pm

@Jennifer - We figured everything on a 10 year time frame. Although we might stay as short as 7, or longer than 10, we thought 10 years was a long time.

In this case, the lender we were checking would waive PMI without a fee. They had the lowest fees overall in fact.
Carnival of Personal Finance #127 - Wonders of the World | Moolanomy on November 19th, 2007 8:04 am

[...] Penny Closer presents Our Home Financing Options — A couple in the process of buying a house shares their experience about mortgage and [...]