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Author: synchronicity Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 127236  
Subject: Re: Making a down payment Date: 3/20/2007 11:36 PM
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<< 3. Some lenders let homebuyers avoid paying PMI by taking out a second mortgage loan, often called a "piggyback." In most cases, you'll have one loan for 80% of the home's cost and a second covering as much as the remaining 20%. You get tax advantages that you wouldn't realize with private mortgage insurance -- specifically, a deduction for your mortgage interest -- but that second loan typically comes at a steeper interest rate than the first. >>

And... what is her point here?


That debt is BAAAAAAAAADDD.

Of course, back when we bought our home, we did an 80-15-5 setup. The first was a 5/1 ARM at 5.625% (30 yr fixed was 6.25% at the time). For the second, we had a choice of prime plus 0.5%, or a 30/15 at 6.875%.

I calc'd some breakeven points based on various interest rate scenarios, and went with the 5/1 ARM on the first and the 6.875% fixed on the second. Oh, and it worked out better than doing PMI (which was not deductible in any way at the time, and I was not certain about future appreciation continuing at a fast enough rate to get us over the 20% equity mark to remove the PMI).

So yeah, the second ahd a higher interest rate, at...uh 6.875%, before tax, or 5.15-5.85% after tax. Uh, OK.

Oh, yeah, we refi'd the first down to a 5.25% ARM with no fees 4 months later, and then about a year later switched to a 5.375% 30 year FRM when I realized that yeah, we'd probably be in the house for more than 7 years unless we won the lottery, in which case I wouldn't much care about having paid an extra 1/8% for 4 years.

I would agree that if you CAN'T save the equivalent of a 20% down payment, and/or you are getting an ARM or an IOM (or both, or a more esoteric loan) because that's the ONLY way you can make the monthly payments, you're asking for trouble. Hence the concern when one hears that 30% or 50% or whatever of loans in an urban area are ARMs (at a time of historically low interest rates), and a sizable percentage are 100% LTV.

But it's another thing entirely when you choose to put down less than 20%. Heck, if you're willing to lend me the money cheaply enough, I'll gladly borrow it all and leave the rest of my money elsewhere to earn a better return. Yes, not all people choose that, and that's fine, everyone has their own risk tolerances and preferences. Just saying that there's nothing wrong with choosing to put little or no money down to buy a house, assuming one otherwise has a margin of safety with regards to their loan.

And heck, if you're stretching to make your monthly payments in the best of times, then putting down 20% isn't much help.

-synchronicity
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