Poor Richard, the First Time Home Buyer
If I've learned anything in the current political environment it's that you can't make people see things they choose not to look for. But what about the opposite? What happens when the truth is hard to find? Or, better still, what if the question at hand involves a bit of both? That is, what if people don't have the inclination to look for something that is a bit difficult to locate? With the help of one of our Founding Fathers, we're going to dispense some wisdom and address this dilemma in the context of a first time home buyer, and we're going to touch the mythical third rail of ownership, private mortgage insurance (PMI) in the process.
Benjamin Franklin once famously said that three people can keep a secret if two of them are dead. But when it comes to PMI, it's a little easier to keep things hushed without resorting to capital punishment. The reason for this is that most homebuyers don't want to hear about PMI, so they deliberately cover their ears. And if prone to believe the myth that all PMI is bad, those looking to buy their first home also tend to follow the advice that a 20% down payment is a must. Still, if our buyer is willing to keep an open mind and open eyes, he may just come to agree with me that an 85% loan-to-value --- that is, a 15% down payment instead of 20% --- with PMI may just be a excellent path to home ownership. Here's why:
"Lost Time is Never Found Again." If you are striving to save a full 20% (plus settlement costs), you could be waiting a lot longer than if you buy with 15% down today. In a housing market of either/both rising prices and rising interest rates, your affordability could be evaporating while you're working to improve your affordability.
"A Penny Saved Is a Penny Earned." PMI can be fantastically cheap in the tier between 80% loan-to-value (LTV) and 85% LTV and where the borrower has a high FICO score. For example, here in Marin County, a $679,650 jumbo conforming loan would have a monthly PMI payment of approximately $90. Read that again and while you do, keep in mind that adding PMI to a loan scenario often causes the interest rate to be lower on the mortgage itself. If we compared the same loan amount at 80% LTV versus 85% LTV, the higher LTV would have a better rate! Why is this? With the loan insured by a private insurance company, the lender actually has less risk. Less risk equals lower rate. Timeless!
"He That Can Have Patience Can Have What He Will." Yes, this is the part where I take questions and handle objections. "So Rob, that's nice, but now I have the larger mortgage AND I have the PMI so I am spending more each month." Yes, you do have the larger mortgage, but remember you have presumably "banked" an extra 5% in current or future savings by taking this approach. And for the PMI itself, you may be able to drop that in as soon as 24 months. With documented 20% equity in the home and a "satisfactory" payment history (using the industry standard of two years), you can petition your servicer to remove the PMI, thus reducing your monthly payment and further cementing the financial efficacy of your decision.
"If you would not be forgotten, soon as you are dead and rotten, either write things worth reading or do things worth writing." I am going to heed Big Ben's advice and continue to extol the virtues of a 15% down payment versus the much more common 20%. If you're open to understanding the benefits, the results to your homebuying success could be truly revolutionary. Call me with any questions and if I can help you today with your home purchase.
A friend indeed,
Vice President of Mortgage Lending
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Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709
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