[quote]Dr. Pangloss wrote:
Eh, in a perfect world we’d all pay cash for our houses and never carry any debt.
BE’s income is a much more important determinant of whether he can afford the house or not than the amount he’s able to put down. [/quote]
Depends on what you mean by “afford.”
If you mean “can make payments — if nothing goes wrong in life — and never get anywhere,” you’re right.
If you mean “easily make payments even if something goes wrong and get free of all debts so you can live without the worry or the burden”, then I’m right.
[quote]Jewbacca wrote:
Depends on what you mean by “afford.”
If you mean “can make payments — if nothing goes wrong in life — and never get anywhere,” you’re right.
If you mean “easily make payments even if something goes wrong and get free of all debts so you can live without the worry or the burden”, then I’m right.[/quote]
But isn’t that the rub?
If something goes wrong and he can’t make payments, it won’t matter if he’s put $20k down or $40k down. Either way, things will get difficult for him very quickly.
It’s always possible to contribute more principal to a property as circumstances allow (raise, bonus, inheritance) but very, very difficult to try and take money out of a property once things go pear shaped.
A larger down payment benefits the lender, first and foremost. The benefit to the buyer is secondary.
This is why debt-to-income is a much more valuable metric than the size of the down payment.
[quote]Jewbacca wrote:
Depends on what you mean by “afford.”
If you mean “can make payments — if nothing goes wrong in life — and never get anywhere,” you’re right.
If you mean “easily make payments even if something goes wrong and get free of all debts so you can live without the worry or the burden”, then I’m right.[/quote]
But isn’t that the rub?
If something goes wrong and he can’t make payments, it won’t matter if he’s put $20k down or $40k down. Either way, things will get difficult for him very quickly.
It’s always possible to contribute more principal to a property as circumstances allow (raise, bonus, inheritance) but very, very difficult to try and take money out of a property once things go pear shaped.
A larger down payment benefits the lender, first and foremost. The benefit to the buyer is secondary.
This is why debt-to-income is a much more valuable metric than the size of the down payment.
[/quote]
You are looking at this from a lender’s perspective, not the borrowers.
If you can’t scrape and save 20% down, you don’t have enough room in your budget for an emergency.
[quote]Jewbacca wrote:
Depends on what you mean by “afford.”
If you mean “can make payments — if nothing goes wrong in life — and never get anywhere,” you’re right.
If you mean “easily make payments even if something goes wrong and get free of all debts so you can live without the worry or the burden”, then I’m right.[/quote]
But isn’t that the rub?
If something goes wrong and he can’t make payments, it won’t matter if he’s put $20k down or $40k down. Either way, things will get difficult for him very quickly.
It’s always possible to contribute more principal to a property as circumstances allow (raise, bonus, inheritance) but very, very difficult to try and take money out of a property once things go pear shaped.
A larger down payment benefits the lender, first and foremost. The benefit to the buyer is secondary.
This is why debt-to-income is a much more valuable metric than the size of the down payment.
[/quote]
Realistically the “how long” something goes wrong for is more important than if something goes wrong. There is a big difference between losing a house after a year or more of being unemployed vs losing it if you can’t get a new job that pays the same within 3 months or less.
[quote]Jewbacca wrote:
Just a hunch, but the escrow for insurance and taxes is probably higher, on the theory that the bank give you a refund each year for over payment.
Also, if you are paying PMI, you can’t afford the house and need to lower your expectations.[/quote]
At one point I would have agreed with this and I myself have never put less than 20% down on a property, but today with a stable job and otherwise generally healthy financial habits I don’t have a problem with a down payment under 20%.
4.125% for 30 years is a little higher than a year or two ago, but it’s still ridiculously low. If OP has already made the decision that they will move and intend to be in the new place for a significant amount of time, they will most likely come out ahead in the long run by going ahead and paying the PMI for a short period rather than risk interest rates rising over that same time while they wait to buy, or possibly having/wanting to upgrade houses again in a short time.
The other key point to consider is that if something were to go wrong, you are better off being house poor and liquid investment rich than having plenty of equity and little cash. The bank’s not going to care how much equity you have if you start missing payments. Better off to have that cushion.
My advice is make sure your financial house is completely in order and go ahead with the purchase. Then be sure to build up an emergency fund as fast as possible just in case you do see a job loss or some other catastrophe, and finally pay off the PMI as fast as you can.
As for the discrepancy in payments, the escrow is going to be part of it. I would guess your mortgage broker overestimating taxes and insurance makes up the rest. They are going to give you conservative numbers in a GFE to cover themselves. $1300 for insurance on a $212,000 house is a pretty good rate in the midwest. Property insurance is one of the few living costs that can be higher in this area that others. Not many other parts of the country get hail, wind, or even tornadoes like we do. I wouldn’t be surprised if you’re mortgage broker is estimating twice this.
Don’t be afraid to question bankers, I was a physics major and derived the mortgage formulas used by bankers(nerd fun). I’ve grilled a bunch of mortgage brokers and one bank president. Maybe 10% of them actually understand the mortgage formulas, and know very little about FICO scores to boot.
Ask them to go over it line by line until either you or they discover the error(the tact you took here is a good one…Im not so good at math, maybe you can explain this again?). If they won’t insist “I’m not going to spend 100s of thousands of dollars if I don’t understand what I’m signing.”