I’d either save a bit more for a DP or go with a 80/15/5. Also PMI is now also tax deductible, no idea if this is a good thing for you or not.

“Subprime Lenders’ Miscue Bad Bets May Foreshadow More General Credit Crunch; HSBC’s Household Setback: Is subprime the first shoe to drop? While house prices kept climbing, it was easy enough for homeowners to pay existing loans by refinancing. But across most of the country, home prices are now falling. That’s causing a headache for lenders to the lowest-rated mortgage borrowers. Though these account for 14% of home loans outstanding, according to the Mortgage Bankers Association, problems in this area may foreshadow a more general credit crunch. But the real problem lies with the general decline in lending standards, that occurred during the housing boom. That was a result of intense competition among mortgage lenders. Loans to subprime borrowers as a percentage of total mortgages have increased fivefold since 2002. Underwriting standards have also been cut elsewhere. Witness the rapid growth of “nontraditional” mortgages, such as negative amortization loans, on which the loan principal actually increases in size. These account for around a third of home loans outstanding, according to Loan Performance, a research firm. For mortgage lenders, having behaved rashly when times were great, there’s a danger that they will now become overly cautious.”

I’m saving up for my 20% downpayment. It’ll probably take another year, but that seems like good timing.

One other thing I heard from other people is that you can buy your own PMI and there’s no reason to take the PMI offered by your lender. This might help defer the cost. I did not hear about this until after I had already purchased the home, so I do not know all of the details. Might be worth looking into as well.

On another note, your loan says they will take off PMI when equity reaches 78% or something like that to get a few more dollars. You will have to make a request to have it removed at 80%.

I started with a minimal down payment on a smaller house, so my PMI was lower. Then I made extra payments of $100/month for just over two years. Then I refinanced, changing my 30-year mortgage to a 15-year mortgage at a lower interest rate. By then my equity was much higher so my PMI dropped substantially.

Note that small increases in your down payment can lead to big decreases in your PMI.

$ 5,000: $147.33
$10,000: $107.25
$15,000: $104.00
$20,000: $ 67.17

It looks like some big cut-off points are 5% and 10%:
5% = $ 8,750: $108.06 PMI
10% = $17,500: $ 68.25 PMI

You might want to try re-doing your calculations with 5% down and see if there’s a big difference.

Remember that you can also pay extra on your principal, since you’re really concerned about how much goes toward equity. When I first got my house, only $30/month was going toward principal, so adding that extra $100/month made a really big difference. In less than three years, I had basically turned my 30-year loan into a 23-year-loan (that’s how much earlier I would have paid off the loan if I quit paying extra from then on).

I come from a country where our equivalent of an ARM (interest rate fixed for x years) is the longest level of fix that you can get on a mortgage, otherwise your interest rate can (and often does) change from month to month.

Bottom line: It’s a good time to keep saving up for the 20% down.

I highly encourage you to look at getting a second trust. Often you can fix the interest rate, which is something I did. (I had a blog post about it last autumn.) I did an 80/15/5 when I was making 40% less than I do now. I don’t pay any PMI, but I do have a slightly higher interest rate on the second trust, but nowhere near as bad as a credit card.

Good luck! I say you should wait another year to save a downpayment if you can, or else go with the second trust scenario. It sounds like you’d be able to pay it off rather quickly.

You may want to look into a FHA loan. We have an FHA loan and the way it was explained to me is that when you reach 20% equity all the money you paid for PMI will be refunded. In our case about 1 year after the mortgage was established they couldn’t verify either my wife’s or my income and therefore the PMI was canceled and our premiums were refunded. Luckily this didn’t affect our loan.

You’re correct to not dip into your emergency fund, but borrowing against a 401K can be risky (the risks have already been outlined here). The risks could be amplified by a deteriorating economy brought on by the mortgage lending crisis. The tech stock crash of 2000 had a very serious impact on some segments of the economy. This mortgage crisis (for lack of a better phrase) has the potential to make the tech-crash look small.

Surely you could use the EF to pay the deposit – and then start pumping the money you would have spent on the loan back into your EF account (or into a mortgage offset account – to bring down interest payments)..