Updated on 11.02.10

Can PMI Be a Good Thing?

Trent Hamm

This week, I’m going to take a look at a few of the longer questions that have been languishing in the reader mailbag. These questions were too long for a regular mailbag post – and deserve a longer answer – but are well worth discussing on The Simple Dollar.

Nick is thinking deeply about two mortgage offers on the table before him:

I’ve been at my job for about 2.5 years, my fiance at hers for about a year and a half. We’re getting married next month. We have a combined gross income just shy of $90,000 annually. Within the next month or so, both credit cards will be paid off. Remaining debt is $9500ish on a car loan @ 9.24% (30 months remaining @ $342/mo). We have a combined amount of around $40,000 in student loans with rates between 2.75% and 5.8% – payments are $505 monthly. My fiance has had some financial issues in the past, but she finished paying off delinquent accounts last year. We are currently paying $1100/month in rent for a 2br/1.5ba townhome, plus about $200/mo in utilities. I’ve missed one utility/loan/credit card payment in the last 7 years, and it was only by 3 days so I’m not sure if I even get dinged for it.

Anyway: We’re ready to start looking at purchasing a home. I majored in personal financial planning in college. In my PF classes before the housing bubble burst, the instructors unanimously said it was a terrible idea to buy a home with no money down. As a general rule of thumb, I cannot say I disagree with them. However, being a finance guy, I also like to look at numbers. With the current state of the housing market and crazy low interest rates, to me it almost seems like purchasing a home NOW would be a great choice, even though I don’t have any money to put down. That is, assuming my fiance and I could get approved for such a loan.

No matter how we do it (0% down or ~10% down), PMI and property taxes will be the same. Waiting for a full 20% down is not something we’re wanting to do when purchasing. We’d be paying rent for far too long.
PMI @ $160 / mo.
Estimated property tax @ $250/mo

Now for the mortgage bit:
If we could buy now, 0% down:
Value of loan: $280,000
Interest rate: 5.25% fixed
30 year mortgage, likely to make extra payments
PMT on mortgage = $1539.44
Total if we paid for 30 years: $554,198.40

Let’s assume 3 years from now (time it would take to get 10% down) that home prices go up 7% and interest rates go up 1.5%. I may be right or it may swing the other way. We don’t know what home prices will do, but we do know that interest rates cannot realistically go down any further. In this time period, we could manage to save up $30,000 for a down payment, which also likely would lower our interest rate slightly (6.25% instead of the new value of 6.75%).
Value of loan: $266,800 (New value of $296,800 minus $30,000 down)
Interest rate: 6.25% fixed
30 year mortgage, likely to make extra payments
PMT on mortgage = $1634.22
Total if we paid for 30 years: $588,319.20
PLUS initial $30,000 down
Total mortgage + down pmt = $618,319.20

Paying $554,198 plus a few extra years of PMI (est. $6000 over 3 years) for a house sure sounds better than $618,319.

Now…..I understand the whole risk thing associated with buying and putting no money down — you have no equity so if you need to sell and the market slumps, you’re liable for THAT much more. I grew up in this area – both of our jobs are relatively secure, we love the area. It has great schools for future children, great public facilities (libraries, etc), and lots of walking paths and parks. We don’t plan on relocating anytime soon.

I understand that we’d pay somewhere around 3 years extra of PMI (rounded up to $6000 total). I understand it would take a while and some extra payments to really get some equity in the home. And I also understand that this might all be a moot point if we can’t get approved for a mortgage with less than 10% down. But my question is…am I missing something? Is the market THAT much of a buyer’s market right now that the math on this looks the way it does? Or is this still a terrible idea?

Nick’s two offers give us an interesting comparison between the different benefits and risks that a potential homeowner needs to think about. Let’s walk through some of them before I offer up my specific thoughts on what Nick should do.

Where will interest rates go? Right now, interest rates on home loans simply can’t go much lower than they currently are. The difficulty, of course, is predicting when interest rates will begin to rebound. Three years from now, interest rates might be just where they are right now… or they might be higher. It depends on a multitude of factors, many of which simply boil down to a question of whether or not the economy will improve.

To put it simply, waiting is a risk in terms of interest rates.

What will happen in your future? Will you remain employed in the current area? Will you want to live in that area in the future?

It’s very hard to tell what a person’s future holds for them. We like to see a future that’s bright and is a direct positive continuation of what we’re doing now, but that’s rarely what happens.

The best way to mitigate this risk is to minimize one’s monthly payments, which is itself a careful balancing act between the small down payment and low interest rates now and the larger down payment and potentially higher interest rates later on.

What will the housing market do? Will the home you buy retain its current value? Will it go up, or will it continue to slide in a weak housing market?

Again, it’s hard to tell what will happen here, but it is important because if you need to sell the home for some reason, as Nick mentioned, you may be faced with a loss compared to what you bought it for. If you buy the house with no money down, then you will have built very little equity in the house, meaning the sale won’t net you anything and you might even have to come up with some shortfall.

The real crux of this matter is an uncertain future. You can easily create a model for a future in which buying now is the right choice. You can just as easily create a model for a future in which waiting to buy is the right choice.

Given a scenario like this, I would almost always choose to be conservative. If I were you, I’d start aggressively saving up for that down payment and keep an eye on interest rates. If you start to see any indication of a significant uptick in rates, that’s the moment I would start shopping for a house, because that’s the point when you combine the best of all worlds. You’ll have a down payment, you’ll still have very low interest rates, and you’ll also have a year or two more under your belt so that you have a better grasp on where your life is headed.

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  1. Sara A. says:

    I would pay off the car at least before thinking about a home. Maybe also pay off half or more of the student debt. Does not seem wise to through more debt on top of that.

    Also… depending on where they live, $1100/month seems like a lot to pay on rent. If they are talking about getting a house in the $280k range, then I think it would be reasonable to think that there are cheaper rents in their area.

    Maybe they should downsize their living arrangements in order to save up more for debt repayment and a downpayment on a house?

  2. Johanna says:

    I see at least a couple of things wrong with Nick’s calculations.

    First is that he’s completely ignoring inflation. You can’t compare dollars spent three years from now or 33 years from now as if they were the same as dollars spent today.

    Second is that he assumes he’ll never refinance. If he gets the 6.25% mortgage and rates drop back to 5% or lower, refinancing might save him a lot of money.

    Also: A fiance is a boy. A fiancee is a girl.

  3. Michelle says:

    Nick, you’ve made a case for yourself because you’ve assumed home values will rise 7% a year. That’s the optimistic version of post-war historic rates. Do you think that the next 3 years are going to produce average returns? What happens if you run the numbers but keep housing prices flat (let alone if they lose value)? In that model you’re going to pay PMI for a very long time.

    You didn’t ask, but since that’s a really high rate on the car loan, I assume it’s your fiance’s? Can you refinance it at a lower rate using your credit (she might have to “sell” it to you)?

  4. Shaun says:

    Well, really, it should be fiancé and fiancée, but since most people don’t know those character codes offhand (thank you years of French classes), I can forgive them. If anyone is looking to add that character(é), hold ALT and type 0233.

  5. Amanda says:

    I have sold a home in the last year and one of the things I noticed: the lowest downpayments I saw on the offer letters (and we received 7 offer letters) were 3% down FHA/VA loans, and they were required to request that we cover 3% of closing costs (all bidding approx. our list price + 3% to make up for that).

    It’s my impression that 3% down is the minimum at least last September 2009.

  6. Joe M says:

    Nick, since you’re a numbers guy you have to make sure you bake risk in to your equation. If you buy the house now and one of you loses a job, can you make all your payments on one income? No one ever plans on losing a job or getting sick or anything else, but hey, it happens.

    Also, where do you and your fiance stand with regards to having kids? Will one of you stay at home? What’s child care cost in your area.

    You’ve got just under $50K in debt and are considering another $280K. That seems like a lot of debt to start out with. I’d pay off some of the debt and get a bit of a downpayment together, even if you still have to pay PMI. Also, you want at least a small emergency fund together before you buy a house – roofs leak, furnaces break down, etc.

    Look at the numbers one more time and make sure you and your future wife will be able to sleep well and have some fun within your budget. Best of Luck to you whatever you decide to do.

  7. Brianne says:

    We’re in a similar situation, so I’d love to hear everyone’s opinion. My husband and I got married this year. We bring in about $125,000/year (though part of that is because I work a part-time job as a tutor). We pay $1395/month rent for a 2BR/1BA apartment with low gas and electricty (<$50/month combined) because we're in Southern California and near enough to the ocean that not having air conditioning isn't a problem. We're looking to buy a house farther inland to make my commute shorter and get in a neighborhood we can afford. We could probably find a forecloseure or short sale in a good enough neighborhood for $250,000 to $300,000 and we'd like to buy before we start a family.

    Our only debt is $37,000 in combined student loans at 3% and 3.75% interest. His are deferred while he's back in grad school and mine have a pament of $199/month. We both own our cars and pay our credit card balance in full each month. In the past three months we have been able to save over $10,000 by simply living off my salary and banking all of his plus some of my tutoring money. All of my savings are in retirement funds that I can't touch, save for a 401K loan for a downpayment. He has $20K in mutual funds from when his former company went public and the rest of his savings is also in retirement funds.

    Should we keep waiting until we have 20% down? Should we pull out his $20K to make a bigger downpayment? Or should we go with an FHA loan so that we can take advantage of the market and the low interest rates. We'll definitely be here at least another four years while he finishes his degree slowly but surely. His family is two hours south and all of our friends live in the area because we went to college here. Plus,it's a good area for our jobs.

    We're not getting any younger (30 and 31) but I don't want my biological clock to screw up our finances.

  8. Johanna says:

    Another thing: Do you know if your fiancee’s past financial issues are still affecting her credit score? (If they were less than seven years ago, they probably are.) Unless you think you can get the mortgage in your name only, you might not qualify for the lowest interest rates right now. Waiting a few years will fix that.

  9. Beth says:

    My husband and I bought our home with 20% down in 2007. We bought our home for $220,000. We have since then put 10,000 in “repairs” that popped up since then. Our value has dropped to $180,000. If we didn’t put the 20% down, we would still need to pay PMI for about another 10-15 years to make up for the falling home prices. So you can’t assume in 3 years you can refinance, because if your home value goes down, that’s more you have to bring to the table to be at that majic 20%. Also I agree with Joe, you never know what’s going to happen when you buy a house. Luckily we listened to our family when they said you ABSOLUTELY NEED an emergency fund. Things may not happen the first year of the house, but everything may happen the 2nd year. And if you are not prepared and don’t have the cash, you might be in a lot of trouble. My advice, don’t give in to peer pressure!! If you feel you have to buy now, then maybe buy a smaller house with 3% down. If you think you can get on a strict save every penny for a down payment on a house plan, then wait 2 or 3 years. Whatever you do, don’t try to “time the market”. Buy when you feel your ready AND prepared.

  10. Johanna says:

    @Michelle: He’s actually assuming that prices will go up 7% total over the next three years. Which is not unreasonable.

  11. Michelle says:

    @ Johanna – then wouldn’t he have 7% equity (plus a bit more from extra payments) in his home in 3 years, not 20%?

  12. Jennifer says:

    This is all based upon an assumption that they’d qualify for a loan. Between their combined debt, her credit issues, their lack of a down payment and no emergency fund, I highly doubt they would be approved for a mortgage. Lenders are much more conservative today than in the past.

  13. Michelle says:

    @Brianne – assuming your income is pre-tax, even if half your salary goes to taxes, 401k, etc, you should be netting more than $5000 a month. With your low rent and few debt payments, you should be able to save enough for a house in a year or two. Why would you want to take out a 401k loan?? Danger!
    I assume your fiances IPO money is the company stock, not mutual funds (unless he diversified the stock?) That sounds like a much better resource for down payment / efund than a 401k loan.

  14. Ruth says:

    Nick pointed out that he “might be right or it might swing the other way” on his mortgage-with-down-payment option… but he didn’t calculate what the situation would be if it did swing the other way. A scenario in which home prices and mortgage rates both go up significantly make the math most in favor of getting a house without a down payment. If you really consider that the most likely thing, then the math points to no down payment. However, you have to consider whether you think that’s really the most likely scenario, or whether you just like the fact that the numbers for that scenario point to making the leap into your own house.

  15. Johanna says:

    @Michelle (#11): Don’t forget that he’s paying down the principal (at a rate of about 1.5%/year) even if he doesn’t make any extra payments. And I think the 3 years refers to 3 years *more* that he’ll be paying PMI if he gets the 0% down loan versus the 10% down loan.

    By my rough calculation, it will take him a little less than 3 years to reach 20% equity if he puts 10% down, and a little less than 6 years if he puts 0% down. So 3 extra years of PMI payments is about right. (But this is assuming that prices increase at 2.3%/year for the next six years, and that’s projecting a bit far.)

  16. Brianne says:

    @Michelle – My husband is suggesting the 401K loan in order to reach 20% more quickly. I’d rather not do the 20% at all. It’s just that in a year or two I might be too old to get pregnant and that really worries me. Plus, in a year or two prices might be much higher and so might interst rates.

    The husband’s mutual funds are not in company stock, they bought him out when they went public so they gave him cash and that’s what’s left after the market crashed.

    We’re also worried no one will give us a mortgage unless we have a safety net in place so I’d rather not touch that money. I’d rather jump in with a $20,000 down-payment and suck it up paying the PMI. I seem to be getting conflicting information about whether or not the PMI will go away when we reach 20% equity or if we have to keep paying it until we hit 5, 7, or 8 years (depending on which website I read). But no mater what, it looks like we’ll have to pay 1.5% down on the PMI and that’s just money we’ll never ever get back. And I’m afraid of closing costs if they end up being more than the actual down payment.

  17. spaces says:

    Is this from 2004? 2005? Whoever is on that car note has some serious issues. The interest is outrageous and indicates a credit score possibly as low as 600. Seems highly unlikely that person would qualify for a no-low down payment home today. Especially for a low, advertised, competitive interest rate.

    I would encourage the couple to save, pay down debts, be patient, and come back to earth. Many are betting that the market hasn’t hit bottom. Assuming real estate only goes up is ignorant. Renting isn’t throwing money away when your finances are not good enough to command premium credit and you can’t really afford the asset, anyway.

    And I think he really needs to look at her credit report, get them both preapproved for a mortgage, and see if she’s over her irresponsible financial habits before assuming he has a full understanding of his situation.

  18. Courtney says:

    I had a very similar scenario when I bought my house 6 months ago. I had saved up a small downpayment, and I was looking for a relatively inexpensive house for my area. I expected to pay some PMI, but I had a great credit score and an $8000 tax credit coming my way, too.

    Then, during negotiations with a seller, they introduced me to a program at BBT Bank that provides 100% loans to people that qualify (a small group, it seems). I had never considered that possibility, but the more I looked into it, the better it sounded – it’s a federally backed loan, so there’s no PMI.

    Ultimately, I sent all my loan offers to a family friend who’s in the mortgage business. She scrutinized them and told me I’d be stupid to not take the 100% offer. Since then, my downpayment has become my home-maintenance fund, allowing me to update the kitchen/dining room much sooner than planned (building equity in a different way!) and giving me plenty of savings to fall back on if I need to.

    Of course, it’s only six months in and anything can still happen…but I still think I made the right decision, and I think it’s worth it for other people to look into it, too.

  19. Wes says:

    $1500 to $1600 mortgage seems like you are missing something. 3% down minimum if you and the home qualify for FHA (5% in CA I believe) and with 3% down plus property taxes and insurance is probably going to be over $2,000 a month for your actual mortage payment.

    And you probably won’t get 5.5% anyway with your numbers as they are- I think I’ve read it here before, or something like it, if you want to buy a house start saving that mortage payment every month for however long it takes to make the downpayment because if you can’t save it you certainly can’t spend it.

    Not to mention like others have, emergency fund for repairs, etc. Our home was only $185k and we qualified for over $350k and are pretty frugal and it is tight every month.

  20. Deb says:

    1) I think our PMI is about $25 per month for a $148k loan.

    2) Look at the houses in your area that are in the $175-200k range and see if you can live there for a while. Drop in on some open houses in different neighborhoods, to see what that will buy for you. You do NOT want to buy a house at the upper end of what your income will get you, for all kinds of reasons. :)

    2a) An example: We were renting the same size apartment for just over what you’re paying now. We bought a house for $165k with 10% down, which gives us a monthly payment (insurance + PMI + interest + principle) that is significantly less than what we were paying in rent. The utilities even went down. We have no debt (except the house), not even student loans. We haven’t been able to put a drop into savings in the year since we bought the house (aside from retirement – which we consider a bill, not savings). The little things, like a lawn mower, and a this and a that and having someone out to check on the plumbing or air conditioning or garage door – all of the things that you don’t have to worry about in an apartment – can eat you alive. Budget for a smaller house so that you have room to spend on taking care of it.

    3) Another option to look into is an 80-20 split loan (or 80-10). Essentially, it’s two loans, one of which covers 80% of the home, and the other is used as the down payment and covers 20% (or 10%). I doubt the banks are letting people use those these days – we tried to get one and were told in November (’08) that we could have one, and by February that we could not, even though our credit score was only improving at that time. The market was just getting worse. It is worth asking about, though. :)

    @ Brianne: I completely agree with you about wanting the safety net. Putting 20% down would have wiped out our savings, and that makes me VERY uncomfortable, so we did go with 10% down and are paying PMI. Our PMI will expire “automatically” when the house reaches… I think 22%, or I can call and have them appraise it when I think the house has reached 20% – or maybe even 18%. I’m pulling those numbers from my head, not the loan paperwork, but they’re close approximations. Either way, if you get a good bank, you’ll want to call them when you think the house has reached 20% to have it appraised. They won’t call you about it. ;)

    Good luck. :)

  21. getagrip says:

    Lets see, $1540 mortgage payment, $505 student loan payment, $342 car loan payment, $250 escrow for taxes, not mentioned but assume another $100 a month in escrow for insurance, comes to about: $2740 a month. Taxes on $90K, married no kids, depends on the state, say $65K actual take home, or about $5420 a month. So around 50% of take home is going for debt payment.

    That’s assuming there is no debt from the wedding and honeymoon. That there is no sudden accumulation of more debt because empty walls/floors/rooms/garages/sheds need “something” and “it was a great deal” and “we really had to have it”. That there isn’t a doubling of utilities because of the likely larger space to heat/air condition/water, etc.

    50% of your take home is lot of debt.

    Then again, depending on where you live, $2700/mo for utilities, food, and sundries for two people isn’t that bad.

    There are risks as others have pointed out, e.g. loss of job, but the real risk IMHO is being newly married, with a new house, and being somewhat constrained in spending compared to where you were. It might be better if you were married a year before going for it. That said, I don’t know you or your real situation. I just see too much potential in it becoming a pressure cooker for the relationship if you aren’t careful.

    Best of luck.

  22. Kacie says:

    Oh, man. DO NOT BUY A HOUSE RIGHT NOW. Seriously. DO NOT.

    Don’t kid yourself by any numbers you can come up with on a spreadsheet. You cannot afford this right now.

    You said it would be 0% down (if you can even get a loan like that…and with your high interest rates on that car loan and other high debt, I doubt you will get a fantastic interest rate).

    I am going to assume you have a minimal amount of money in savings.

    You absolutely need an emergency fund. Do not put yourself into a house without having an emergency fund. Three months of expenses is good, and six is even better.

    Your reasons for wanting to buy a house right now seem to be purely emotional. You don’t want to be paying rent for very long. You don’t want to wait until you have 20% to put down, which is fine. Look bud, nobody deserves a mortgage. You have a rental that sounds like it’s fitting the bill for now. Be content with that until you get your situation in order.

    The part that I have the biggest problem with is you are heavily in debt and have minimal savings.

    If you take care of your debt and build up savings and want to buy a house with 5-10% down, go for it.

    THEN run your spreadsheets on PMI.

    But for pete’s sake, you do not need a mortgage right now.

  23. Kacie says:

    One other thing — you cannot predict what the housing market will do. Interest rates could be about the same, or still very favorable for buying. Same with house prices.

    So don’t worry about predicting that.

    What CAN you predict? Whether you’ll still be in debt or not. If your income and expenses hold steady right now and you get serious about getting out of debt and building savings, then you’ll be in a substantially better situation than you would otherwise.

    Try and focus on what you can sort of control, rather than the housing market.

  24. Gretchen says:

    Possible repost:

    9% on a car loan?

    Not only does Nick not have a downpayment, he has active debt.

    I’m also not sure he’s looked at his credit report which seems odd based on all the other numbers he ran.

    I also agree as brand new newlyweds they shouldn’t be house hunting, money aside.

  25. Courtney20 says:

    Having already done what Nick plans to do (3% down, PMI, etc) I can wholeheartedly say “Don’t do it.”

    We bought our place for $193K in 2005 (cue a bit of naive panic about the fact that houses were appreciating faster than we could save money, plus the perceived urgency of being right at the income cutoff for a county grant program). We JUST got our PMI removed four months ago, and only because we were “fortunate” enough that my dad had life insurance when he died. Our house is now worth approximately $50K less than what we paid; when we hopefully sell it in the spring we will consider ourselves lucky if we don’t have to write a check to our mortgage company at the closing table.

    I sincerely doubt that someone’s PMI is $25 a month. PMI is usually 0.5-1% of the initial loan balance per year. Ours was $149/month. And depending on the loan, some will require you to carry the PMI for a minimum of 5 years regardless of your equity situation; others will require an up-front PMI payment.

    Lesson learned – we will be buying our next place for 20% down on a 15-year mortgage, because I don’t ever want to be in the same position again. Nick, your situation (credit score, down payment, income) will likely only improve over time. Don’t rush into something like we did because of panic over factors you can’t control.

  26. Bethany says:

    I second everything Kacie said.

    Also, I don’t know where Nick is living, but I think a 7% increase in home prices, even spread out over the next three years, is very, very, very optimistic.

    In my neighborhood, prices are still falling. We would never have predicted three years ago where prices are now. Be conservative.

    @Brianne, what is behind your desire to buy a home before starting a family? It seems like you and your husband are in good financial shape.

    My husband and I rent a two bedroom apartment we love. We are planning on starting a family here soon, and who knows when we’ll buy a house. No rush.

  27. Johanna says:

    @Brianne: Prices are not going to be “much higher” in a year or two. Home values don’t just move around on their own – homes are worth what people are willing and able to pay for them. People including you. And lots of people like you. You don’t have to worry about being priced out of the market forever, because if you’re priced out forever, so is everyone else, and that’s impossible.

    And despite the recent glut of popular medicine articles scaring women that their ovaries will fall out when they turn 25, plenty of women in their 30s have children without incident, and have been for centuries. So unless you have a specific reason to think that *your* fertility will be much worse in a year or two (and maybe you do, I don’t know), I wouldn’t worry too much about that.

  28. Claudia says:

    I don’t think you should buy right now either.

    Instead of comparing now to three years from now, maybe you could just put plans on hold and re-evaluate in ONE year. In the meantime you could:
    1. knock out the car loan debt (and some student loan debt).
    2. “practice” paying a mortgage each month (pay your rent, then put into savings ALL the additional expenses of owning a house, so that you get used to the reality of the numbers that currently are just on a spreadsheet).
    3. wait for the dust to settle from the wedding/honeymoon and just enjoy newlywed life. Relatives often give young couples money as a wedding gift- use that to pay down your current debts and as the beginning of your emergency fund.

    best wishes!

  29. Kacie says:

    @Brianne — Are you putting your money in just a 401k, or are you doing a Roth IRA as well? Because first-time homebuyers can tap as much as $10k of contributions from their Roth IRA to use for a down payment.

    It’s not a loan. It’s your money. But, you cannot pay it back, since you can only put $5k in your Roth IRA per year anyway.

    That might be a little bit of a better option for you to research rather than doing a 401k loan.

    And I agree with a previous commenter — if you want kids now and feel like you can swing it, do it! It’s a-ok to be a new parent and to rent.

  30. deRuiter says:

    Pay off the car loans. Pay off a large chunk of the student loan debt. Build an emergency fund. With what sonds like a substantial income, YOU HAVE DEBTS AND NO SAVINGS, plus your fiancee has a history of bad credit. Get your ducks in a better row over the next year. House prices are not likely to rise much any time soon. America has an effective unemployment / underemployment rate of 17%, masses of house foreclosures in the pipeline which depress the prices of the houses which are not in foreclosure. Besides, give being married a year more before you commit to a house which you may not be able to sell if the two of you find this doesn’t work out.

  31. I think its more importnat to just keep in mind that you don’t need it after you’re reached this 20% plateau.

    Its not bad to have while its required, but I don’t think it s a necessity thereafter.

  32. kristine says:

    OK, picture this scenario:

    Still paying down debts. Have a mortgage. No emergency savings. Great unexpected news- baby on the way! One of you loses job, or wife is unable to work for a while after the birth (childcare unaffordable, or medical complications). Money stress, small child, and post-partum wife. No foreseeable financial windfall or relief in sight. Marriage degrades. Great house, stressed out family…possibly for 5 or more years till the child is in school. Unless you have another…you start to feel trapped in your job, if only because you cannot quit no matter what.

    Nightmare, no? Happens every day.

    In any case, 3X your gross is a lot of mortgage, even without one single debt. Besides, if you read WSJ, housing will not bounce back until at least the end of 2012. Save up!

  33. Courtney20 says:

    Another thing that concerned me about this plan is that neither Nick nor Trent mentions closing costs. For a $280K house you can expect to pay somewhere in the neighborhood of $8K to close – money that you either have to save up yourself, or roll it into your loan (if you can even find a lender who would let you do that now).

    There’s also nothing in the analysis or response about a maintenance fund, which should be, at bare minimum, 1% of the value of the home per year. Add on another $235 to your monthly payment, because at some point you will need to call a plumber or replace a roof or get a new appliance or something else.

  34. Heather H says:

    This is tricky for me because my husband and I did this when we were first starting out, in fact we bought our first house before we were married with no down payment on a VA loan. It was a fixer-upper and we’ve had a few of those along the way, updating each one and making a small profit on each. BUT we started back in 1993 during some similar but different housing market challenges. We’ve never regretted our decision to buy our first house or any of the 5 other sequential homes we’ve owned. By our 3rd house we no longer needed PMI because we had the 20% built up from equity when we sold. In today’s market that might not happen, or it could it depends on the market, a bit of luck, and the house and location you choose.

    The real key is to buy a house you can afford with only one salary in a good school district and to not be afraid to get something that needs work. Otherwise, I would say you are not ready.

  35. Kevin says:


    “And despite the recent glut of popular medicine articles scaring women that their ovaries will fall out when they turn 25, plenty of women in their 30s have children without incident,”

    LOL! Thanks, Johanna. Who needs a huge pile of stupid “medical studies” when you’ve got anecdotes to back you up?

    Those medical articles are based on science and statistics, and the truth is that female fertility does in fact fall off a cliff in your mid-30’s. In addition, the risk of serious birth defects like Down’s Syndrome increases dramatically at the same time. So if someone is certain they want children, they’d be well-advised to heed the advice of medical professionals and get to it before age 35.

  36. Telephus44 says:

    I agree with everyone on needing cash for closing costs and having some sort of cash on hand afterwards for an emergency fund. I would also wait until you’ve been married for a year or so just to get used to being married. It’s an adjustment period, stressful, and adding a new house to the mix probably won’t help.

    However, I agree with your numbers analysis. We bought with 10% down – enough to qualify for the lowest PMI payment Every bank we talked to, you paid a different PMI cost depending on the down payment – the smaller the down payment, the higher the PMI cost was. However, the PMI rate was the same whether you put down 10% or 19% – so we scraped together 10% for a down payment and just paid PMI. Honestly, it’s the best thing we’ve ever done. Yes, my house value has dropped, but I’m not planning on selling it so I don’t worry about it.

    I think what people also tend to ignore when they suggest waiting is how this will effect your long term plans. Buying a house at 25 and having it paid off at 55 puts you in a different position for retirement than buying at 35 and having it paid off at 65. Also, the effects of inflation become a lot more real the longer you wait. If we had waited until we paid off both car loans and had a 20% down payment we would have needed another 7 years before we bought. I was 30 years old when I bought my house, so I’ll be 60 before it’s paid off. What would happen if I waited until I was 37? And again, think of inflation. I know people who bought houses 20 years ago and have $400 and $500 mortgage payments. My mortgage payment of $1100 (P&I only) is going to look ridiculously small in 20 years.

    In short – I think that as long as you can cover your bases, you should go for it in about a year. And by cover your bases, I also mean being realistic about what happens – not a what happens if the sky falls. I think that people tend to be overly conservative when it comes to giving advice on buying a house – what if you lose your job for the next 2 years and your wife gets pregnant with triplets and becomes a SAHM and one of the children has major health issues and…. While yes, these things happen and need to be planned for, you don’t have to plan for the worst case scenario. You’ll never be able to save up enough money to cover everyting that can possibly go wrong in your life.

  37. Jane says:

    Are banks not doing piggyback loans anymore? In 2007 we bought a $165,000 home with 10% down and had two mortgages. This stopped us from having PMI. Of course, the mortgage on the smaller loan is around 7%, but it’s a relatively small loan and we are close to paying it off. But it sounds like their credit might not be good enough for such a loan. I know each of our credit was close to 800.

    I think buying now for this couple is a bad idea. Your numbers are all speculative, and I think it’s unrealistic that houses will appreciate that much in the next couple of years. Depending on where you live, they might remain stagnant, which would actually work in your favor. I also wouldn’t trust that mortgage rates are going to go up all the much. And really, who stays in a house for thirty years anyway? If you’re calculating your “savings” that way, it really doesn’t make sense unless you really plan to stay that long. Whether you buy now or buy later, the bulk of your initial payments for the first couple of years will be almost all interest anyway. I think you are using the numbers to justify your desire to buy now. Your reasons for doing so are emotional and not financial. The reality is that you can’t afford to buy now. Looking back, we shouldn’t have bought when we did either, and we had 10% down. But we didn’t have an adequate emergency fund.

    My husband and I were talking the other day about how strongly we feel that couples should really try to buy houses that they can afford on only one income. This is not to say that only one person should work, but you really have to assume that at some point someone might be unemployed either because they lose their job or they voluntarily leave the work force. You don’t want to be stuck unable to afford your mortgage. This is too much risk.

    Looking back, we should have waited a year or two more before we bought. But then again, I can’t say I regret it, because owning put us in a frame of mind to start a family. And two children later, I really can’t say I regret that! This speaks to Briana’s desire to buy before they start a family. I can really understand that desire, even if it doesn’t make financial sense. But we had no credit car debt or car payments, and a relatively small mortgage. If we had been in a different situation, we really should have started our family in an apartment. Sure, it’s not ideal, but if the ideal means you are drowning financially, it really isn’t ideal!

  38. SavingFreak says:

    You should always consider how much your rent is vs. how much interest you are going to be paying. If your rent is close to the same amount as the amount of interest you will be paying then you should wait and save the money for a down payment. This keeps you liquid instead of all the money being tied up in the house. This also keeps you from being liable for repairs which means you can save even faster. If you can keep your rent equal or better than what you would pay in interest then you are better off renting and saving.

  39. Courtney20 says:

    @ Jane – A lot of banks who financed the second mortgages in 80-20 or 80-10-10 situations got completely burned after the huge numbers of foreclosures and short sales that have taken place over the past few years. Being a secondary lien holder meant that they only got to make a claim after the primary lien holder recovered their investment – if there was anything left from the sale at that point (that’s why the interest rate is higher, because they are at more risk than the primary lien holder). We briefly looked into it but even with near-800 credit scores and our only other debt being a $5000 student loan at 1.75%, we couldn’t find anyone willing to do an 80-10-10. They all said they’d do 90-10 with PMI, but we’re not willing to go that route again.

  40. Jane says:

    Thanks for the explanation. Even in 2007 they told us that the reason for the higher interest rate was because they stood to lose everything if we defaulted. It makes sense that they would be hesitant to make them now.

  41. Brandon says:

    Can you scrape together 3.5% for an FHA loan? I would suggest considering that route carefully.

  42. Johanna says:

    @Kevin: Are you a medical professional? Have you been reading the scientific literature on female fertility? Or are you drawing your conclusions from popular media reports too?

    Having seen how badly the news media can mangle their stories on areas of science that I do know something about, I don’t trust any popular article on science or medicine any farther than I can throw it. And I throw like a girl.

    And anyway:

    “So if someone is certain they want children, they’d be well-advised to heed the advice of medical professionals and get to it before age 35.”

    Brianne is 30. She said she wants to “get to it” in the next year or two. So what’s the problem?

  43. Kevin says:


    The “problem” is that she probably won’t get pregnant on the first try. Also, she might want more than one kid. That’s 2 problems right there.

  44. Tall Bill says:

    Pay off those high interest loans & Save Save Save. We just had an eye opener in mid term elections & nothing will change very fast. They are cranking up the money printing machines faster just this morning, which they say will keep interest rates low or even lower. Don’t commit to more debt till the balance sheet looks better – don’t take after Uncle Sam…

  45. Kacie says:

    Can we get an update from Nick? I don’t know when he submitted his question, but i would like to hear his thoughts on all of our comments and what he’s planning to do.

  46. socalgal says:

    Buying a REO property is very tough. We were successful just over two years ago, but after dozens of offers rejected we finally got the house that we loved all along—and the kicker is that we paid all cash. The competition is fierce in the Southern California area. In addition with every REO or sort sale that we viewed there was a lot of $ that had to be invested in the house. We did most of it ourselves, but still ended up at the $7,000 mark. I would recommend that you save, pay down your debt, then start looking in a few years.

  47. Steven says:


    There is data and statistics of increasing number of birth defects at the same time that the average age women have children are also going up.

    Granted, correlation doesn’t imply causation, because many things have changed in the last few decades. Processed foods, pesticides, increased levels of all sorts of radiation and pollution (note, I’m not one of those tin-foil hat nut-jobs, just saying it could), and etc. are just a few of the major changes in our way of life.

    There are many variables, and women waiting until they are older is one of them. I mean, 100 years ago, women (aka jail bait in today’s society) were married and having children in their teens.

  48. R S says:

    Bought in late 2008, refi in late 2009.
    Another thing against 80/10/10 loans (piggy back 10%, 10% down), even if they are available, is it makes it much harder to refi, if you haven’t paid off the smaller loan.
    For me, luckily the primary & piggyback were with the same lender, and I did the refi of the primary loan with existing lender. When I went rate hunting however, there were only a couple lenders who were willing to take on a refi that would require resubordinating a loan from a different lender. Most of the suggested doing a refi and putting both loans into one (which would then incur PMI).
    OTOH, I did manage to secure an excellent rate (at the time of my refi, not compared to now) because rates were better if the LTV < 80%. It also allowed for a bit of buffer for depreciating home values.

  49. Johanna says:

    @Steven: I just googled “birth defect prevalence.” The first result on the list was a report from the CDC. It states: “The findings in this report indicate that the overall prevalence of major birth defects in metropolitan Atlanta did not change significantly during 1978–2005.”

    According to their data, between 1997 and 2005, birth defects affected about 2.6% of live births to women under 35, and 3.6% for women over 35. Considering that the “under 35” group includes women in their teens and 20s, and the “over 35” group includes women in their 40s and maybe beyond, I’m going to take this report as evidence that waiting 1-2 years is unlikely to make a huge difference for any particular woman.

  50. Kevin says:


    Are you seriously denying that maternal age is a risk factor for birth defects? I don’t mean to be obstinate, but the notion is so absurd to me that I want to be clear on what you’re claiming lest I say something rude.

    I can’t post a link here or this comment will be lost to moderation limbo (as you well know), but if you Google for “down syndrome age risk”, the very first link is a page on the Down Syndrome health website that features a table demonstrating how the risk of Down Syndrome changes with maternal age. Specifically, the incidence is only 1 in 1400 live births for mothers aged 20 – 24. By age 31, that risk has only risen to 1 in 900.

    However, if you watch the numbers through the mother’s 30’s, you can see it gets much worse, very quickly. By age 35, the risk is 1 in 250. By age 40, it’s 1 in 100.

    These aren’t opinions, these are facts. 1 in 250 (age 35) is much, much worse odds than 1 in 900 (age 31). Women planning to have children should definitely do so before their mid 30’s.

  51. Johanna says:

    @Kevin: “Are you seriously denying that maternal age is a risk factor for birth defects?”

    No. How on Earth did you come to that conclusion?

    “By age 35, the risk is 1 in 250.”

    The chart I see says 1 in 350, but whatever. So, 99.6% or 99.7% of babies born to 35-year-old women do not have Down syndrome. I fail to see why this is such a big deal. If you find the prospect of having a mentally handicapped child so awful that a 0.3% risk of it is worth freaking out over, then maybe you shouldn’t be having children at all, since there’s no age bracket for which the risk is 0.

  52. Marle says:

    When you put the risk numbers in percents like that, it really does look like a big deal over nothing. A 0.3% risk? I think everything else in life is riskier than that.

    I don’t think it’s necessary to run out and buy a house before getting pregnant. Babies don’t actually take up that much space. This is probably going to sound crazy, but this is a frugal blog so whatever. When I was born my mom lived in a 1 bedroom condo. She had a fairly large closet though, so she literally put my crib in the closet. She bought a 2 bedroom house when I was a year and a half old or something. That worked out fine, though I now have a goofy preference for small spaces. ;-)

  53. LeahGG says:

    Couple things about having kids and buying houses. First, if you want a guarantee of a perfect baby, buy a doll. My family has no history of anything worse than hayfever, yet my son was born with a significant birth defect. (My parents have 29 grandchildren, and this is the only one with a serious birth defect) I was well under 35 when he was born. It’s not something that could be seen on ultrasound, with alpha-feto protein (did that), neuchal translucency (did that too), or even with amnio – it could have been seen with a fetal MRI, but there was never any indication for that. Thank G-d, my son is doing great, and I am very happy that I have him, even if I do end up making a lot of phone calls and doing a lot of traveling to experts for his rare condition.

    Second, it is quite possible to live in an apartment – even a rental – with kids. My husband and I live in a 3 bedroom apartment with two kids and a small dog, and it’s actually not too bad. If we weren’t packrats, I think the place wouldn’t feel particularly small, either.

    We do have to work hard to keep the clutter down, because we just don’t have space for clutter here, but I don’t think the kids suffer. If anything, I think that my daughter loves that she can walk to a friend’s house “alone” (the friend lives on the same floor in our building, so I literally open the door and tell my 3-year-old that she can go knock on her friend’s door.)

    If we want to play outside, we go to the public parks or to a friend’s house who does have a yard (some do, some don’t).

    I didn’t put off having kids until we could buy a home, and I think it would be a big mistake to do it – not because of birth defects, but because kids are a part of the whole life plan. A house is just a place to live.

  54. Paula says:

    I agree with LeahGG. There are no guarantees when you have a baby. I was 31 when I had my son. He was born healthy, but it wasn’t until he was three years old that we discovered he had autism. I don’t regret waiting until my 30’s to have a child at all.

  55. David says:

    You need to be a little careful with phrases such as “increases dramatically”.

    If the chance that X, where X is a bad consequence of Y, will happen increases from 25% to 100% as the person to whom it might happen gets older, that is indeed a “dramatic” increase, and the person in question should undoubtedly attempt Y while young (or not attempt it at all).

    But if the chance that X will happen increases from 0.25% to 1%, that is not a “dramatic” increase at all, and the person to whom it might happen should merely weigh it against other potentially bad consequences of successfully attempting Y while young.

    In each case, of course, the increase can dramatically be presented as “fourfold” – you are, for example, four times more likely to have a defective child at age 35 than at age 25 if the data above are reliable.

    But a fourfold increase may be “dramatic” (as in the first case above) or “negligible” (as in the second). As Marle correctly observes, when you hear the words “X percent increase”, the first question you should ask yourself is “X percent of what?”

  56. lmoot says:

    I was 5 years old before my parents bought a house. I barely remember the apartment we lived in and I turned out alright. My sister and her husband didn’t buy their house until my niece was 2 and my brother and his wife still rent a house(and lived in an apartment until their kids were 3 and 4) and they’re all doing fine as well. Life isn’t going to always “line up” the way you want it to. Sometimes you just have to do what is best is most appropriate for you situation. Having kids is stressful enough, but try bringing on an unknown expense like children while being house poor. For all you know, once you get that house you may decide you don’t want to have kids until you’re financially stable, and if you get a house that you are not financially prepared for you may not feel financially stable enough to have kids until well after you’re able to. Or you might lose the house before/while you have kids and be back to square one or worse. Not to sound doom and gloom, but I think this is a good situation where you should ask yourself, if I had to choose, which would I rather have? Kids or a house? If kids are more important, do that first, then work on getting the house. That way if only one thing is attainable to you (at least in the near future) at least it’s the one thing that is the most important to you.

  57. lmoot says:

    Oh yeah, and I bought my house over a year ago and it is still going down in value. It has yet to increase since I bought it. So when you start having more kids in 5-7 years and “need more space” you might just be stuck in that little house or have to pay just to sell it. At least with renting you will have more mobility.

  58. lmoot says:

    Also wanted to add that although it is a buyer’s market and interest rates are low does not, let me repeat that last part, DOES NOT mean that you will qualify for those low rates. I had a great credit score, never missed or was late on any payment on anything, paid credit card in full each month, no student loans, college degree (yes they took this into consideration during the rate approve process), car paid off in full. I LITERALLY had no debt except about $600 on my credit card (which was the current balance that was to be paid off at the end of the month). But I had a delinquent account with an apartment while I was in school that I tried to no avail to dispute and ended up paying it off. This caused a fiasco with my future lender and literally almost halted the process. I had to track down the collection company, get them to fax me a letter of release, forward that to the bank. It also helped give me the less than premium rate of 4.5% and instead I got 5.375% (not bad, but that was after I paid 1% of the homes value to knock it down from 5.8%)The kicker? My delinquency was a grand total of $375 that I paid of 3 YEARS AGO. so that set off my spidey senses when, coupled with your combined debt and lack of funds, that your wife paid of several delinquencies 1 year ago. I fear you won’t get anything below 6.5% from even the most competitive of lenders. Even though I put 20% down (just over 15k for my house), had no debt, great credit score and spotless bill paying history, that measly ole ding was taken into great consideration. This was a good time for me to buy because I’d been saving for years to buy a house and was close to my saving goal. That, coupled with the timing allowed me to get those great deals, but only after I brought quite a bit to the table myself. Don’t fool yourself in thinking though that it’s a good market. It’s only a good market for those who are ready to buy a home and can afford it, and who would have bought a home anyway. You’ve heard the saying that it’s not a bargain if you buy it just because it’s on sale.

  59. lmoot says:

    Sorry for the thousandth post in a row! I just went back up to read Nick’s calculation. Nick, when you say PMT on mortgage: 1634.22, it is not payment on principal. I can pretty much guarantee you that out of your monthly mortgage payment a MINIMUM of $1000 of that payment,for a MINIMUM of your first 5 years of a 30 year mortgage, is doing NOTHING for your principal. And I am being highly giving with that amount (it’s probably closer to a minimum of 1200/month for 7 years going towards interest alone).

    You state that the reason you guys want to get a house 0% down is that “We’d be paying rent for far too long.” Which I’m assuming to mean you believe renting is throwing money away. Your rent is $1100. If you are spending $1000/month on interest alone + $250 for taxes + $160 PMI that = $1410 a month (and realistically, with the way they calculate interest for about the first 10 years of the loan it’s probably more like $1700/month)But anywho, that is $1410/month that you are “throwing away”.

    It’s money that is not working for you at all. Not to mention that you will probably pay close to 1% of your home’s value each year on upkeep and repairs. Another expense you would not have renting. 1% of 280k = $2800/12months = (rounding down from 233) $230/month. Now you are looking at non asset building fees of about $1640/month (1410 + 2800). That’s over $500/month more of “wasted” money than your rent. Add about $300/month for the principal (remember that $1640 is ON TOP of your principal).

    You would do better to save that $800/month ($500 fees surplus + $300 principal) for 3 years in a high-yields savings account, work on your debts, and allow time from the paid off delinquencies. At the end of 36 months, you would have $28,800 in savings which would be about 10% of a down payment on a $280k house (and considering the house values are still falling, I don’t think in 3 years it will be much harder to find the house you want for $280 still)That 28k you could save is not even counting interest that you could earn which could easily push that to over $35k with a modest 2% interest over 3 years.

    The fact of the matter is, you might be able to get a better interest rate in a few years time, not because of the market, but because of your financial preparedness. The banks don’t care about the market when they create your rate, they are looking at each individual portfolio (now more than ever) and 5% premium rate aint gonna do squat for you if you are not considered a “premium” borrower.

  60. lmoot says:

    Oh, yeah I forgot about the insurance! On a 280k house expect to pay a minimum of $150/month on insurance. I don’t think insurance was even addressed in the original question, which sends up a flag that emotional optimism is trumping real-world logic. Which I can understand, I’ve done the same, it’s fun to dream. But surely you cannot realistically (with all the other bills) feel comfortable about buying a house now.

  61. Kevin says:


    2 nitpicks:

    1) “Insurance” – He should have insurance on his apartment anyway, so while it will indeed cost more to insure a house, to be fair you should still discount an amount that he should already be paying to insure his apartment.

    2) Interest on his down payment. You said: “At the end of 36 months, you would have $28,800. That 28k you could save is not even counting interest that you could earn which could easily push that to over $35k with a modest 2% interest over 3 years.”

    Even if he started out with the whole $28,800 right from day 1 (instead of accumulating it at a rate of $800/month, starting from $0), then at 2% interest per year, it would only grow to $30,563, nowhere near the $35k you quoted. In actuality, taking into account that he’s saving at $800/month over 36 months, at 2% interest it would only grow to $29,656.

  62. lmoot says:

    Kevin, you’re right. But to be honest I didn’t do the math because my main point was it would be better to save and earn interest, where as you wouldn’t be putting near that amount per month directly to principal and you certainly wouldn’t be making interest on equity. But thank you, you are correct. Hopefully though, if they saved over 3 years they would save additional to the $800, any extra money, tax returns, etc…ideally though, right?

    As per the renter’s insurance. When I was renting for 5 years I never paid renter’s insurance. Stupid? Yeah. Required? No. I suspect less renters pay for renter’s insurance than people pay for health insurance. When you have a mortgage however it is required and you can’t opt out or drop out when things get tough. Having a mortgage binds you to all types of responsibilities that renting just couldn’t match.

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