"Brian Huether" wrote...

I really don't know what to make of this. By avoiding PMI, I end up
with about $3000 more in equity (ok, equity is tough to estimate, but
I just assumed house value remains the same...). But I pay about $3000
for the origination fee. And I would have paid about $7000 more in
interest! But with the 80/15/5, there are tax benefits (which I have
no idea how to compute...).

So with the above numbers, what makes sense? It just isn't clear to
me... Should I do what many people do, and just pay PMI, with the
hopes that after the first year the house has appreciated enough to
remove PMI?


Regardless of appreciation, the paydown of the principal will still be what
you calculated, so your equity interest will not be further affected by the
type of loan you take out.

Tax benefits will (in round numbers) come to about 25-30% of the interest
paid each year; option 2 will yield about $600/year more in tax savings.
Again, there is no further effect that depends on the type of loan -- it is
strictly dependent on interest paid and your marginal tax bracket.

In your case, you have estimated the total costs for your expected 3-year
term, so you should probably go with the cheaper alternative. In your case,
paying the PMI is cheaper than the creative 80/15/5 option by almost $9000
over the 3 years.

HOWEVER, you risk a more expensive loan if you stay more than 3 years. Do
another look at the likely cost of the ARM after the 3-year interest hike,
and balance it against your potential ability to refinance it at or before
that time on better terms.