DIYbanter - Avoiding PMI via 80/15/5

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Avoiding PMI via 80/15/5 - follow up

Thanks for the replies to my last post. I thought I would post a
follow up with more info. To sum up, I am trying to decide if a
80/15/5 loan makes sense for a $339,000 loan. I will be moving in 3
years, and so am going with a 3-1 ARM.

I am military and am moving to the Hanscom AFB area in MA. Renting is
out of the question - I am also a musician and need to modify the
basement to accomodate a recording studio. If the housing costs really
do plummet, then I will seriously consider taking a second assignment
there, or switching to civilian. Also, I am plain sick of renting.
Given that a house rental in the area is around $2200-$2400, I highly
doubt that renting would lead to a considerably better financial
position.

Here are some numbers:

loan amount: $339,000

option 1: 4.5% non-conforming 3-1 ARM, 30 yrs, 0 pts, $220/mo PMI
payment: $1,717.66
payment + plus PMI: $1,938

after 3 years:
balance: $321,828
int. paid: $44,664
equity: $17,172
PMI paid: $7920

option 2: 80/15/5
1. $285,600: 5% conforming 3-1, 30 yrs, 1 orig. fee pt
2. $53,550: 6.5% fixed, 15 yrs

orig fee = $2856

after 3 yrs:
balance: $272,301 + $46,558 = $318,860
int. paid: $41,895 + $9802 = $51,697
equity : $13,299 + $6992 = $20,291

In each case, downpayment = $17,850

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?

regards,

brian

Avoiding PMI via 80/15/5 - follow up

On 26 Jul 2004 04:18:04 -0700, someone wrote:

....there are tax benefits (which I have
no idea how to compute...).

You can NEVER "save money" (NET) by paying more interest. You are
instead paying a dollar to save 35 cents (or so). The ACTUAL tax
effect has to be calculated by your own specific situation, what is
your income, what are your other deductions. But you DO NOT deduct
your interest "from" your taxes. Maybe "on" your taxes but that is a
big difference.

Instead, the interest is an allowable deduction from income, so your
taxable income is less if your interest is more, but since you are not
taxed at a 100% rate, that's why for most folks at best its spending
$1 to save 35 cents. For many people, its much much less, they don't
make enough to begin with to be in a high rate class, and/or they have
other deductions that bring them down already.

-v.

Avoiding PMI via 80/15/5 - follow up

"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.

Avoiding PMI via 80/15/5 - follow up