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

(Brian Huether) wrote:

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?

With the numbers you posted, the difference in interest is about $7000. The tax
benefit for most people buying that kind of house is approximately 30%, so you
would see a reduction in taxes of around $2000. Property taxes would be the same
for both options, and the benefit from that would be a similar percentage.

If you do go the PMI route, make sure it gets documented in writing taht teh
lender will remove it when a certain percent equity is reached. Otherwise they
don't have to (unless you refinance).

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.

"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.

Brian,

I am a loan officer in NH and we also do loans in MA,GA,ME and ID.
I'm not sure who is giving you your info but you have many more
options on programs. If you went with a cash flow ARM, you can decide
between 4 different payments types each month. It sounds as if you
are sure that you will be moving within 3 years, so you could make
interest only payments or a predetermined monthly payment. You
wouldn't make a dent in the principle but instead of wasting money
renting, you'd still get the write off. Or you could do a 3/27 ARM
with a fixed rate for 3 years with no PMI. And the rate would be
close to a conventional loan rate (depending on your credit). You may
want to shop around some more. If you have any other questions, let
me know.

Terry





(Brian Huether) wrote in message . com...
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