Eyal Tropen - Sr. Loan Officer

NMLS # 874253

So, is it better to wait until you save enough down payment to not pay mortgage insurance? Let's review the numbers...

For example, you want to buy a house that today costs $400,000. 20% down payment will require you to have $80,000 (plus closing costs). However, if you have not owned a home for the past three years, you are considered a First-Time-Homebuyer and may qualify to buy a primary residence with as little as 3% down (others may be required to pay a minimum of 5%-15% down).

For calculation purposes*, let's say you have now enough for a 5% down payment - just $20,000. If you can save as much as $2,000 a month (and that's a big "IF" for most people), you will reach your goal of 20% within about two and a half years... or will you??? Because in two and a half years, with a forecast of a 5% appreciation in home value per year (realistic in some areas, but very conservative in Greater Seattle for example), the $400,000 home will now cost at least $452,000 and your 20% down payment will now be $90,400 - that's over $10,000 more than what you saved! (not to mention the interest rate increases expected during this same time period...)

However, if you buy the house now, with the money you have available for a 5% down payment, your PMI payment may be as little as $129 a month - A total of only $3,870 in two and a half years, which is about one-tenth of the expected home appreciation during the same period!

And the beautiful part? On conventional loans, once the outstanding balance reaches 20% of the property value (to use the appreciated value, all you need is to pay for a new appraisal, which costs about $700) and request to cancel the mortgage insurance**! In the example above, this can happen after about 4 years, during which you will pay a total of less than $9,000 for the PMI component, while the house is expected to have already appreciated by about $ 86,000... (Note: FHA loans may require a refinance to drop the PMI, but this is for another time).

What about investment properties?

Unlike primary residence, when buying an investment property, a down payment of less than 20% or even 25% may result in significantly higher costs for interest, "points", and mortgage insurance. In the long run, these increased costs will reduce the profitability of the investment, and during periods when the asset is vacant without a tenant, you will have to pay these costs out of your pocket. These considerations will generally (but not always) tip the scales in favor of a larger down payment on an investment property.


* Rates below were available as of 12/15/2017 and are for example only, they may not be available, or you may not qualify for these rates at the time you read this. On a purchase price of $400,000:
       20% down = $80,000, 4.500% (4.726% APR), 1,621.39/mo. P&I plus taxes and insurance. 
       5% down = $10,000, 4.250% (4.817% APR), $1,869.37/mo. P&I plus $129.83 PMI plus taxes and insurance.

** If not explicitly requested at 80% Loan-To-Value, the PMI will automatically be canceled when the outstanding balance of the mortgage reaches 78% of the original home value... so don't forget to ask, or you will needlessly pay more!

Copyright © 2018. Eyal Tropen NMLS # 874253
Residential Mortgage Loan Originator Licensed in CA, OR, TX, WA

American Pacific Mortgage | NMLS #1850
625 4th Avenue, Kirkland, WA 98033 | NMLS # 1055557
Phone: 425-922-1055 | Fax: 855-549-8730 
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Master Builders Association