Put minimum down on primary residence if you have a 20% down payment?
I recently ran across this idea, and wanted to get some input if people have tried this. We have 20% cash for a down payment, don't currently own a house and are looking to purchase. This idea is to make the minimum down payment of 3.5% or 5% (which theoretically gets you a better interest rate), close, then after some time period pay the rest of the 15% cash towards the loan, and then recast the loan and keep the lower interest rate. This strategy seems to assume a few things (interest rate is lower with lower % down, you can recast the loan, no penalties for paying off early, PMI can go away), but if those assumptions work out is this a viable option? Worth the hassle/risk? Thanks
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I think that there are better ways to save money.
A few thoughts: 3.5% down is typically fha financing and FHA pmi cannot be removed without a full refinance and also inside a large upfront insurance payments; while some lenders will give your a lower rate for a larger mortgage, they won't give your a lower rate for a lower prevent down, does that make sense?
Recasting often requires a new appraisal and a fee and the customer service isn't as great as when you get the mortgage (I've done it twice).
If this is your first home, I would consider looking at first time home buyer programs.
I recast my loan when starting graduate school, after having put a large unnecessary chunk towards principal. It did not cost me anything to recast (I kept same time frame and interest rate), but my mortgage was with a local bank, and I don’t think you can consider that typical.
I went through this same debacle when we bought our house almost 3 years ago. I ended up putting 20% down for a few reasons.
1.) My wife had extra savings we could tap into should anything arise, so me depleting my savings to my last 3k didn’t cause sleepless nights
2.) I didn’t want to pay PMI, although it’s minor in the grand scheme of your payment, it was the principal of not paying fees I didn’t have to.
3.) my interest rate was high. 6.875%, so I could justify the extra down payment wasn’t loosing compared to investing the same amount, or at least if it did, it wasn’t by a large amount.
Looking back, if we didn’t have an emergency fund, or had a much lower interest rate, I wouldn’t have put as much down and either kept it for an emergency, or invested it elsewhere and just paid the bare minimum.
Note: it was also our first house we planned to live in for 5-7 years, so we knew we’d never fully pay it off
When I made this decision on my current house I also factored in opportunity cost, using a range of interest rates offered for different loan periods, and different rates of return for having that money invested. When I did the math in early 2020 the lowest monthly payment was the best pay off. From there I did invest some money into the house in improvements, interest rates dropped again a year later and so I refinanced with a 0.75% lower rate, and about 10 months after that figured I had enough equity to meet the 20% threshold to eliminate PMI. I paid the appraiser and got PMI removed from the house after about 2 years.
When I did this, interest rates were lower so the opportunity cost may not be the same at it was for me.
1st home: 5% down and removed PMI a few years later with appraisal
2nd home 10% down and removed PMI a few years later as well with appraisal
3rd home 20+% down, no PMI, no escrow, and a few years later recast to pay lower mortgage payments then HELOCed to pay down further lowering monthly payments.
1&2 more leverage less cash and more financially savy although I didn’t realize that at the time.
3 more cash intensive but now mortgage payments are much lower now which opens up more resources for other things.
I would start by reverse engineering the monthly mortgage payment including PMI, taxes and insurance (escrowed or not) and go from there on your decision making sure that you have at least 5k for a repair because something will break down. Again make it all contingent on your monthly payments and resources.
I am a real estate agent. I work with lenders all the time. It would have to be a very special case for the lender to give you a better rate with a lower down payment.
I would encourage you to speak to your lender, because they're the only one who is going to be able to give you a definitive answer.
I have seen this work twice, when the rate for a jumbo loan was lower than the rate for a traditional loan. There was a period of time where this was the case, and someone I worked with did this, explained it to me, and I shared this approach with a client who was buying a house and was right on the cusp of a jumbo loan versus a conforming loan.
Jumbo loans are typically a higher interest rate than a conforming loan, and I believe that is the case now as well.
From my experience, interest rates are higher with a lower % down. Add on PMI and you may be paying quite a bit more that isn’t going to principal. I may be wrong on this, but I believe recasting the loan will always incur a cost. You can, however eliminate PMI once you get to 80% equity through any combination of early principal payments and home appreciation. You will likely have to pay an appraisal fee, however.
All that being said, I paid 5% down on my first home 8 years agowhen I could have put down 20%, although both prices and interest rates were better than they are now. I thought it was worthwhile to keep more liquid assets both in savings and brokerage. I eliminated PMI after 4 years with about $200 for reappraisal.
You will have to decide what works best for you. If all you’re looking to get is the lowest rate, though, I think 20% down is your best bet.
Thanks for sharing your experience! I have not compared the rate differences between putting less or more down with our lender (only got a preapproval so far with a general rate estimate), but good to hear that the assumption it will be a lower interest rate is definitely not always the case.
I am 60 and have not had a mortgage since 1999. I can’t imagine a lender providing a lower interest rate, because of a lower down payment.
Why not? I could see it since you will be paying more interest to them in the long run. As long as your finances look ok and you aren't a risky loan
A lower down payment represents more risk for the lender since borrowers are more likely to default the less money they have invested. I talked to about 10 lenders in the past 6 months and they all offered lower rates for more money down.