Cash for a Down Payment

[Marita40]

I'll frame this hypothetically.

Let's say a person lives in a very nice paid-off condo but would greatly prefer not to have such close neighbors who are increasingly driving her batty Let's say she decides to look casually for a single family home to move to, planning to put her condo on the market only if the dream house comes along since this would impel her to make a decision she is too conflicted to make at the moment. Let's say all her money, except for an emergency fund of about $11,000. is invested and she'd prefer not to pull it out due to tax implications, etc. But she will need to have a pile of cash for the house downpayment sitting at the ready should the right place appear in an increasingly hot market. She thinks a contingency would be ideal but perhaps this won't be possible. Let's say she may need about $60,000--ie. 20% down on a $300,000. house.

How does she get this pile of money without waiting a couple years to build it up? Should she take a home equity loan or is it stupid to be paying interest on a loan when she doesn't know when (even if) she may use the bulk of it? What she'd really like is a loan that can happen very fast when and if the right house comes along. She's afraid that, if she applies for a loan when the house appears it will be gone before the loan comes through.

Rambing here. . .any thoughts or advice for this hypothetical and deeply conflicted person?

 

[mpeirce]

Heloc?

 

[aaronc879]

If the neighbors are making an unreasonable amount of noise to the point of infringing on your right to "quiet enjoyment of your home" then call the police. If the police do nothing file a suit in civil court. The law is on your side. Stop their noise and you don't have to move.

 

[jerome len]

Talk to her bank, take out a bridge loan guaranteed by the Condo and repaid when the condo is sold should work.

 

[ivinsfan]

Why do you feel you need 20% down? Yes, you can avoid PMI and get a little break on the interest rate, but if you are going to sell your condo and put all the proceeds into your new home, the PMI will go away and the interest increase would be negligible. I think I'd just put the minimum down and figure things out from there. Just be sure you have the bank pre-approval for your new purchase so things don't slow down and you lose out.

 

[Marita40]

You're right about the 20% down. . .the minimum should be fine.

 

[Marita40]

Oh, and the condo neighbors are not making a lot of noise. In fact they are quite quiet. I am just very tired of the lack of cooperation in working together as an association.

 

[brewer12345]

Set up a HELOC on the condo. Many lenders will do one for no fees or costs and they will usually offer you something like 3.XX% (variable) with no charges if you do not draw the money down. If you close the line before 2 years are up you usually have to pay for the setup charges, but they are typically pretty small.

 

[Cobra9777]

Many years ago, we bought our dream house and THEN put our existing house up for sale. We funded the 20% downpayment with a 401K loan, which was paid back in full a few months later when we sold the old house. No tax problems, no qualification delays, no credit score implications, no "real" interest cost, no discernible impact on growth. Conventional wisdom says 401K loans are inherently bad on every level. But it worked out very well in our situation, which appears quite similar to the OP. Not sure if that's an option for the OP or not, but thought I would share our experience.

 

[Texas Proud]

Why do you feel you need 20% down? Yes, you can avoid PMI and get a little break on the interest rate, but if you are going to sell your condo and put all the proceeds into your new home, the PMI will go away and the interest increase would be negligible. I think I'd just put the minimum down and figure things out from there. Just be sure you have the bank pre-approval for your new purchase so things don't slow down and you lose out.

PMI does not always go away... I had a loan back in the 80s and thought I would be rid of it.... they told me it never went away... and it was in the paperwork that it did not... .... Did a refi at a lower rate and got rid of it...

 

[Marita40]

Great advice about the HELOC--thanks. I investigated this option and think it is the way to go.
It feels like a huge gamble to buy a house before the other one is sold. I'm still not sure whether I have the stomach for it. Lots of soul searching yet to do.

 

[A Bird In Hand]

Many years ago, we bought our dream house and THEN put our existing house up for sale. We funded the 20% downpayment with a 401K loan, which was paid back in full a few months later when we sold the old house. No tax problems, no qualification delays, no credit score implications, no "real" interest cost, no discernible impact on growth. Conventional wisdom says 401K loans are inherently bad on every level. But it worked out very well in our situation, which appears quite similar to the OP. Not sure if that's an option for the OP or not, but thought I would share our experience.

Our experience was exactly the same except for one minor difference: it took over a year for our home to sell, and we were very poor and stressed out for most of that time. It worked out great in the end, but it really stunk at the time!

 

[ERD50]

PMI does not always go away...

According to my niece, who just bought a house with her fiance, her PMI will not go away, they will need to re-fi to get rid of it. She says it has to do with recent FHA loans. If rates go up above what her PMI payment is, she may never get rid of it.

My DD seems to have her head straight on most financial matters, when she was house shopping recently, before I could even mention it, she said she planned to put 20% down so she wasn't wasting money on PMI. Good girl!

-ERD50

 

[ivinsfan]

According to my niece, who just bought a house with her fiance, her PMI will not go away, they will need to re-fi to get rid of it. She says it has to do with recent FHA loans. If rates go up above what her PMI payment is, she may never get rid of it.

My DD seems to have her head straight on most financial matters, when she was house shopping recently, before I could even mention it, she said she planned to put 20% down so she wasn't wasting money on PMI. Good girl!

-ERD50

That's interesting, the OP and I live in a very pro-consumer state, and I always understood you just needed to hit the 20% equity with a current appraisal to have your PMI removed. I certainly don't want to misinform anyone about PMI I guess as with everything financial, buyer beware and research everything. All loans are not FHA either, so that might be a factor. It seems like permanent PMI means you need have help insure everyone, instead of just your own mortgage. If that's the case, I wonder why they don't just charge everyone PMI....

 

[bubba]

That's interesting, the OP and I live in a very pro-consumer state, and I always understood you just needed to hit the 20% equity with a current appraisal to have your PMI removed. I certainly don't want to misinform anyone about PMI I guess as with everything financial, buyer beware and research everything. All loans are not FHA either, so that might be a factor. It seems like permanent PMI means you need have help insure everyone, instead of just your own mortgage. If that's the case, I wonder why they don't just charge everyone PMI....

I believe the change in PMI "rules" only happened in April of this year.

 

[MichaelB]

If the mortgage is not FHA guaranteed, PMI can be cancelled once the mortgage value hits or falls below 80%. See here When can I remove private mortgage insurance from my loan? > Consumer Financial Protection Bureau

The Homeowners Protection Act gives you the right to request that your lender cancel PMI when you have reached the date when the principal balance of your mortgage is scheduled to fall to 80 percent of the original value of your home.

With an FHA loan different terms apply, from their website (here) it looks like PMI is reduced once the term and equity amount reach certain thresholds.

 

[Walt34]

My DD seems to have her head straight on most financial matters, when she was house shopping recently, before I could even mention it, she said she planned to put 20% down so she wasn't wasting money on PMI. Good girl!
-ERD50

Good, in this financial climate.

A long while back in a different climate housing prices were rising faster than I could save. In that case biting the bullet and paying the PMI on a 5% loan locked in my housing costs. In my case the PMI did go away when equity went over 20%. In that case the ability to fix my housing costs was well worth the relative pittance of the PMI. Delaying buying the house would have cost far more.

 

[ERD50]

...

With an FHA loan different terms apply, from their website (here) it looks like PMI is reduced once the term and equity amount reach certain thresholds.

Finally getting back to this - I'm not sure that link indicates that PMI is reduced when those LTV criteria are met, I think it is the initial LTV for the determination of the PMI.

My niece was quite insistent on this (her Dad kept saying you could drop PMI when your LTV improved), but she said those were the old rules and they changed this year.

So when I did a search including 'changes 2014', I found this:

( MIP = Mortgage Insurance Premium )

FHA May Soon Reduce Its Mortgage Insurance Premiums (MIP)

The complete MIP schedule, as of June 5, 2014, is as follows :

15-year loan terms with loan-to-value over 90% : 0.70 percent annual MIP
15-year loan terms with loan-to-value under 90% : 0.45 percent annual MIP
30-year loan terms with loan-to-value over 95% : 1.35 percent annual MIP
30-year loan terms with loan-to-value under 95% : 1.30 percent annual MIP

Note that the number of years you're required to FHA MIP also varies by loan type. Loans for which the initial downpayment was 10% or more are required to pay premiums for 11 years from the date of the mortgage.

Loans for which downpayments are less than 10 percent must pay FHA MIP for as long as the loan is active.

I had trouble finding that kind of wording on the FHA site, but I'm bad at reading government/legalese.

edit/add - I poked around the FHA site more, and found conflicting info, but it may have been old, I couldn't find a date on it.

But I also found another site that talks about the recent changes:

FHA loans in 2014

Worst of all is that you now have to pay the annual FHA premium for the life of your loan. Before June 3, 2013, you were able to -- in most cases -- cancel your mortgage insurance premium after five to 10 years.

OK, one more edit as I found it from HUD. The source below referenced a table from: "Annual MIP cancellation rules for FHA loans. Source: HUD Mortgagee Letter 2013-04

Read more: http://www.homebuyinginstitute.com/news/fha-mip-rates-and-rules-515/#ixzz346To5M73"

And a google got me to the horse's mouth:

http://portal.hud.gov/hudportal/documents/huddoc?id=13-04ml.pdf

For any mortgage involving an original principal obligation (excluding financed UFMIP) with an LTV greater than 90 percent, FHA will assess the annual MIP until the end of the mortgage term or for the first 30 years of the term, whichever occurs first..

Sorry, but it was just bugging me. I hate to throw something out there w/o the proper back up.


-ERD50

 

[ivinsfan]

Thanks for taking the time to do all that PMI research, that information reflects a big change in PMI policy,I wonder how many buyers will get caught by surprise. One more thing that everyone needs to verify before signing loan paperwork.

 

[inquisitive]

I am in a similar situation as the OP, only I am considering renting out the first property and taking a home equity loan on it to make the downpayment for the new property.

Does anyone know if I can avoid PMI by doing this? I am planning on going with Penfed. I don't think they even have to know where the downpayment is coming from; I will have enough liquid funds in investments; I don't know how long it takes to process a home equity loan but I think I could qualify for a Penfed mortgage and then take out a home equity loan after that so that it wouldn't appear on the credit report that Penfed pulls? I called a different company about a home equity loan and based on my conversation with the agent it seemed like they would approve it and it's okay to use it for the purchase of another residence.