re: Extra $10,000: finish paying off truck or put towards down payment on a house?(Updated)

I look at PMI like interest on a loan.

How far off are you from PMI and are you willing to pay that "interest" on the difference?

IE. you elect to only pay 10% down resulting in a PMI of $100/month. How much liquidity did you shelter and is it worth it to you?

if you kept 15k instead of paying the full 20%, you effectively took out a 15k loan at 8% interest (assuming 100/m PMI) for x number of years (however long it will take you to get your equity position to 20%). You have to decide if that's worth it to you.

I'm sure your numbers are different but that's how I look at PMI.

quote:

---

But with interest rates so low (3.25% on 30-year; 2.75% on 15-year) and the spreads between the two quite thin (0.5%), it doesn’t make sense to me to lock oneself into a much higher payment for 15-year (56% higher per month for 180 months) and lose flexibility with that extra 56%.

For example, in a $240,000 loan, the 30-year loan at 3.25% is $1044.50 per month while the 15-year loan at 2.75% $1,628.69 per month, a $584.19 per month difference (over $7,000 per year). If they really wants to pay off their home, they can put that difference back towards principal, and less than 9 extra payments (little over $13,000).

Or if they want to invest it all, they’ll have over $230,000 if they invested in an 80/20 portfolio based on historical returns (over 9.8% annually). Even a more conservative 8% will put it at about $198,500.

And since it’s not an either/or, they could put some towards their house to pay if off sooner and some towards investing/saving as well. Or they could spend some on things they enjoy as well.

So the flexibility of the 30-year loan with the current rates and spreads just makes more sense to me.

---

yup

The flexibility is worth the extra 0.5%

Put 10k in VSTAX and get 6-8% annual gains which would be more than the interest on your car loan or more than pmi insurance on your house.

Theres two things going on here. The straight math is you invest the money in a index fund and you will come out ahead end of story. If you can't sleep at night because of your debt levels then you need to put toward the truck or house for your emotional assurance. I personally don't like financing over 3% just because your change of coming out ahead from investing gets less appealing (not impossible though). Assuming an average 7% investment return and paying 3% in interest isn't worth the margin after considering you're paying taxes on the 7% gains eventually. It all comes down to your feelings towards debt. Good luck on the decision.

Take the future value of three scenarios:

1)Future value of you not making payments at whatever interest rate for however many payments are left

2)$10k at the ROR of what you think the house will appreciate at minus PMI.

3)$10k at 6-8% for however long you are going to live in the house.

Which ever one has the highest future value wins.

Update: my home loan is locked in at 2.875%. I decided to take enough out of my 401k (penalty free due to COVID) to put 20% down on the house AND pay off my truck.

I feel like the opportunity to pull from my 401k penalty free was too good to pass up. Good decision or no?

I cant imagine wanting to pay taxes and pull out money from retirement funds in the market, with the average yearly returns of those funds, and thinking that was a good idea to avoid the PMI for 24 months. Delusional.

I don't have the loan amount or you credit score to see what pmi rate you would end up around, but I can't fathom how that was the right decision.

The amount of hate towards PMI gets me in these threads every time. Yes ideally if you had enough cash you want to avoid it, but some of you would advise to wait long enough to have enough funds to put 20% down. In that time frame rates could have gone from the 3% with a PMI rate of around 40 bps that will drop off. To 12 months from now with your 20% down but an interest rate that could have climbed to 4% or over in the meantime.