Thursday, January 29, 2009

Fiscal Conservatism

We really appreciated all of the comments to the last post. There was definitely some sound advice, and as a result of this we've changed around what we're doing. To those people out there renovating who don't have a blog, I suggest starting one. Blogs provide a great means to ask a question and get responses from others who are in a similar situation.

We're avoiding PMI (called MMI for FHA loans). For an FHA mortgage greater than 15 years and an LTV greater than 0.78, but less than 0.95, you have to pay MMI. We are between this area. MMI stops when you reach a LTV less than .78. Unfortunately, you must pay this MMI for a minimum of 5 years. This adds up to about $6k for 5 years for us. I don't know about you, but I don't like paying $6k for nothing.

For a mortgage that is 15 years or less, there is no MMI for any LTV less than 0.9. For this reason, we are going with a 15 year loan. There is still an up front cost on both mortgages, but no additional monthly payments for the 15 year. This loan requires higher payments, but we can swing it, and we're viewing it as a forced savings plan as the extra money is going toward principal.

As for the loan value, we are only taking out enough to pay off the refi fees and the credit cards. The back yard and HVAC stuff, will be paid out of pocket. I thought about pulling out more money, but I don't want to pay $7200 over the life of the loan for every $5k taken out now. Even if we have to use a credit cards for short term needs it is still a much cheaper solution that the $2200 in interest (per $5K) than the loan would provide.

It feels good to own a smaller home that doing a 15 year mortgage is even an option. While home values may still go down, there is security in knowing that we have enough home equity to be able to move without having to pay money out of pocket.

7 comments:

erin@designcrisis said...

I learned a lot from your question, too. Thanks for posting it!

Newburgh Restoration said...

Good information

Beancountingqueen said...

You mean I shouldn't take out extra money to pay for that pony I always wanted????

:-p

rehabordie.com said...

I would say that this is a good insurance plan, in case you want or have to move.

Babies can sometimes occur and folks often want more or different space for that.

I had initially thought that with rates where they are, a 15 is too short, but you are wise to save the mandatory $6k. That's hooey. Save it.

And here's the thing, you do save it, by paying down principle.

And lets say in a couple years, urban real estate looks much better, and rates are still down here, well, do a refi then and put the savings into 401k and Roth IRA, and even a college fund. Frankly, a little could probably go to a vacation as you apparently have earned it.

Anyway, I like the plan. Very prudent, relative to real life changes, needs, and risks.

Mark

momnipotent said...

I think you made all the right choices on this. Great comments by all the readers. I am so impressed by all your hard work, living IN a construction zone can't be fun.

Rehabordie cracked me up with the comment "babies can sometimes occur".

rehabordie.com said...

Momnipotent,

:) with enough practice...

Hey, I also found this bit regarding a $7500 tax CREDIT for first time home buyers. This may or may not apply to you. Note there are beneficial changes to this under consideration now by Congress.

http://www.federalhousingtaxcredit.com/

Mark

Danny said...

Hi. I write for a Baltimore living blog and would like to do a post about your project. (You can find my blog here: http://urbandiscoveriesblog.com/ ) If you're interested please contact me at dvolin1@jhu.edu

Thanks so much,
Danny