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FHA vs Conventional for a "GOLDEN" borrower

by Clyde

This is not my ego speaking...these are the words from a mortgage broker describing my wife and I. We have Fico scores at 809 and 802. We have cash reserves of $300,000.

The purchase price of the house is $495,000. I found out we qualify for both a conventional and FHA mortgage.

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This will be the third home I have purchased. Historically I put down 20% to avoid PMI and to have a low monthly payment. My friends tell me this is silly to do at this time because money is so cheap today.

He says go with FHA and only put down $17,325 verus $99,000 with the conventional loan to avoid PMI. The idea is to take the money I save and put it to work.

My thinking is why spend $450 a month on mortgage insurance for 5 years when I can avoid it?

Besides my monthly payment would be much larger and rather scary.

His thinking is it would be worth it to avoid giving your money away in the form of a big down payment. He says the PMI is a good tax deduction since I'm in the 30% tax bracket. Besides that I have lots of cash and can afford the high monthly payment.

Now my thinking is: Where can I get a guaranteed safe return for the money I don't put down in the conventional in order to justify not paying the monthly PMI of $450?

The stock market is certainly not stable and the bank savings account rates are a whopping 1%. On paper this seems logical, but the reality does not seem so obvious.

Signed: Confused over a good problem to have.

Thank you.

=====ANSWER=====

Hello Clyde,

Thanks for coming by my site and leaving these thoughts and questions.

Yes you have a very unique situation. You really do not fit the typical client I speak to on this website.

However, with that said, I have done loans for high net worth people in the past. I no longer do mortgages or I would offer to help you. Yes you are what we call in this business a "GOLDEN" borrower or another phrase was a "Vanilla Loan".

In my days, when I ran across people like you and your wife, I put them in a fancy mortgage product that allowed them the privilege of having 3 options to make payments.

There was once a loan product that allowed the borrower to pay 1) Interest Only 2) A 30yr payment and 3) A 15yr payment.

This was called a "Power ARM" and was a conventional loan product based on the 1 month LIBOR Index. It was for sophisticated borrowers only.

That loan product disappeared with the mortgage meltdown.

It was a combination of a 1st and 2nd mortgage which went to a combined LTV of 90%-95%. This allowed for the borrower to put their money in the stock market when it was doing good.

Since I'm no longer in the mortgage market I'm somewhat out of touch with these kind of products.

However, the FHA loan has barely changed for decades. It has been the mortgage product of choice for first time home borrowers for many years.

So in your situation, I would have to ask myself what I would do if I were you?

Well, I'm a big proponent of not having debt. Why owe people money if we do not have to? This is especially true when it comes to PMI.

Whenever I could, I would get my clients out of PMI since it was a big waste. Why spend a dollar to save a nickel in taxes??

In your case, the first thing I would do is make very sure you are buying in a market where prices have bottomed out. This is very important.

If your research turns up that prices are beginning to rise in your market, then I would not be afraid of putting down the 20% and go with the conventional loan product. The interest rate on this loan is normally lower than the FHA.

I agree with you about the stock market. I do not have dime in there. As I grow older I get less excited about risk. My money is in annuities. Yes it's a low return, but my financial guy has us in a product that is getting us around 6% a year. It's better than the banks, it's fairly liquid and tax deferred.

I hope you find this helpful.

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Kind Regards,

Jeffrey Ragan



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