Do you need a 20% discount on your home purchase?
According to a mortgage consultant Ivan SimmentalThis is one of the most common questions that first-time homebuyers ask themselves.
“Twenty percent is a big down payment that can sometimes seem unrealistic and intimidating,” Simmental said in a recent episode. Mortgage Reports podcast… “If you’re trying to save a 20% down payment, it can be a little scary at times.”
Fortunately, a 20% reduction is not always necessary. Many home buyers today can qualify for a discount of as little as 5, 3, or even 0%.
Symenthal says it’s important to weigh the pros and cons of a large down payment before putting everything on the line. Here’s what to consider before buying.
Listen to Ivan on the Mortgage Reports Podcast!
Best to postpone 20%?
The correct amount of the down payment is personal. It depends on your goals for buying a home, your personal finances, and the local real estate market you want to buy from.
While you might think that investing more money is always better, this is not always the case. There are both pros and cons to making a 20% down payment.
|Pros 20% lower||Cons 20% lower|
|Lower monthly mortgage payments||It can take years to save 20% as house prices rise|
|Lower mortgage rates||Drain your savings for emergencies, home renovations, etc.|
|Avoid mortgage insurance||More risk if the value of the home falls|
Yes, a 20% discount lowers the cost of buying a home. Borrowers who can make a large down payment will save significant amounts over the life of the mortgage.
But a smaller down payment allows many new home buyers to climb the corporate ladder faster. They can start building home equity and reap the rewards of home ownership without waiting a year to save 20%.
Let’s take a deeper look at each of these pros and cons.
Pros of 20% down payment
Lower monthly mortgage payments are the biggest benefit for a 20% drop.
When you make a larger down payment, you have a smaller loan amount. This means a lower monthly payment and lower mortgage interest paid over the long term.
Let’s see an example:
- Let’s say you buy a house for $ 200,000 with a 30-year loan at 3% per annum.
- If you made a 20% down payment, your payment would be only $ 675 per month.
- With a 5% down payment, your monthly payment will rise to $ 800 – an additional $ 125 per month.
Another benefit is that higher down payments usually mean lower mortgage interest rates.
The less money a homeowner borrows, the less risky his loan is to the mortgage lender. Lenders reward this lower risk with a lower rate and lower long-term borrowing costs.
Finally, a 20% down payment avoids mortgage insurance.
For conventional home loans, private mortgage insurance (PMI) costs between $ 30 and $ 70 a month, according to Freddie Mac. This can increase significantly over time.
Another low down payment mortgagesLike the FHA and USDA programs, they require mortgage insurance regardless of the amount of the down payment. Only VA loan borrowers are exempt from monthly mortgage insurance payments.
By reducing at least 20% on a regular loan, home buyers can avoid additional costs and save thousands over the life of the loan.
Cons of 20% down payment
The biggest disadvantage of a large down payment is that it cuts down on your savings – and the funds you have left over for possible emergencies.
As Symenthal says, “If that 20% is all your savings, and you don’t have any more emergency money or that six-month airbag that many people will tell you to have in case of an emergency.” Fund, I strongly recommend that you do not invest 20%. “
Another big drawback is that it can take years to maintain the 20% down payment.
- Let’s say you want to buy a house for $ 300,000
- A 20% reduction requires $ 60,000 in cash.
- If you save $ 500 a month, it will take you 120 months to save $ 60,000.
- It’s 10 years to save 20% down payment!
Keep in mind that the value of the home is likely to rise from year to year. Thus, the longer you wait for a 20% down payment, the higher the down payment amount will be.
Thus, for many people, saving 20% is simply unrealistic.
A 20% drop can also be a bad idea if you don’t plan on owning a home for a long time. First, it is reduces your profitability after the sale… On top of that, it jeopardizes most of your money if the value of your home falls.
Low Down Payment Loan Options
Fortunately, a 20% down payment isn’t your only option.
There are many loan programs that can significantly reduce the down payment. And as long as you can afford the monthly payment (and potential mortgage insurance) on these loans, they may be a good choice for you.
Here’s how the down payment requirements break down by loan program:
- FHA loans: These loans, supported by the Federal Housing Administration, require a minimum down payment of 3.5% if you have a credit rating of 580 or higher, and 10% if your score is 500-579. These loans require both monthly and mortgage upfront insurance premium (MIP).
- USDA credits: These are loans for use in specific rural and suburban areas. If you are buying a property in a suitable region, you will not need any down payment. Credit score requirements usually start at 640
- VA Credits: VA loans are mortgage loans issued by the Department of Veterans Affairs. If you are a veteran or military personnel, you can apply for this type of loan. Like USDA loans, they don’t require a down payment at all.
- Conventional loans: Normal mortgage down payments are only 3% of the purchase price. It’s only $ 6,000 for a $ 200,000 home. Fannie Mae HomeReady Credit, Freddie Mac Home Possible Credit, and Conventional 97 Program all save just 3%.
- Large loans: If you exceed the appropriate credit limit ($[currrent_loan_limits] in most regions of the United States). Although many large loans require a 20% discount, some lenders now offer them for as little as 10% or even 5% lower
Another variant? Explore the down payment assistance programs in your local housing market.
Down payment assistance (DPA) may offer grants or loans to help cover your down payment and / or closing costs. These programs are usually offered by state and local governments and non-profit organizations.
Eligibility requirements vary, so check with your loan officer or real estate agent about DPA programs in your area.
Don’t let the thought of a large down payment deter you from buying a home.
“If you’re stuck with the question, ‘Hey, I need this 20% down payment because this is what I was taught – this is what I was thinking,’ then get that out of your head,” Siemental said.
“You no longer need a 20% down payment to buy a home.”
If you are wondering how much down payment to pay, contact a qualified mortgage specialist. They can advise you on all loan options as well as possible costs.