October 20th, 2015
If you think you’d be a homeowner right now if it weren’t for the down payment, read on. Even for those who have decent credit and make good money, the down payment is often the great homeownership killer.
For many others, who do have enough money set aside to make a substantial down payment, the question is: how much? Conventional wisdom – not to mention most of the banks and a good portion of homebuying and financial experts – will tell you that 20 percent is the standard bearer when it comes to down payments. But is it really necessary to put 20 percent down?
As the Facebook status says: It’s complicated.
“Raising a 20 percent down payment isn’t an easy thing to do. Fortunately, you don’t have to. “It’s a myth that all homebuyers must have a 20 percent down payment to buy a home,” says Nancy Herrera-Siples, a Riverside, Calif., branch manager at Primary Residential Mortgage on U.S. News. “So why do you constantly hear that you need to put 20 percent down? Because if you don’t, it usually means you’ll have to shell out money for either private mortgage insurance or government insurance, which is usually financed by the Federal Housing Administration (FHA).”
And there’s another rub for those who are already struggling to come up with the minimum down payment: that extra couple of hundred dollars per month feels like a penalty. It’s not, of course – “Mortgage insurance protects the lender in case you can’t make your payments and the house is foreclosed on,” said U.S. News – but that money can make a significant difference for those who are stretching to buy a home.
Still, when your only option to buy is a low down payment, which can mean an FHA loan or one of the new low down payment loans from Freddie Mac and Fannie Mae – “At the end of 2014, the two government-backed companies announced plans to slash down payments from 5% to 3%,” said CNN – PMI might literally be a small price to pay. Especially if swelling rents are making homeownership look more and more promising. Remember that PMI does go away eventually when your loan balance is 80 percent or less of the home’s value. If you’re in an area where homes are rising in value, this could happen sooner than you think.
Still confused about the ins and outs of down payments? Here are a few reasons to go high…or low.
Written by Jaymi Naciri