Think you need to save 20% for your down payment? Think again.
In the real estate industry, a common myth among buyers is having to save 20% as a down payment in order to purchase a home. As a REALTOR, homeowner and former banker, I’m here to debunk this lending legend.
TRUTH: there are (and have been) many mortgage products available that allow borrowers to put as little as 3.5% to 5% down on a home.
Some may respond with, “Well, then I am going to have to deal with PMI payments.” While that notion is correct, let’s break down what it really means and how it can realistically affect buyers’ monthly expenses.
PMI stands for Private Mortgage Insurance. If a borrower owes more than 80% of the home’s value, the lender will typically obligate them to pay PMI – an insurance the lending bank collects on if the borrower defaults on the loan. It's required because the borrowing side owns minimal equity in the home and the lending side owns the majority. The upside? You can put less money down to get into the home of your dreams. The downside? A portion of what you save upfront becomes a monthly expense in the form of PMI payments. While it seems like a mix of good and bad news, PMI may be less of a financial hassle than you expect.
Back in the day, PMI could be several hundred dollars a month on top of your mortgage payment. However, that’s not always the case these days. I have a client who purchased a home in spring of 2017 and their PMI is under $60 a month. When my wife and I purchased our first home in winter of 2015, our PMI was about $120 a month. All this talk about PMI leads to the next myth: PMI lasts the entire lifespan of the loan, and the only way to remove it is to refinance.
TRUTH: many loans allow PMI to drop once the loan balance reaches 80% of the original purchase price. Some also allow PMI to drop after 2 years of making payments, when the value of the home increases to the 80% with a certified appraisal.
From my personal experience, our home’s worth increased drastically over 2 years, so we were able to get our PMI dropped after 2 years by going through the formal appraisal process.
The best thing to do is to educate yourself, weigh your options and find the wisest financial direction to go, because sometimes that direction is different than what you expect. For example, while some clients have the 20% down payment saved, it may be smarter for them to put 10% down and pay the PMI for a while in order to utilize the remaining savings for closing costs, home upgrades, moving costs, new furniture, etc.
If this article has helped clarify the 20% myth and you’re curious about your real estate or lending options, my job is to help guide you through the process and represent your best interests.
Let’s get the conversation started! Call 619-993-9559 or send me an email today.