While a 20 percent down payment was once the standard when purchasing real estate, it eventually fell out of favor. Because many new loans were available with minimal down payments, most homebuyers didn’t recognize a real need to save up that much. However, after the housing crisis, buyers are now reconsidering the appeal of a 20 percent down payment mortgage.
Many homebuyers can qualify for a conventional mortgage with as low as 5 percent to 10 percent down. However, if you put less than 20 percent down, you will usually have to pay for Private Mortgage Insurance (PMI). On FHA loans, mortgage insurance is required for five years. FHA borrowers are required to put down 3.5 percent, and it can’t come as a gift from the seller (but can come from family/friends). VA loans are available with no down payment and no mortgage insurance. As mentioned earlier, there are conventional loans available with 5 percent to 10 percent down payments. These loans require mortgage insurance.
Whether you should put a full 20 percent down on your mortgage is up to you and dependent upon your financial situation. With home prices still low (extremely low in some areas), and with interest rates still at historic lows, it may not make sense for you to wait to save up 20 percent.
However, if you can make a 20 percent down payment, you may be able to afford a bigger house with the same total monthly payment than you might have had if you only put down 3.5 percent, for instance. This is because a 20 percent down payment eliminates the mortgage insurance requirement. You’re likely to score a better interest rate as well. (Depending on your credit scores and other requirements, of course.)
One could also make the argument that it would be financially beneficial to have money socked away in savings in case something untoward should happen, rather than using it all on a down payment. When the money is tied up in your house, it’s not easy to access it in case of an emergency. However, a 20 percent down payment yields that much more beginning equity in your home. If you need to sell, you’ll have more room to negotiate with potential buyers.
Some lenders still offer what are known as piggyback loans. This includes the 80-10-10 loan, where your first mortgage is 80 percent of the home’s price, then your next mortgage is 10 percent (to cover part of the down payment), and the remaining 10 percent is what you put in as cash to add up to a 20 percent down payment. With an 80-10-10, you don’t have any Private Mortgage Insurance, but you do have a second loan on the house.
The bottom line: Discuss your down payment and mortgage options with your mortgage professional before you determine how much you need to save.
About the Author
Shawn Kaplan is an active, 50 state Licensed loan officer with Access National Mortgage. Email Shawn at skaplan@accessnational.com or call 615-426-3182.
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