Some buyers are under the impression that they need to wait until they have saved a 20% down payment so when they buy they can avoid mortgage insurance (PMI) which lenders required when the loan-to-value ratio of larger than 80 percent. The only exception to this rule is VA loans.
Here is a typical example. Let us assume that a buyer has saved $10,000 for a down payment and is interested in a $200,000 home. Their choice is to purchase now using a 95 percent loan or purchase later once they save up another $30,000 down payment so they get an 80 percent loan without PMI.
Problem is it may take that buyer 3 years to save up the additional down payment but by then the $200,000 home has appreciated to at least $218,545 if we assume 3 percent appreciation and that is conservative. Then a 20 percent down payment on the increased sales price would be $43,709 less the $10,000 already saved or $33,709 or $936.36 per month. More bad news, they would have to get a mortgage loan at the rates available 3 years from now which will most probably be higher.
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