Did You Know that You Don't have to put down 20%???

By
Real Estate Broker/Owner with Turn Key Real Estate 31RA0874656

The Cost of NOT Paying PMI

The Cost of NOT Paying PMI | MyKCM

Saving for a down payment is often the biggest hurdle for a first-time homebuyer as median incomes, rents, and home prices all vary depending on where you live.

There is a common misconception among homebuyers that a 20% down payment is required, and it is this limiting belief that often adds months, and sometimes even years, to the home-buying process.

So, if you can purchase a home with less than a 20% down payment… why aren’t more people doing just that?

One Possible Answer: Private Mortgage Insurance (PMI)

Freddie Mac defines PMI as:

“An insurance policy that protects the lender if you are unable to pay your mortgage. It’s a monthly fee, rolled into your mortgage payment, that is required for all conforming, conventional loans that have down payments less than 20%.

Once you’ve built equity of 20% in your home, you can cancel your PMI and remove that expense from your mortgage payment.”

As the borrower, you pay the monthly premiums for the insurance policy, and the lender is the beneficiary. The monthly cost of your PMI depends on the home’s value, the amount of your down payment, and your credit score.

Below is a table showing the difference in monthly mortgage payment for a $250,000 home with a 3% down payment and PMI vs. a 20% down payment without PMI:

The Cost of NOT Paying PMI | MyKCM

The first thing you see when looking at the table above is no doubt the added $320 a month that you would be spending on your monthly mortgage cost. The second thing that should stand out is that a 20% down payment is $50,000!

If you are buying your first home, $50,000 is a large sum of money that takes discipline and sacrifice to save. Many first-time buyers save for 5-10 years before buying their homes.

To save $50,000 in 10 years, you would need to save about $420 a month. On the other hand, if you save that same $420 a month, you could afford a 3% down payment in less than a year and a half.

In a recent article by My Mortgage Insider, they explain what could happen in the market while you are waiting to save for a higher down payment:

“The time it takes to save a (larger) down payment could mean higher home prices and tougher qualifying down the road. For many buyers, it could prove much cheaper and quicker to opt for the 3% down mortgage immediately.”

The article went on to say,

“Since renters typically devote a higher percentage of their income to housing than homeowners, providing flexible down payment options can help renters with solid earnings purchase a home – and gain a fixed-rate mortgage with principal and interest payments that will not increase over the life of the loan.”

If the prospect of having to pay PMI is holding you back from buying a home today, Freddie Mac has this advice,

“It’s no doubt an added cost, but it’s enabling you to buy now and begin building equity versus waiting 5 to 10 years to build enough savings for a 20% down payment.”

Based on results of the most recent Home Price Expectation Survey, a homeowner who purchased a $250,000 home in January would gain $50,000 in equity over the next five years based on home price appreciation alone (shown below).

The Cost of NOT Paying PMI | MyKCM

Bottom Line

If you have questions about whether you should buy now or wait until you’ve saved a larger down payment, let’s get together to discuss our market’s conditions and help you make the best decision for you and your family.

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Rainer
295,469
J.R. Schloemer, CRS
Kentucky Select Properties - Louisville, KY

You are correct, you can buy with PMI and only 3% down, and it is potentially beneficial for those that need to use it.

The part I have a strong aversion to with this scenario is, the buyer is paying $6,669 in PMI they will never get back, & and $9,372.91 in interest over that same 5 year period you mention. The PMI will be there until the owner reaches 78% LTV or requested once they reach 80% equity. My numbers did not factor in the equity or interest the owner would have if they were to use the $329.02 difference in the two payments to reduce the loan principal on the conventional loan.

Sep 26, 2018 03:13 PM #1
Rainmaker
3,985,753
William Feela
WHISPERING PINES REALTY - North Branch, MN
Realtor, Whispering Pines Realty 651-674-5999 No.

You can also get a better interest rate with more money down

Sep 26, 2018 03:32 PM #2
Rainmaker
71,238
Philip A. Raices
Turn Key Real Estate - Great Neck, NY
1 of the Most Knowledgeable Brokers on the Net!

Good Morning William,

You are correct, but the point of a less than 20% down is allowing people, who qualify to enter the market.  Once they have enough equity, 20%, they can call their lender to take the PMI off, once another appraisal is done, if needed.  Possible refinance, to get a lower rate, if it makes sense and depending how long they will be in their home to make it worthwhile to do it.

Sep 29, 2018 07:25 AM #3
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Rainmaker
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Philip A. Raices

1 of the Most Knowledgeable Brokers on the Net!
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