Downpayments Explained

By
Services for Real Estate Pros with Peter Mark

People are buying homes left and right and now you want to own your own home too. Just how much is a downpayment on a house today? Do you need 20% or more? This is the biggest misconception people have in assuming you need 20% down to buy a home. Back in the old days when I went when our parents and grandparents were getting homes, a lot of times they did need to have 20% down payment.

 

 

The mortgage industry has evolved a ton over that time period. Currently there are many different ways to get into a house for much much less than that 20%. In fact, I wrote a post on several first time hombuyer grants and programs available currently to help you with your downpayment.

 

 

When you have less than 20% downpayment

 

PMI is required when a borrower is unable to provide the typical 20% down payment of the property's purchase price when you're applying for your mortgage. PMI also known as mortgage insurance is the insurance premium that you as the borrower pay in order to protect your lender in the event that you default on your primary mortgage.

 

 

Now this is because the lenders are gonna obviously look at this scenario as a riskier investment for themselves and will thus require the borrower to take out PMI. Although the PMI payment is usually paid monthly as part of the overall mortgage payment to the lender it can in some cases be paid in full upfront along with the loan to keep the monthly costs down. So that may benefit your cash flow and you should at least evaluate that option.

 

This is going be taken out from your down payment though which makes your down payment smaller once you as the borrower have paid the equivalent of that 20% down payment toward the principal amount of your loan. Then you can actually contact your lender and ask that the PMI payment be removed a great way to do this is by paying more toward the principal balance each month.

 

3-3.5% Downpayment Programs Available

 

VA is one of the very best loan programs out there that it will actually allow for 100% financing where the veteran doesn't have to have any down payment. If you are a Veteran you can get in this loan. There's even programs where you can get in with no money down. But you have to be a Veteran to qualify for this loan.

 

Another government back loan is FHA. FHA does require a 3.5% down payment but once again that's way less than that 20%. So an FHA loan is 3.5% down.  So on a $200,000 home that's a $7,000 down payment. Somebody can buy a home with a down payment of $7,000. There's a fair share of people out there that understand FHA and understand the 3.5%.  

 

 

A Conventional Loan is The Best Way to Go

 

 

Many people think that just because they don't have 20% down payment automatically think they are stuck with FHA and can't get a conventional loan. This is another misconception.

It depends on that person's individual circumstances what is going to be their best option FHA or conventional. But you can do a conventional loan with as little as 3% down.So on that $200,000 you would only need to put down $6,000.

 

With FHA there are some drawbacks. For example. the private mortgage insurance UPFRONT , AND the continuos locked in 24 months of its payment BEFORE you can request for it to be removed. Furthermore before it can be removed, you have to meet the banks criteria to meet the qualifications for the removal of the private mortgage insurance.

 


5% is going to help you out on pricing, costs and things of that nature. There's also programs depending on the area that you're looking to purchase in. You have the USDA the rural housing program.

That's kind of a cross between a VA and an FHA. It does allow for zero percent down. You do not have to be a veteran but based off the area that you're purchasing and will determine if it's eligible for the rural housing. They're not looking to do those types of loans and metropolitan areas.



When to Put Less Downpayment on a House

 

Is it better to put more money down than the bank actually requires when purchasing a home? So for today's example I'm going use some numbers just so you get the idea of this.

 

Example 1: Let's say in our savings account you have $200,000 and we found a house for $500,000 that we're looking at buying. The bank tells us that we have to put down a $100,000.

We now have $100,000 of equity and a $400,000 loan.

 

If the house value goes from 500,000 to 600,000 in which in many markets this is happening now, we have a $100,000 in equity from the value going up plus another $100,000 equity in our downpayment and the final $100,000 is still sitting safely in the bank. You have $300,000 total.

 

Example 2: Let's say we buy that same $500,000 house but we put our full $200,000 savings as the down payment. The value goes up to $600,000 on this property as in example 1. So we have $100,000 in equity from the value appreciation plus another $200,000 equity as out downpayment is $300,000 total.

So we have $200,000 in equity, plus the

The difference is is in the first example we still had $100,000 in liquidity. So if something breaks, if something needs to be fixed if there's an emergency with your family, if there's medical expenses that need to be paid if life happens. You have money in savings. In the 2nd example you've put all the money into your home.

 

Now let's look at the reverse scenario. If the $500,000 house value goes down to $400,000 what happens in the 1st example? You have zero in equity but you still have $100,000 in savings.

With the 2nd example and the house value going down to $400K, you tied up all your savings of $200,000 into your home, you still have a $300,000 mortgage with $100,000 in equity tied into the house.

 

So it really comes down to personal preference. When people think about putting more money into their home, there's a lot of different factors you have to think about. Yes, you have to think about the mortgage payment. Yes, you have to think about the interest rate. Yes, you have to think about the longevity of what you're trying to accomplish and building equity.

 

When you put more money into that home you're also going to reduce the amount of interest that you're paying and the amount of interest that you can write off.

You may not be changing the monthly payment that drastically. So you have to think is it worth having a hundred thousand dollars in the bank or is it worth dropping my mortgage payment by X amount of dollars? Those are the things that you really have to think about when you're deciding which strategy to go with.

 

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