Why are Average Down Payments Shrinking When Buying a Home?
Most of today’s first-time Tampa FL area home buyers are aware that they’re no longer tied to strictures laid down in previous eras—especially the one dealing with 20% down payments. For buyers with stellar credit histories, that’s horse-and-buggy material. Last year, the U.S. average down payment was just 12%—but for first-timers, that average dropped to 6%!
Relaxing steeper down payment requirements makes sense for everyone. It expands the field of buyers, so sellers and lenders benefit. But most of all, for first-time homebuyers who would need many years to save up the cash required for a 20% down payment, the advantage of being able to buy sooner (and thus, to begin building equity sooner) couldn’t be clearer. And today, with home loan interest rates scraping historic lows, why wouldn’t everyone rush to buy?
In other words, what’s the catch? Well, it isn’t a trapdoor-sized catch—more like the delivery charge that’s added onto an online sale item. It’s called “PMI”—short for “private mortgage insurance.” Since the borrower gains their new house without putting nearly as much of their own cash at risk, the PMI payment added each month serves to defray the extra exposure assumed by the lender. Since a large down payment would be lost to a borrower who defaulted on their home loan, smaller down payments make defaults more likely. The PMI protects the lender against that possibility—with the new homeowner required to make the compensating payments.
Those payments (and the insurance) are no longer required once the principal paid on the mortgage reaches 20% of the loan amount. The details are covered in the Homeowners Protection Act. The amount of the PMI payment is determined by the size of the loan, borrower’s credit score, and various other measures—such as being able to show a history of making high rent payments.
The bottom-line question is whether the total monthly payment makes buying less of a bargain—an answer that’s only possible by working out the details. Call me for help doing just that!
Dave Tipton, Broker ~ Tampa Active Adult Living