October 22, 2015

Down Payments: What to Expect

Your Team: What to Expect

If you're in the market to buy a home, your down payment is probably top of mind. Here’s what you should expect:  

Expect to Put Between 5 to 20% Down

It's likely you’ve heard the rule of thumb that you shouldn't buy a home unless you can put 20% down, however, that’s a common misconception in today’s market. A growing number of borrowers are putting down between 5 and 10% of the purchase price. Some qualified borrowers are even putting down as little as 3% through Freddie Mac's Home Possible AdvantageSM product.

It’s a fact that the more you put down, the lower your monthly mortgage payment and the less you'll owe the bank. It's also a fact that homebuyers who put at least 20% down don't have to pay PMI, an added insurance policy that protects the lender if you are unable to pay your mortgage. However, if putting 20% down will deplete all of your savings and leave you with no financial reserves, it's probably not in your best interest.

A Math Challenge: A $200,000 Home: 5% Down vs. 20% Down

 5% Down Payment20% Down Payment
Down Payment $10,000 $40,000
Loan Amount $190,000 $160,000
Mortgage Type 30-year fixed-rate 30-year fixed-rate
Interest Rate 4.5% 4.5%
Monthly Mortgage Payment (Principal and Interest) $962.70 $810.70
PMI $80.75* $0
  $1,043.45** $810.70**

Expect to Pay PMI With Less Than 20% Down

While you’ll have to pay PMI for a conventional loan with a down payment of less than 20%, you'll still be able to take advantage of today's low mortgage rates and affordable home prices in many parts of the country.

You can expect to pay between $40 and $80 per month for every $100,000 borrowed but it varies based on your loan-to-value ratio – the amount you owe on your mortgage compared to its value – and your credit score.

If you are current on your payments, PMI will automatically terminate on the date when your principal balance is scheduled to reach 78% of the original value of your home. That date will be given to you in writing on a PMI disclosure form when you get mortgage.

You can also request that your lender cancel your PMI if you have made additional payments or if rising home values have increased your home equity to more than 20%. Your request must be in writing and meet these additional criteria.

Carefully evaluate your finances to determine how much you can afford and talk with your lender or housing professional about the down payment option that makes best sense for you.

Follow this series to learn what to expect about other important topics and visit My Home by Freddie MacSM where we discuss it all.

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