January 26, 2017

The Down Payment Math Challenge

If you're in the market to buy a home, the amount of your down payment is likely top of mind: three percent, five percent, 10 or 20.  There's no right answer for everyone; what is right for you depends on some key factors, namely your savings and monthly budget.

The Down Payment Math Challenge

You've probably heard the rule of thumb that you shouldn't buy a home unless you can put 20% down.  However, a growing number of borrowers are putting down between 5 and 10%. Additionally, you can put down as little as 3% through Freddie Mac's Home Possible AdvantageSM product.

It's true — the more you put down, the lower your monthly mortgage payment and the less you'll owe the bank. It's also true that homebuyers who put at least 20% down don't have to pay Private Mortgage Insurance (PMI), an added insurance policy that protects the lender if you're 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 interests.

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 most areas of the country. Plus, when you reach 20% equity in your home, you can drop the PMI monthly payments.

Breaking It Down: A $200,000 Home with Various Down Payments

  5% Down 10% Down 20% Down
Down Payment $10,000 $20,000 $40,000
Loan Amount $190,000 $180,000 $160,000
Mortgage Type 30-year fixed-rate 30-year fixed-rate 30-year fixed-rate
Interest Rate 4.5% 4.5% 4.5%
Monthly Mortgage Payment
(Principal and Interest)
$963.00 $912.00 $811.00
PMI $81.00* $77.00* $0
  $1044** $989.00** $811.00**

*Assuming an insurance rate of 0.51%; this cost can be cancelled from your payment once you reach 20% equity in your home for conventional loans, but not FHA loans.
**Does not include property tax and homeowner's insurance payments.

Remember to factor in closing costs, also called settlement fees, that will need to be paid when you obtain a mortgage – typically between 2 and 5% of your purchase price. 

Carefully evaluate your finances to determine how much you can afford and talk with your lender or housing professional to get the facts and discuss the best down payment option for you.

Follow this series to get more information about getting into a new home this new year and visit My Home by Freddie Mac where we discuss it all.