If you believe that you need to make a down payment of at least 20% to buy a home, you have lots of company. Although putting down that much upfront certainly has benefits, it's not required. Also important to remember: The money may come from sources other than your personal savings!
Gathering Your Down Payment
The average down payment among first–time homebuyers in 2016 was 6% and 14% for repeat buyers, according to the National Association of Realtors. It's possible to put down even less. For example, Freddie Mac's Home Possible® mortgage products let eligible homebuyers put down as little as 3%.
True, your loan amount and monthly payments would be bigger if you put down less than 20%. But also true, you could become a homeowner sooner. Plus, you can have help in gathering your down payment.
Hundreds of programs provide down payment assistance, with eligibility requirements varying based on your location and generally limited to first–time and/or low– and moderate–income homebuyers. Certain programs specifically benefit veterans, Native Americans, and workers employed in education, health care, law enforcement, and firefighting.
The U.S. Department of Housing and Urban Development (HUD) gives grants to state and local organizations nationwide. These organizations, in turn, use these funds to help homeowners bridge the down payment gap. To find the programs in your area, check out HUD's listing or Down Payment Resource's handy tool.
State and local housing finance agencies (HFAs) administer many of these programs. Go to the National Council of State Housing Agencies' web site for a state–by–state listing. Or visit the National Association of Local Housing Finance Agencies' site, for local–level program information.
In addition, some mortgage products let you use gifts from your family or employer and grants or loans from not–for–profit or government agencies.
Understanding Mortgage Insurance
If your down payment is less than 20% and you have a conventional loan, your lender will require private mortgage insurance (PMI), an added insurance policy that protects the lender if you can't pay your mortgage for some reason. The cost varies based on your loan–to–value ratio — the amount you owe on your mortgage compared to its value — and credit score, but expect to pay between $30 and $70 per month for every $100,000 borrowed. The PMI may be cancelled once you’ve built 20% equity in your home.
Other types of loans might require you to buy mortgage insurance as well. Depending on the type of loan and its terms and conditions, the mortgage insurance might be added to your loan amount, thereby also increasing the amount of interest you pay over the life of the loan. In addition, you might have to keep paying mortgage insurance even after the 20%–equity mark.
Let's add up what this all means, using the following example:
A $200,000 Home: 5% Down vs. 20% Down
|5% Down Payment||20% Down Payment|
|Down Payment Amount||$10,000||$40,000|
|Mortgage Term||30–year fixed rate||30–year fixed rate|
|Monthly Mortgage Payment (Principal + Interest)||$962.70||$810.70|
|Total Monthly Payment (Excluding Property Taxes, Insurance)||$1,043.45||$810.70|
*Assumes a PMI rate of 0.51% — in this case, applicable with a conventional loan until you have 20% equity in your home or for the life of the loan with an FHA loan.
How much longer would it take you to save or otherwise piece together $40,000 than $10,000?
Whatever you do, be sure to leave yourself enough of a financial cushion after buying your home to feel confident that you can afford to keep and enjoy it.
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