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August 10, 2017

The Facts (and Myths) on Down Payments and PMI

Homeownership

Are you in the market to buy a home? Are you worried about your down payment? No doubt you've heard the rule of thumb that you shouldn't buy a home unless you can put 20% down. Before accepting this myth, it's important to do your homework, weigh the pros and cons regarding your down payment options and separate the facts from the myths.

Fact or Myth?

The more you put down, the lower your monthly mortgage payment will be and the less you'll owe the bank.

Fact: It's a simple numbers game – the more you pay now, the less you pay monthly during the life of the mortgage. However, if putting 20% down is not an option or will deplete all your savings and leave you with no financial cushion, it's probably not in your best interest.

Your down payment must come from your own savings.

Myth: Your down payment can come from a number of sources, including personal funds, gift funds, grants and affordable second mortgages. In addition, many state, county, and city governments provide financial assistance for people in their communities who are well qualified and ready for homeownership. Down Payment Resource will let you know if you may be eligible for down payment assistance programs in your area.

A growing number of borrowers are putting down less than 15%.

Fact: The average down payment among first–time homebuyers in 2016 was 6% and 14% for repeat buyers. You can even put down as little as 3% through mortgage options like the Freddie Mac Home Possible Advantage® mortgage.

Homebuyers who put less than 20% down have to pay Primary Mortgage Insurance (PMI), an added insurance policy that protects the lender if you are unable to pay your mortgage.

Fact: 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 the 30–year fixed rate mortgage that can offer you security and peace of mind throughout the life of your loan.

Now that you know the facts, let's crunch some numbers:

The Math: $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
Total Monthly Payment $1,043.45** $810.70**

*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.

**Does not include property tax and homeowners’ insurance payments

Carefully evaluate your finances to determine how much you can afford and talk with your lender or housing professional about down payment options that make best sense for you. For more information and tools on buying a home and homeownership, visit Ready to Buy on My Home by Freddie Mac®.

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