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April 20, 2018

Debunking the 20% Down Myth

Are you looking to buy a home this spring, but are worried you don't have enough for a 20% down payment? Good news: You can put down less than 20%. In fact, the average down payment for first-time homebuyers in 2017 was 5%, and 10% for repeat buyers, according to the National Association of REALTORS®. And, it's possible to put down even less. For example, Freddie Mac Home Possible® mortgage products let eligible homebuyers put down as little as 3%.

Putting less than 20% means you'd likely have higher monthly payments and you'll be required to pay private mortgage insurance (PMI). 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.

Many potential buyers are also unaware of the fact that their down payment can come from sources other than personal savings. Some mortgage products let you use gifts from your family or employer. Others let you use grants or loans from not–for–profit or government agencies.

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.

Let's add up what this all means, using the following example:

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

Before signing on the dotted line, it's important that you understand your finances – and shop around for the best mortgage terms that fit your needs.

Visit My Home by Freddie Mac® to learn all you need to know about the homebuying process and be sure to follow our Spring Homebuying blog series.

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