Why You No Longer Need to Put 20% Down on a Home
When we ask people if they’re ready to purchase a home, the #1 response we get is “I’d love to, but I don’t have the 20% down payment.” While it’s true that 20% is the traditional down payment amount for a house, that is no longer the norm. In fact, according to a report from NAR, the average first time home buyer puts a down payment of about 6% of the purchase price. At CB&T Mortgage, we see an average down payment of 3.5%.
Let’s look at some numbers
For example, if you were looking to purchase a $220,000 home, a 20% down payment would be $44,000. However, a 6% down payment on that same home would be $13,200 – which seems much less daunting than the $44,000 amount. While your monthly payment will be higher on a home with a smaller down payment, it gives you the option to spread those payments out and removes the pressure of coming up with that chunky down payment.
Sometimes, even our clients who have access to the full 20% down payment choose to only put 6%, 10% or even 15% down so they can keep some cash in the bank, prepare for home upgrades or set the funds aside for a future financial need.
Which loan types does this work with?
Nearly all types of loans allow the buyer to put less than 20% down, but here are the details:
- VA loans allow 0% down payment up to $484,350
- FHA loans require a minimum of 3.50% down
- Conforming Conventional loans up to $484,350, allow a minimum of 3% down
What’s the Catch?
Private Mortgage Insurance
When you put less than 20% down, you will need to pay something called Private Mortgage Insurance (PMI). PMI protects the lender in case of a default from the borrower. This payment is rolled into your monthly mortgage and is usually a very small percentage of your overall costs. Additionally, PMI is dropped from your monthly payment after you’ve gained sufficient equity in your home.
While your mortgage rate depends on various factors, when you put less than 20% down your rate might be slightly higher as your lender is taking on more risk by agreeing to a higher loan amount. However, like the PMI payment, this does not have to be long term. You can refinance your house in the future if the market changes, such as rates going down or the value of your home increasing.
While you’ll most likely need to pay PMI, and might have a slightly higher mortgage rate, the upside is that you will have much more control over your housing expenses for the foreseeable future. There’s no landlord hiking up your rent just as you’re getting settled into your new place.
Additionally, you gain the freedom of home ownership. Don’t like the canary yellow paint on the walls? Just change it, no need to ask permission. Hate that one ceiling light in the dining room? You can swap that out too! This is YOUR home, and you get to make the decisions.
The number one question any good lender should ask you as you’re deciding whether to put 20% down, is what monthly payment are you comfortable with? Because YOU have to make that payment every month. So, you can put 5% down, but if that increases your monthly payment to an amount you’re not comfortable with, then it’s not worth it.
Want to learn more about your options? Reach out to our team today.