There are many questions when it comes to buying a home. One of the most prevalent is how much money is required for a down payment. The common misconception is that a buyer needs to put at least twenty percent down in order to purchase a home. This certainly is not the case and it is important that you understand your options.
While there are benefits to putting twenty percent or more down, there is also an argument to put less money down. To view a comprehensive summary of your options, click here. Some of these options include Mortgage Insurance which is what protects the bank and makes it possible for buyers to purchase a home when putting less than twenty percent down.
Historically, lenders have operated under an 80/20 LTV (Loan-to-Value) benchmark, meaning that they will lend a buyer up to 80% of a property’s appraised value. From the lender’s perspective, they want that 20% “investment” to deter default and ensure buyers have some “skin in the game”. If a borrower does default, the bank can foreclose and take possession of the property.
Mortgage Insurance, sometimes referred to as PMI or MIP, is what makes it possible for buyers to purchase a home without meeting the 80/20 LTV benchmark. This insurance is an additional expense and is generally included in your monthly mortgage payment to protect the lender in case of default. With most conventional loans, mortgage insurance and the associated premium can be removed once you reach an 80/20 LTV and notify your lender. With an FHA loan, the insurance and premium remain part of the loan for its entirety.
Pro Tip: Mortgage Insurance isn’t “bad”
Mortgage insurance is often looked at as a negative and I get it, it is better to not have that extra expense. However, if you do not have the ability to put twenty percent down, it may be your only option to purchase and more advantageous than renting.
For example, on a $400,000 loan you may pay $350 a month in mortgage insurance. This equates to $4,200 a year or $21,000 over five years. While that may seem like a lot of money, keep in mind that you are paying down the principle on the loan with every payment and hopefully gaining appreciation in the property value.
Compare this to the person who does not want to pay the $350 a month in mortgage insurance because they consider it a rip off or waste of money. This person has continued to rent for five years at the cost of $2,200 per month, $26,400 a year or $132,000 over five years. My advice: consider the monthly mortgage insurance payment to be a cost of doing business.
Check out some of our past articles and look forward to some Coming Soon articles:
- Coronavirus: Should I Buy or Sell Now?
- Virtual Showings: Is Matrix the way to go?
- Does staging make a difference?
- Settlements During Coronavirus
- Down Payment Myths
If you have specific questions or would like to set up an in-person meeting to discuss your scenario, please call or email me directly at 703-915-2244 / [email protected]. If you enjoyed this post and would like access to more of my articles/videos, visit the video/blog section of my website at: https://jcurrygroup.com/videos/
Licensed Realtor: VA & DC
J Curry Group at KW Metro Center
2101 Wilson Blvd #100
Arlington, VA 22201