Thursday, October 20, 2016

How Much Should I Put Down On My New Home?

Posted by: Chris Ulrich, United Home Loans

A common misconception for both new and repeat homebuyers is that 20% down is required when buying a home. There are other options, but putting less money down seems to have a stigma about it. Why is this?  Any conventional loan with less than 20% down payment requires private mortgage insurance (PMI). PMI is an added insurance premium that the homeowner pays to help protect the banks and loan servicing companies if the homeowner defaults on their mortgage. Homeowners believe that this is “throwing money away” because it leads to a higher monthly payment. However, there are options to avoid paying monthly PMI, even with as little as 5% down.

First, here are the minimum down payment requirements for different loan programs:

  • VA (for military veterans): 0%
  • FHA (government sponsored): 3.5%
  • Conventional First Time Homebuyer:         3%
  • Conventional Loans: 5%
  • Jumbo Loans (loan amounts over $417,000): 5%

Let’s focus on conventional loans since most homebuyers fall into this category. A conventional mortgage refers to a loan that is not insured by the government, is equal to or less than $417,000, and adheres to the guidelines set by Fannie Mae and Freddie Mac. The cost of PMI is risk-based when putting less than 20% down. If you have excellent credit, the PMI factor will be lower than someone with poor credit. If you put 15% down, the PMI factor will be lower than someone who put 5% or 10% down, and the cost is lower on a 15-year fixed verses a 30-year fixed. Don’t want to pay PMI at all? There are Lender Paid PMI and Single Premium PMI programs that actually allow you or your lender to “buy out” the PMI. Assuming you have excellent credit, the cost of buying out the PMI can be beneficial. This “buy out” is typically done by taking a slightly higher than market interest rate, but because you don’t pay monthly PMI, your overall payment is lowered.

Sometimes putting less down and paying PMI is beneficial. Perhaps you have 20% to put down, but instead you put 10% down and use the other 10% for home renovations, furniture, or to pay off debt. The monthly PMI cost is likely lower than the APR on your credit card, so using down payment money to pay off debt makes sense.

To talk more about down payment options or available loan programs, contact me here or call 708.955.7271.

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