Buyers often think they need to put down a 20% down payment on their new home, but is it really necessary? While there are significant benefits that come into play at the 20% threshold, a large down payment may not be necessary or appropriate for all buyers, depending on their circumstances.
Here are some of the factors to consider when deciding what down payment amount is right for you.
The first thing to point out is that there is nothing mandatory about a large down payment. For a conventional mortgage, lenders typically only require a 3% down payment, although this number may increase for borrowers with lower credit scores or higher debt-to-equity ratios.
Borrowers who meet the criteria to qualify for specific government-backed loans — such as Federal Housing Administration (FHA) loans, U.S. Department of Veteran Affairs (VA) loans, or U.S. Department of Agriculture loans — may receive even more flexible deposit requirements. Conversely, borrowers looking for a jumbo loan or buying a second home will often face larger down payment requirements from lenders.
Still, for most homebuyers, there are real benefits to hitting that 20% mark. More importantly, it translates to a lower interest rate and the monthly interest payment savings really add up over the long term of a mortgage. In addition, a 20% down payment exempts the borrower from having to pay PMI (private mortgage insurance), which usually costs between 0.05% and 1% of the loan balance per year. So, for a $500,000 mortgage, the PMI could reach $5,000 per year, or $420 more per monthly mortgage payment, for a minimal down payment. (Note however that the PMI requirement automatically ends when the mortgage balance reaches 78% of the original purchase price, so unlike a higher interest rate, PMI is not an additional expense over the entire term. of the loan.)
Finally, the ability to pay a 20% deposit often makes your offer more attractive to the seller compared to other bidders, as the seller may conclude that the purchase is more likely to be successful.
However, a buyer’s personal circumstances may weigh against a 20% down payment. Especially for young buyers or first-time buyers, it could take many years to save enough money to reach the 20% threshold, which could significantly delay the purchase of a home during a period when interest rates are falling. interest and market prices could rise steadily. For these buyers, it may make perfect sense to buy a home as soon as possible and strike while home prices and interest rates are relatively low.
Scott Silverstein (NMLS ID# 1445513), from Caliber Home Loans, points out that a buyer who delays a purchase for a larger down payment would also be deprived of the appreciation in the value of the home during this period, which could be substantial in a rising market. Scott also pointed out that a buyer’s personal investment portfolio can weigh against a large down payment. For example, if a buyer has to sell financial assets to meet the 20% threshold, those assets will no longer generate a return on investment, and the sale may well attract capital gains tax.
Even for a buyer who has the down payment funds available in cash, a large down payment can leave fewer family resources available for unexpected living expenses (including inevitable home repair expenses). Finally, although it seems like a remote possibility in the current market climate, a large down payment exposes a buyer to more risk if the value of the home drops significantly.
A savvy realtor in partnership with an experienced loan officer can help a buyer with strategies for making a smaller down payment while avoiding some costs. For example, a buyer may be able to put down a 5% down payment, take out a second “stacked” mortgage for 15% of the purchase price, and combine the two to meet the 20% threshold.
Interest rates and the PMI requirement can also be more flexible with the right lender. For example, James Gaudiosi (NMLS ID# 474088), senior loan officer in the Gaudiosi group at Atlantic Coast Mortgagerecently told me that his borrowers with a credit score over 700 can put down a 5% down payment on a home costing up to $1 million and get the same mortgage rate and terms as a borrower with a 20% down payment, although mortgage insurance will still be required.
And while the borrower can put down a 10% down payment on a home up to $1.5 million, Atlantic Coast Mortgage even waives the PMI requirement. In addition, these same conditions are available for the purchase of a second home costing up to $1.5 million.
Experienced loan consultants have other creative ways to ease the pain of PMI. For example, Silverstein told me that because Caliber handles its own loans, it can fund the entire cost of PMI as a single premium, roll it into the monthly mortgage payment, spread it over 30 years, and thus considerably reducing the monthly cost. PMI payment.
The decision on how much down payment to put down can be as individual as choosing your home! Let the Jean Beatty Group work with you to find what’s best for your particular situation.
Jean Beatty is a licensed Realtor in VA, MD and DC with McEnearney Associates Realtors® in McLean, VA. If you would like more information on selling or buying in today’s complex market, contact Jean at 301-641-4149 or visit his website JeanBeatty.com.
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