When you buy a house, you usually have to put a certain amount of money aside. Lenders require you to do this to reduce the risk that the home will no longer be worth enough to secure the entire mortgage.
It’s also a good idea to put some money aside so you don’t owe more than the house is worth (this is called being underwater). This could make it very difficult to sell if you needed to because you would have to find the remaining money to pay off the loan.
Although lenders require a down payment, you can usually choose to make a small payment or a large payment. This can be a tough decision because the bigger your down payment, the lower your mortgage costs, but the more you need to save before you can buy.
To help you make your choice, financial expert Dave Ramsey has some advice – and it’s actually quite surprising from the famous debt guru.
Here’s why Ramsey’s advice is so surprising
Ramsey’s recommended minimum down payment is much lower than you would expect, given that he recommends avoiding debt where possible and ideally suggests buying a house with cash if you have any. have the means.
So what does Ramsey suggest is the minimum you should deposit? “If you’re a first-time home buyer, a 5-10% down payment is fine,” said the Ramsey Solutions says the blog.
The fact that Ramsey says it’s okay to buy a house with so little down is truly surprising for several reasons.
First, as Ramsey acknowledges, if you deposit less than 20%, you’re going to end up with an extra payment for something called private mortgage insurance (PMI). “Anything below 20% is considered riskier for a lender, so to cover their butt, they make the mortgage more expensive for you by adding things like private mortgage insurance,” Ramsey said.
PMI protects the lender by covering any costs they cannot offset if they have to sell your home in foreclosure. But that doesn’t protect you – you can still be seized even if you’re the one paying for the protection. So, by suggesting that it’s okay to buy a home with just 5% down, Ramsey agrees to go ahead with a purchase that will come with higher monthly payments that will affect your ability to do something else with your money.
Ramsey also said, “Anything less than 5-10% is actually a very low down payment, not to mention a surefire way to end up upside down on a house. And you’ll be wasting a lot of money on interest and fees over the life of your mortgage. But this is also true if you make a down payment of less than 20%. You will likely be stuck with a higher interest rate loan, have fewer choices of lenders, and You will have to pay additional fees if you choose special low down payment loans, such as an FHA loan.
Now, to be fair, Ramsey says people who already own should definitely put down 20% because they can cash out their equity to come up with the down payment. And he points out that a larger down payment is better, even for first-time buyers.
But while he says a 5-10% down payment is fine for first-time homebuyers, the reality is that it’s going to be a risky and costly decision, especially if you’re down. end of this range.
How much should your down payment be?
In most cases, even if you’re a first-time buyer, you should try a 20% down payment to protect yourself and avoid making your mortgage more expensive. But, if that’s totally impossible for you, you should stick to a minimum of 10% – not go for a 5% down payment.
Anything less than 10% puts you at serious risk of not being able to sell your home enough to pay off the mortgage, as well as cover closing costs and real estate commission. You just don’t want to take that risk.
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