September 26th, 2018 11:25 AM by Tenby Dahman
Saving for a down payment is often the biggest hurdle for a first-time
homebuyer as median incomes, rents, and home prices all vary depending on
where you live.
There is a common misconception among homebuyers that a 20% down payment
is required, and it is this limiting belief that often adds months, and
sometimes even years, to the home-buying process.
Mortgage Insurance (PMI)
“An insurance policy
that protects the lender if you are unable to pay your mortgage. It’s a
monthly fee, rolled into your mortgage payment, that is required for all
conforming, conventional loans that have down payments less than 20%.
Once you’ve built
equity of 20% in your home, you can cancel your PMI and remove that expense
from your mortgage payment.”
As the borrower, you pay the monthly premiums for the insurance policy,
and the lender is the beneficiary. The monthly cost of your PMI depends on
the home’s value, the amount of your down payment, and your credit score.
Below is a table showing the difference in monthly mortgage payment for a
$250,000 home with a 3% down payment and PMI vs. a 20% down payment without
The first thing you see when looking at the table above is no doubt the
added $320 a month that you would be spending on your monthly mortgage cost.
The second thing that should stand out is that a 20% down payment is $50,000!
If you are buying your first home, $50,000 is a large sum of money that
takes discipline and sacrifice to save. Many first-time buyers save for 5-10
years before buying their homes.
To save $50,000 in 10 years, you would need to save about $420 a month. On
the other hand, if you save that same $420 a month, you could afford a 3%
down payment in less than a year and a half.
In a recent article
by My Mortgage Insider,
they explain what could happen in the market while you are waiting to save
for a higher down payment:
“The time it takes to
save a (larger) down payment could mean higher home prices and tougher
qualifying down the road. For many buyers, it could prove much cheaper and
quicker to opt for the 3% down mortgage immediately.”
The article went on to say,
typically devote a higher percentage of their income to housing than
homeowners, providing flexible down payment options can help renters with
solid earnings purchase a home – and gain a fixed-rate mortgage with
principal and interest payments that will not increase over the life of the
If the prospect of having to pay PMI is holding you back from buying a
home today, Freddie Mac
has this advice,
“It’s no doubt an added
cost, but it’s enabling you to buy now and begin building equity versus
waiting 5 to 10 years to build enough savings for a 20% down payment.”
Based on results of the most recent Home Price Expectation
Survey, a homeowner who purchased a $250,000 home in January
would gain $50,000 in equity over the next five years based on home price
appreciation alone (shown
If you have questions about whether you should buy now or wait until
you’ve saved a larger down payment, let’s get together to discuss our
market’s conditions and help you make the best decision for you and your