Get the low­down on low down pay­ments

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You may have heard the rule of thumb that you shouldn’t buy a home un­less you can put down 20 per­cent of the pur­chase price. How­ever, to­day’s home buy­ers have many choices when it comes to the size of the down pay­ment.

While this magic num­ber of 20 per­cent will save you from pay­ing Pri­vate Mort­gage In­surance (PMI), an added in­surance pol­icy that pro­tects the lender if you are un­able to pay your mort­gage, you can pay con­sid­er­ably less than this if you want.

“To­day’s con­sumers per­sis­tently over­es­ti­mate the size of a down pay­ment they need to fi­nance a home,” says Christina Boyle, SVP and Head of Sin­gle-Fam­ily Sales & Re­la­tion­ship Man­age­ment at Fred­die Mac.

Ac­cord­ing to the re­sults of a re­cent survey con­ducted by Zel­man & As­so­ciates, 39 per­cent of those sur­veyed es­ti­mated that the min­i­mum down pay­ment re­quire­ment for a home is at least 15 per­cent of the pur­chase price. The re­al­ity is quite dif­fer­ent how­ever, as qual­i­fied buy­ers can get a con­ven­tional mort­gage with a down pay­ment of as lit­tle as 3 per­cent.

In fact, re­cent statis­tics show more than one in five bor­row­ers who took out con­ven­tional mort­gages in 2014 put down 10 per­cent or less.

Ed­u­cat­ing po­ten­tial home­own­ers on the rules of down pay­ments — and avail­able as­sis­tance pro­grams — plays a large role in get­ting qual­i­fied bor­row­ers off the side­lines and into home­own­er­ship, ac­cord­ing to Boyle, who also notes that to­day’s his­tor­i­cally low mort­gage rates, cou­pled with af­ford­able home prices in many parts of the coun­try, make it an at­trac­tive time to con­sider buy­ing.

“If putting 20 per­cent down will de­plete all of your sav­ings and leave you with no fi­nan­cial cush­ion, it’s prob­a­bly not in your best in­ter­est,” she says.

If you don’t put down 20 per­cent, the cost of PMI varies based on your loanto-value ra­tio — the amount you owe on your mort­gage com­pared to its value — and credit score, but you can ex­pect to pay be­tween $30 and $70 per month for ev­ery $100,000 bor­rowed. While it’s no doubt an added cost, it en­ables buy­ers to pur­chase now and be­gin build­ing eq­uity ver­sus wait­ing five to 10 years to build enough sav­ings for a larger down pay­ment.

Ad­di­tion­ally, once you’ve built eq­uity of 20 per­cent in your home, you can can­cel your PMI and re­move that added ex­pense from your monthly pay­ment.

New home­own­er­ship op­por­tu­ni­ties are poised to grow. Care­fully eval­u­ate your fi­nances to de­ter­mine how much you can af­ford and talk with your lender or hous­ing pro­fes­sional about what makes best sense for you and your par­tic­u­lar sit­u­a­tion.

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