How Much to Put Down on a Mortgage
One constant perception that both new and repeat homebuyers have is that 20% down is required when buying a home. There are other options, but many of the people that are aware you can put less down seem 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 were to default on their mortgage. Homeowners believe that this is “throwing money away” as it can lead to a higher monthly payment. However, there are options to avoid paying monthly PMI, even with as little as 5% down.
First off, let’s look at the minimum down payment requirements for different loan programs for a one unit (single family or condo), owner-occupied purchase.
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0% |
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3.5% |
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3% |
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5% |
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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 less than $424,100 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 than 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 very 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 effective rate/payment is lowered.
Sometimes putting less down and paying PMI is beneficial. Maybe you have 20% to put down but instead you put 10% down and use the other 10% for future home renovations, window treatments, furniture or to pay off some debt. That monthly PMI cost is likely lower than the APR on your credit card.
As you can see, there are so many moving parts that end up determining how much you should put down when buying a home. It’s important to see if it makes more sense to pay monthly PMI or do a “buy out” program eliminating your monthly PMI. The best thing to do is call a seasoned mortgage professional that will walk you through all your options and show you comparisons tailored to your current needs and financial goals.
Written By: Chris Ulrich – United Home Loans
NMLS# 215735
