Gone are the days when a 20% down payment was the standard for purchasing a home. Today, making a smaller down payment typically involves acquiring mortgage insurance (MI), a fee paid to mitigate the lender’s risk due to the lower down payment.
Surprisingly, conventional loans are now available with as little as 3% down. The cost of the mortgage insurance depends on the borrower’s credit score.
Lenders will allow borrowers to drop the monthly MI once the loan-to-value ratio reaches 80%. They will typically require an appraisal (about $500) to show the value, and the loan should have been in good standing for at least the previous 12 months. Different lenders have different procedures, though, so it is worth making a call to them to get their specifics.
If real estate values are going up, a prospective home buyer should buy as soon as possible (even with MI) rather than waiting to save up a larger down payment. If values are going up, say, 4% per year, today’s $300,000 home will cost $312,000 a year from today, $325,000 two years from today. There is also the uncertainty about whether mortgage rates will be as low in the future as they are now. Higher rates would obviously increase the cost of owning a home.
have you saved enough to buy a house?
Post updated. Originally published April 2018.