You are renting, but you want to be a home owner. For generations, making that move has had to wait until you saved up enough for even a small down payment. But today, the trend is to buy with 100% financing and no money down. Just because the trend is growing, it does not mean it is a good idea for everyone.
When you pay little or nothing down, you increase your monthly mortgage payment because you’re borrowing more money. Also, you’ll pay a monthly private mortgage insurance (PMI) premium, which is folded into your house payment. The purpose of PMI is to protect the lender against the increased risk of losses when buyers pay less than 20% down. That tends to cost 0.5% to 1% of the loan value, up to $3,500 per year on a $350,000 home, or $5,000 on a $500,000 home. It’s money that doesn’t go toward your principal or interest and isn’t tax-deductible.
The higher monthly payment is the first factor to weigh. Consider, too, that your payment may go even higher in the near future. Some no- or low-down-payment mortgages have a fixed interest rate, but often these products come with an adjustable rate. If the rate changes a year or two down the road, you could have payment shock.
Equity in your home also gives you a source of cash in an emergency. And the bigger the down payment, the lower your monthly payments, which may mean one of you can afford to stop working, if you wish.
Ways to Accumulate a Down Payment:
- Start saving as much as you can as soon as you can.
- If you have enough equity in your 401(k) retirement plan at work, you can borrow the money from your account. You will be charged prime rate, with possibly a small margin added on, and you can have the payments from this “loan” deducted from your paycheck through payroll deduction plans.
- Borrow the down payment from family members or relatives and pay it back monthly.
- Investigate mortgages that are insured by the Veterans’ Administration or the Federal Housing Authority. These government agencies guarantee the mortgages and may even get you in the house without a down payment.
Waiting until you have a sizeable down payment can save you thousands every year and provides a cushion a new homeowner might need. If you wait to amass the 20% down payment, you can avoid these extra costs, qualify for a lower-rate loan and keep your mortgage payments much lower, which gives you a lot more flexibility in the future.
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