The majority of people will only purchase a home maybe once or twice in a lifetime. The process is a relatively new venture. With this fact in mind, it makes sense why real estate myths might hinder this American dream.
Putting 20 percent down on a home is a typical saying in the industry today, but it’s not a requirement. Learn more about down payments so that you can make an educated choice about your next investment.
The Housing-Market Shakeup
The 20-percent guideline has been around since the 1930s, but it was reinvigorated by the housing collapse during the Great Recession of 2008-2009. Previously, lenders had dolled out millions in dollars in questionable loans. Many borrowers didn’t even put a down payment on their property, which put them in a difficult position when jobs became scarce. The 20-percent guideline had been loosened up until the housing collapse.
As the housing market recovered, lenders simply felt more comfortable with a large down payment to protect their companies. The 20-percent guideline flourished and became the norm for many months.
Saving up 20 percent of a six-figure home is a daunting challenge in today’s market. The industry is strong and resilient today. You don’t have to put 20 percent down on a home. Today’s averages typically range from 7 to 16 percent. A first mortgage, for example, might have a smaller down payment because the buyer doesn’t have any existing equity to lean on for a larger sum. Experienced homebuyers tend to put down the 16-percent amount as they use their current property as a form of payment.
Other Low-Rate Options
The United States government wants its citizens to invest in their communities. Homeownership improves quality of life across the board. Because the 20-percent guideline is a lot of money, the government has programs that insure or back mortgage loans.
FHA mortgages require only a 3 or 3.5 percent down payment. VA loans for veterans might include 100-percent financing. Rural loans are also available at low rates. Smaller banks and other specialty lenders might require a higher down payment because they don’t rely on government-backed funds. It’s up to the consumer to pick the mortgage that works for his or her needs.
These mortgage solutions give consumers a lot of choices as they decide on financing options. Although 3-percent down might sound like a great deal, remember that you’ll have higher payment amounts as a result.
Ideally, put down as much as you can on the property. You’ll have to finance a smaller amount, which translates into lower payments. The interest won’t add up as much either. Borrowing any amount will always come with interest accrual that drives up the home’s ultimate price.
Understanding Mortgage Insurance Premiums
Keep in mind that lenders must add mortgage insurance (PMI) onto loans that have a less than 20-percent down payment. This insurance is simply a safeguard on the loan in case of default. Once the property has an equity amount that equals 20 percent of its value, you can cancel the mortgage insurance.
Until then, these premiums are due each month with the principal and interest. Paying the 20-percent down will allow you to skip any insurance premiums applied to the loan.
Improve Your Credit History
Placing a low amount down on a home will bring about insurance costs and higher interest rates. If you can’t put the 20-percent amount down, improving your credit score is a clever way to qualify for low interest rates.
Pay off credit cards and reduce debt in other ways. Consolidate student loans into one account. You can still put a low amount down on a home, but with good credit, your financing options will be plentiful.
Competition Among Lenders
Another good reason to put 20 percent on a home is borrowing power. When lenders see that you have a large sum of money, they’ll compete for your business. Low interest rates, payment options and other benefits might be possible with your buying power. You don’t have to put that much down, but it does improve your borrowing chances in the long run.
Save up for the Investment
When you’ve decided that homeownership is the goal, start saving right away. Try to save up as much as possible by curbing spending habits. Cook dinner at home and skip the coffee run to the local shop. All of these small changes will translate into a healthy savings account for that eventual purchase. The down payment is your ticket to equity and potential wealth.
If you have any questions about real estate today, contact Gregg Busch. As an experienced mortgage broker, we can walk you through the purchasing steps with ease. Buying real estate is a goal that can be achieved with the right partner by your side.