Down-Payment & PMI
Typically, buyers put down 5 to 20% of the purchase price but this can be as little as 3%. Buyers putting down less than 20% are required to pay Private Mortgage Insurance (PMI) monthly until they build up 20% equity in their home.
The National Association of REALTORS® reported that in 2019, the median down payment was 12% for all buyers and 6% for first-time buyers.
The reality of down-payment
A recent Freddie Mac survey found that nearly a third of prospective homebuyers think they need a down payment of 20% or more to buy a home. This myth remains one of the largest perceived barriers to achieving homeownership.
What most people don’t realize is that you have choices when it comes to your down payment, even the possibility of putting as little as 3% down through Freddie Mac’s Home Possible® or HomeOne® mortgages. You can also use USDA loans in rural areas if the home qualifies. Georgia Standard Down Payment Assistance and other FHA Grant programs. Ask your mortgage lender about grants and downpayment programs in your area.
Where PMI comes in
If you make a down payment of less than 20%, you’ll have to pay PMI each month until you build up 20% equity in your home. Take the time to understand PMI as the cost can be relatively small in comparison to the value of being able to secure a 30 Year Fixed Rate mortgage sooner rather than later.
What is PMI?
For homeowners who put less than 20% down, Private Mortgage Insurance or PMI is an added insurance policy for homeowners that protects the lender if you are unable to pay your mortgage.
It is not the same thing as homeowner’s insurance. It’s a monthly fee, rolled into your mortgage payment, that’s required if you make a down payment less than 20%. While PMI is an initial added cost, it enables you to buy now and begin building equity versus waiting five to 10 years to build enough savings for a 20% down payment.
While the amount you pay for PMI can vary, you can expect to pay approximately between $30 and $70 per month for every $100,000 borrowed.
PMI in action
A $200,000 HOME: 5% DOWN VS. 20% DOWN
| 5% DOWN PAYMENT | 20% DOWN PAYMENT | |
|---|---|---|
| Down Payment | $10,000 | $40,000 |
| Loan Amount | $190,000 | $160,000 |
| Mortgage Type | 30-year fixed-rate | 30-year fixed-rate |
| Interest Rate | 4.5% | 4.5% |
| Monthly Mortgage Payment (Principal and Interest) | $962.70 | $810.70 |
| PMI | $80.75* | $0 |
| Total Monthly Payment (Excluding Property Taxes, Insurance) | $1,043.45** | $810.70** |
**Does not include property tax and homeowner’s insurance payments
PMI isn’t forever
Once you’ve built equity of 20% in your home, you can cancel your PMI and remove that expense from your monthly payment. If you’re current on your mortgage payments, PMI will automatically terminate on the date when your principal balance is scheduled to reach 78% of the original appraised value of your home. If you choose to use PMI, be sure to talk with your lender about these specific details of your policy.
Talk with your lender about what down payment makes the most sense for your financial situation. Remember, you have options!
If you have questions and want to get started in the process contact The Wagner Team, we can answer any of your questions. We will be happy to. “A Higher Standard of Real Estate”
0 Comments