EL SEGUNDO HERALD April 18, 2019 Page 9
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Want To Buy A Home? Do The Math Image courtesy www.vecteezy.com
(BPT) - It is a common misconception that
a 20 percent down payment is required to
buy a home. Advice to wait and save a large
down payment is often based on the theory
that the cost of mortgage insurance
(MI), which is required when you buy
with a smaller down payment, should
be avoided. This may not be the best
advice and is, in fact, not in line with
market trends, considering the median
down payment for first-time homebuyers
is 7 percent, according to the National
Association of Realtors.
Yes, you can qualify for a conventional
mortgage with a down payment as
small as 3 percent of the purchase
price. It is also true that you can reduce
your monthly mortgage payment by
paying for discount points at closing,
but that can be 5 or 10 percent of the
purchase price - not 20. And because
every buyer’s situation is unique, it’s
important to do the math. In today’s
market, it could take a family earning
the national median income up to 20
years to save 20 percent, according to
calculations by U.S. Mortgage Insurers
using a methodology developed by the
Center for Responsible Lending; a lot
can change during that time, in the
family’s personal finances and in overall
mortgage market trends.
How can buying now save you money later?
Consider you want to purchase a $255,000
home. A 5 percent down payment is $12,750
versus $51,000 in cash for 20 percent down.
With a 740 credit score at today’s MI rates,
your monthly MI payment would be about
$110, which is added to your monthly
mortgage payment until MI cancels. MI
typically cancels after five years; therefore,
you will only have this added cost for a short
period of time versus waiting an average of
20 years to save for 20 percent.
With home price appreciation, today’s
$255,000 home will likely cost more in the
years ahead and this will also have an impact
on the necessary down payment and length
of time required to save for it. There are
other variables in the equation too, such as
interest rates. As federal rates rise from their
historic lows, so too will the costs associated
with financing a mortgage. The savings a
borrower might calculate today could be
altogether negated by waiting even a
few more years. Another factor is that
rents are on the rise across the nation,
leading to a reduced capacity for many
would-be homebuyers to save for larger
down payments.
If you decide to buy today with
a low down payment mortgage that
has private MI, keep in mind that the
monthly MI payments are temporary
and go away, lowering the monthly
payment over time. Again, private MI
typically lasts about five years as it can
be cancelled once a homeowner builds
approximately 20 percent equity in the
home through payments or appreciation
and automatically terminates for most
borrowers once he or she reaches
22 percent equity. Importantly, the
insurance premiums on an FHA
mortgage - a 100 percent taxpayerbacked
government version of mortgage
insurance - cannot be cancelled for the
vast majority of borrowers.
So, do the math and let the numbers
guide you. There are many online
mortgage calculators that can help. Check
out lowdownpaymentfacts.org to learn more.
Lynn O♥Neil Real Estate
(310) 261-0798
Assoc Broker 31 years/Manager
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LYNNONEIL@GMAIL.COM #♥00 88 008 0 WWW.LYNNONEIL.COM