Here's the thing nobody tells you about your down payment...
Posted by Kelly
Wed 15 July 2020
Pssst...you don’t actually need a 20% down payment.
In fact, a 2019 National Association of Realtors study found that the average first-timer’s down payment was around 6%.
So if you were looking at a 250k house and madly trying to save 50k for the deposit — congratulations, because that just became more like 15k. Sounds a bit more doable, right? Maybe you’re already there?
Now it would be remiss (and kind of douchey) of us to tell you don’t need to put 20% down without talking about Private Mortgage Insurance (PMI).
Basically, if you do decide to put down less than 20%, you’ll need to pay PMI — it gives your lender peace of mind because they’re protected if you stop making payments on your loan. It’s generally paid as part of your monthly home loan payment.
PMI costs between 0.5 -1% of the entire loan amount, annually. So on that 250k loan, you’d be looking at around $2500 a year, or $48 a week.
Now, the payments on a 250k loan with a 3.2% interest rate, fixed for 30 years are approx. $250 a week — add in your $48 for PMI and you’re still paying less than rent. And if property values are heading in the right direction, you’re even better off yet.
And it gets better — once you’ve paid enough off the loan’s principal, PMI is removed.
So, just how much is ‘enough’?
It’s pretty much what a ‘standard’ down payment would be — so 22% of the home’s original value. Yes, it’s a very precise number and it’s got everything to do with LVR.
So that rent you’re paying? You could actually be putting that towards paying off your own place, not your landlord’s.
If we’ve made your wee heart skip a beat with this little secret, here’s what you should do now —
> Research FHA lender criteria and low down payment conventional loans and see if you qualify.
> Revisit your budget — now that you know it’s not 20%, how much sooner will you be ready?
> Start a Pinterest board of indoor plants you can buy (and then accidentally forget to water)
> Jump onto our calculator right here and get an idea of your borrowing amount, rate and monthly payments.