You don’t actually need a 20% down payment. Sweet!
Posted by Kelly
Wed 15 July 2020
How many times have you heard (or said), “Sorry, we can’t afford to do that awesome thing — we’re saving for a house”?
Ugh. It can take a ton of sacrifice, discipline and leftovers for lunch to save for that down payment.
Well, put down last night’s mac and cheese Randy because we come bearing exciting news about how much you can actually put down.
And plot twist — it ain’t 20%.
It’s not even 10%. 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? Actually, maybe you’re already there?
And guess what? If you’re eligible for an FHA loan, you only need to pay 3.5% down.
Now it would be remiss (and kind of douchey) of us to tell you that 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.