Adapted from an article authored by Carla Fried | CNBC
Many potential homeowners are unable to buy a home because they can’t come up with the 20% down payment. The National Association of Realtors reports the medium price tag of $236,000 in our current market, which equates to more than $47,000 required for the down payment. That’s a hurdle too high for many buyers, especially first time home buyers.
If a buyer purchases a home with less than 20% down, then mortgage insurance enters the picture. Adding the insurance premium to the monthly mortgage payment places a higher burden on the homeowner and limits his buying power.
Purchasing mortgage insurance presents several scenarios:
If you have a good credit score, PMI (private mortgage insurance) on a conventional mortgage may be your best option. Once you have the 20% equity, your lender is required to drop the insurance.
If you’re considering a FHA loan, it may have a lower monthly payment, but the mortgage insurance is permanent—you will pay the premium for the life of the loan or until you refinance the loan once you hit the 20% equity mark.
If you’re a military veteran, it is recommended you work with a lender experienced in mortgages backed by the Department of Veterans Affairs. The 0% down payment required for a VA-backed loan is hard to beat, although there is an upfront fee of 2.15% or 3.3% of the loan amount, that fee be rolled into the mortgage.
Another option available to borrowers to avoid the 20% requirement is an 80-10-10 loan. This allows the buyer to make a 10% down payment and requires taking out two mortgages. The primary mortgage covers 80% of the loan value; a 2nd mortgage, often called a piggyback loan, covers 10%; and the other 10% is the down payment. It eliminates the need to buy mortgage insurance.
It’s a bit more hassle, in that there are two loans that need to close. The lender handling the primary mortgage will coordinate getting the piggyback, which may come from a different lender. You may pay a few hundred dollars to open the piggyback but shouldn’t be charged again for the appraisal, title insurance and other requirements you’ve covered with the primary. Piggybacks are typically home equity lines of credit (HELOC), which are variable rate loans and subject to increasing interest rates.
I love helping my clients purchase the home of their dreams and I know the in’s-and-out’s of home buying. I’m experienced in creating the right conditions for buyers to purchase that home. If you or someone you know needs help in the home buying process, call me at 682.551.0336. I’ve helped 100’s of clients work toward successful closings and home ownership.