It’s a myth that you need at least 20% or more to buy a home these days. There are a lot of options that offer 5%, 3 1/2%, 3%, and even zero down loans so the old adage of 20% for the conventional loan is not necessarily the rule any longer. So how much do you really need to put down on the house?
According to the National Association of Realtors, 61% of new buyers in 2017 made a down payment between zero and 6% of the home price. With government-backed programs like the USDA home loan an FHA loan, homebuyers are putting a very small down payment on the purchase of a new house, even without perfect credit. So what do you need to do?
First, you need to figure out which loan option works for you. A USDA loan is perfect for those buying in rural areas, not in-city and only specific properties qualify, however, this is a zero down payment option. Other programs such as FHA require 3.5% down and loans for veterans such as the VA loan, there is very little down if anything at all.
You have to weigh the risks and costs involved of a zero down home loan. Usually, less than 10% of a down payment will require mortgage insurance. This is because if you default on the loan the lender needs to have extra money to back up the fact that they cannot turn around and resell the home without losing money. This could add anywhere from a few dollars to a couple hundred dollars to your mortgage payment each month depending on how big the loan is.
You also have to compare the costs. For instance, on a $300,000 loan for 25% down payment would be $75,000, however, that would only save $500 per month compared to a zero down home loan. By going with a zero down or even a low down payment, you may be paying more per month, but you’ll have more money in your pocket because you’re not making that initial huge payment.
Let’s take a look at this graph from the Mortgage Reports. On a $300,000 loan, the USDA loan has the monthly payment at about $2000, a VA loan just under $2000, a conventional 97 loan with 3% down at about $2100, with a 25% down payment at just $1500. You have to decide what’s worth it for you. Would you prefer to be in a home now or wait until you have that 20% down payment? You could be gaining equity and buying down your loan simply by purchasing now rather than five years from now to save a couple extra bucks on your monthly payment.
But again, you have to make that deciding factor. What will work for your budget now and in the future as you start making mortgage payments? Can you afford 3%? Can you afford more? Do points matter? Buying down your loan?
GIVE US A CALL to go over all the figures and information so you can make an informed decision on the right home loan for you.