Mortgage Down Payments
Twenty percent of, say, $300,000 is a lot of money to average people with average income. That’s $60,000! For many, that’s two years’ (or more) worth of paychecks! Today, many lenders offer little to no down payment incentives. So, why would you want to try and struggle to gain such a hefty sum if you don’t have to?
For one thing, the lack of PMI (Private Mortgage Insurance). The primary advantage of making a mortgage down payment of 20 percent or more of the home’s purchase price is that the mortgage lender won’t require you to have private mortgage insurance. A secondary advantage is a smaller monthly mortgage payment.
The disadvantage, if there is one, is that you’ve put equity to work in investing in real estate that you could have invested elsewhere. This argument is typically put forth by people who want to invest in the stock market, and it’s a tough argument to make, especially with weakness in stock and real estate markets.
Although your loan can be structured to pay PMI premiums at closing, PMI policies typically charge a monthly insurance premium that the homeowner pays until the policy is canceled. You need to talk to the lender to determine when PMI is paid.
The policy won’t last the full term of the mortgage loan. Lenders are required to cancel the policy when the home owner’s equity position, from principal repayment, reaches 78 percent of the original purchase price.
In appreciating real estate markets, you can make the argument that paying PMI with a smaller down payment actually saves homeowners money because they’re capturing that appreciation rather than waiting to buy until they have a larger down payment.
There are alternatives to PMI, like piggyback loans and lender-paid mortgage insurance, which also allow consumers to finance a home without a large down payment.
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