Whether or not you’ve started thinking about buying a house, you’ve probably heard that you’ll need 20% saved up for a down payment. True? Well, the good news is, not necessarily. Today, there are many loan offerings that allow as little as 6% or even 3% as a down payment. That’s a big help, especially with the rising rental rates making it hard to save extra for your first home.
Most lenders will require that you pay Private Mortgage Insurance (PMI) when putting less than 20% down on a home. This is an additional cost to your loan that protects the lender in the case of default on the loan. The monthly amount will vary based on how much you put down and your credit score, but you can have it removed from your monthly payment when you have reached 20% in escrow.
If you want to avoid paying PMI, there are also 80/20 loans, for qualified buyers. This type of loan is an 80% first mortgage and a second mortgage for the remaining balance. In any case, you will want to compare your options to make sure you are making the best decision for your situation. Sometimes the cost to the second, sometimes called “piggyback” mortgage may be higher than the mortgage insurance you would have to pay. Always consult your lender and have them explain the details of each type of mortgage before deciding.
Another thing to consider, with rental rates in the city, could you still end up paying less if you bought a house and had a mortgage with PMI? Let’s take a look at a general example:
Kelly and Max are renting a 1 bedroom with den apartment in Fells Point for $2,670 a month. They want to buy a $275,000 3 bedroom home on Wolfe Street in Fells Point with 5% ($13,750) down. They qualify for a loan at 5% interest and will have to pay PMI. See below for the breakdown of their $2,131.48 mortgage payment! Now they just need to figure out where to invest the extra $538.00 they have in their monthly budget!