Home buyers are opting to put less money down on their home purchase, according to a new study by Black Knight Financial Services, published by CNBC. About 40% of purchase money mortgages now have down payments of 10% or less. Here are more highlights from the study, along with our own insights!
The trend of lower down payments has been made possible by the expansion of low down payment Conventional mortgage products. In recent years, Conventional loans backed by Fannie Mae and Freddie Mac lowered their minimum down payment requirement to 3%. FHA loans have long offered a down payment minimum of 3.5%, but expensive, unremovable mortgage insurance requirements made FHA loans an expensive prospect.
While Conventional mortgages also require mortgage insurance when the down payment is less than 20%, the premiums are removable when a loan-to-value ratio of 80% is achieved. This can be accomplished through home value appreciation, or by paying down the principal balance, or a combination of both.
With more mortgage choices on the table, home buyers are increasingly making down payments of 5% to 9%, instead of waiting to come up with 20% down. In our Chicago real estate market, this makes sense. Home prices have been rising consistently, and there comes a point when prices could be rising faster than one’s ability to save. Saving 20% is a moving target!
There is also the expectation that we’ll face rising interest rates in the future. If it takes 5 years to save 20% down, but then you end up paying a higher home price and having a higher interest rate, it may not be worth the wait. Especially if you could have been enjoying home value appreciation in the meantime!
On the other hand, there can be some drawbacks to a low down payment. You may not get the very best mortgage rate offer, even if you have great credit. This is because lenders consider your loan-to-value ratio in their pricing. And when you make an offer on a home, a low down payment, along with a small amount of earnest money, can make your offer appear weaker than a competing bid. You’ll also have to deal with mortgage insurance in some form or another, which adds to your monthly mortgage payment.
The “right” down payment amount is a question that each home buyer has to answer for themselves. You shouldn’t buy a home until you are financially prepared for the ongoing costs of home ownership, which go beyond the down payment amount and the monthly mortgage payment. Nor do you want to sacrifice every penny of your savings for a down payment – you should also have a reserve fund, in case your employment is interrupted, or some unforeseen emergency comes up.
A good mortgage lender will help you do the math on the mortgage scenarios you have available, so you can make the best decision for your situation. When you work with StartingPoint Realty, we will refer you to local, trustworthy lenders who will counsel you on your mortgage options!
StartingPoint Realty – dedicated to first-time Chicago home buyers!
StartingPoint Realty proudly serves first-time home buyers throughout Chicago and the Northwest suburbs. We provide complete education and guidance during the entire home buying process! Attend a free home buying seminar to begin your path to home ownership!
We also provide many other resources to help you become a successful home buyer! Need down payment assistance? Check out our list of home buyer assistance programs on our website! Visit our Chicago Resource Center for no-pressure information and assistance.
Always feel welcome to contact us for help with your Chicago home buying questions!
Ryan Gable Broker/CEO Starting Point Realty
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