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In the United States, 64.8% of the country owns a home. While that’s a lot of people, it still leaves more than 30% as renters (potential buyers). There are a number of factors that keep people out of buying property. For many, saving up for a down-payment is often the biggest deterrent. Ironically, this topic is also often the most misunderstood.
The most common misperception about down-payments is that you need 20% down. Not true. Often 20% is the exception. It is possible to put down 10% or less with the help mortgage insurance (PMI). Mortgage insurance takes the risk away from the lender, freeing them to give you more for less. It doesn’t come for free, however. It will typically cost the buyer around 1% of the total loan each year. Depending on the cost of the property, that can be a significant increase in your monthly payments. The owner is also still on the hook for all financial responsibilities. If you end up underwater on your home, PMI will now help. New tax law has also stopped making it tax deductible.
So should you run out and buy a home with 3% down? Not necessarily. Opinions vary on how good of a deal PMI is for the buyer. It increases the monthly payment and locks in those rates for years – certainly not ideal. Yet, every real estate professional will tell you that buying a home is the best thing you can do to accrue wealth. With that in mind, it is important to weigh all options available. FHA loans are also available to help decrease the down-payment, but those often still require mortgage insurance.
House hacking is a newer term that is picking up steam. Basically it’s when you buy a home, take one room and rent out the others. This can often cover all or almost all of your monthly mortgage. Obviously the downside is that you have to live with people in your house. But if you know of friends or family who might be interested in that type of situation, you get all be benefits of homeownership without the large monthly bill.
The main point is that a large down-payment shouldn’t scare you away from buying a home. It may still prevent it from happening for a few years to come, and that’s okay. Use that time to do research, understand all the options and pick one that works for you. The worst option is to pick a direction without knowing the financial consequen