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For many would-be homebuyers, saving a 20% down payment for a mortgage can be a big barrier to homeownership. Consequently, more people are buying homes by putting less money down.
Putting a full 20% down on mortgage ensures you won’t pay private mortgage insurance and will most likely get the lowest available interest rate.
Some real-estate agents, however, say the benefits of making a smaller down payment outweigh the consequences — it can help homeowners build wealth and equity sooner rather than later.
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Putting 20% down on a home purchase is daunting, and rightfully so.
For many young Americans struggling with student-loan payments, higher rent costs, and relatively stagnant salaries, saving a fifth of a home’s value to get a mortgage simply isn’t on the radar.
Would-be homebuyers are finding it can take years to save a full 20% down payment, especially for anyone living near a big city, where real-estate prices are soaring. According to Zillow, the typical home value in Los Angeles is $794,935. You’d have to save $158,987 to place 20% down.
And for many millennials in particular, it’s just not feasible. A survey of 1,000 Americans planning to buy a home in 2020 by the real-estate listing site Clever found that 70% of millennials planned to put down less than 20%. Twenty-seven percent planned to put down less than 10% on their home purchase. Survey data from the National Association of Realtors found that 73% of Americans who bought a home in November put down less than 20%.
These days, the practice of putting down less than 20% to secure a mortgage is becoming more common, and real-estate agents say it’s a practical way to get into the market.
Buyers traditionally put 20% down to lower their interest rate and skirt insurance
The 20% figure comes from the minimum payment most lenders require to avoid paying private mortgage insurance, an extra monthly payment that can cost 0.2% to 2% of the loan’s principal balance. Banks charge PMI to borrowers who put down less than 20% to get some protection should the borrower stop making mortgage payments.
But Christian Morrison, a real-estate agent with Keller Williams in South Dakota, says that in areas where homes are increasing in value quickly, paying a small amount of PMI each month might be worth it while your home value climbs.
“I had a client that bought a house at the beginning of 2018 and they didn’t put any money down,” Morrison said, explaining that the client used a state program in South Dakota allowing people to buy a home without making a down payment. “They had to have PMI on it, which cost them an extra $86 a month.”
“At the end of 2019, they went back to the bank to see what the equity stake was …read more
Source:: Business Insider