MORTGAGE PROGRAM HIGHLIGHTS
There are many misconceptions regarding down payments and mortgage insurance and it is hard to know where to start. The ones I hear most often:
- You must have a down payment of 20%;
- If you put less than 20% down, it is financial mal-practice or not a good thing;
- Paying mortgage insurance is bad; and
- You are required to pay mortgage insurance on a mortgage if you put less than 20% down.
20% Down Payment Myth Number 1
In survey after survey, generally 50% of the respondents say the number one thing keeping them from purchasing a home is they don’t have 20% for the down payment. This is not accurate because 20% is almost never the required down payment. Simply stated, there is not a minimum down payment requirement. Some people are able to qualify for no down payment programs such as VA, while others choose to go with FHA, which requires as little as a 3.5% down payment. Conventional mortgages can be obtained with as little as a 3% down payment. In all cases, the down payments don’t even need to come from the borrower. The can come from different sources such as gifts from family members.
20% Down Payment Myth Number 2
The second thing I hear, usually from older people who have benefited from years and years of real estate price appreciation and have built up significant financial assets, is that it is financially risky to put less than 20% down. They forget that people who are just starting out don’t have that luxury and that by delaying purchasing their house they are costing themselves money in the following ways (not to mention that they did not put 20% down when buying their first house). The arguments for buying a house with less than 20% down are strong:
- Buying a home fixes the monthly housing expense. By continuing to rent, people are subjecting themselves to annual increases in their housing expenses due to rent increases. Unless they are getting raises that exceed the rent increases, they are losing ground every year; and
- Real Estate Appreciates. I have clients that have purchased a home with 3% down. Within 12 to 18 months, they have gained $50,000, $75,000 or in some cases even $100,000 of equity. They are then able to move up the real estate ladder by using that equity for a down payment on their next house.
Every three years the Federal Reserve Bank conducts a survey of household finances. The most recent survey covers the years 2013 through 2016 and reports that the median net worth of a homeowner is 46 times higher than a renter. (Source: The Federal Reserve Board’s triennial Survey of Consumer Finances, September 2017).
The advice of not putting less than 20% may be well-intentioned, but it is outdated advice in most cases, can cost money through lost appreciation opportunities, and the fact that they may pay more due to the same appreciation factor. The more appropriate advice that I think a new buyer needs to understand is that if they put less than 20% down the payments will be higher due to the loan amount being higher and if they continue to wait appreciation will continue to make houses more expensive resulting in a higher payment in the long run. As a result, prospective homeowners need to make sure they are evaluating and making the best decision about a home purchase and a mortgage that is right for their current situation which can include mortgage insurance.
Mortgage Insurance Myth Number 1
A common perception is that if you have less than a 20% down payment, you are required to pay mortgage insurance and that is bad. A contrary argument might be that it is good because without mortgage insurance a significant number of people would never be able to qualify for a mortgage. People who cannot qualify for a mortgage are required to continue to rent, thereby losing economic ground every year due to rising rents exceeding their rising income (see Down Payment Myth Number 1). Additionally, if they continue to rent there is a delay in building the kind of equity that helps build net worth (see Down Payment Myth Number 2).
Mortgage Insurance Myth Number 2
When someone has a down payment of less than 20%, there are many options to reduce or eliminate paying monthly mortgage insurance if they want. We work with our clients to evaluate these options and assess their eligibility. Among the options are:
- Monthly Plan/Zero Upfront Monthly Plan
- Single Premium
- Split Premium
- Financed Single Premium
- Lender Paid Single Premium
- Second Mortgages
- No MI Portfolio Mortgages
When the proper analysis is performed, it is often determined that sometimes paying the mortgage insurance for a while is the best financial option or the best option for qualifying for the mortgage. Other times, taking advantage of one of the programs designed to reduce or eliminate monthly mortgage insurance is a better option. Everyone’s individual situation is different and must be analyzed to arrive at the best option.