You hear it everywhere, SAVE 20% for a down payment or the mortgage insurance will make it too expensive and be a huge waste of money. But the truth is waiting to save 20% can be costing you thousands of dollars.
Here is the reality. Fannie Mae’s loan-level price adjustments and Freddie Mac’s credit fees are .25% lower at the 85% LTV level than the 80% LTV level. Why? It’s simple: mortgage insurance reduces their exposure to credit risk.
So, to get the same interest rate at 85% LTV that the borrower would pay at 80% LTV, you receive a .25% discount on closing costs. That discount provides a few great options, either take the lower rate to off the cost of mortgage insurance or lower the amount of cash you may need to bring to closing.
Let’s assume you are saving for a 20% down payment on a $200,000 home. But right now, you only have $10,000 of the $40,000 needed for a 20% down payment. Assuming you can add $500 to savings each month or $6,000 a year you should be there in 6 more years! Here is the problem, the house won’t and using 3% appreciation the home is now $40,000.00 more. The scary part is if you are also paying a $1000.00 a month in rent you will have paid more than $80,000 while the home equity position would have been over $72,000 if you had bought and not saved 6 years prior.
I never want to encourage anyone from buying a home before they are ready and understand all aspects of being a homeowner. However, many who want to own a home simply do not realize they can buy with less than 20% down and many more have not stopped to consider that there is a cost to waiting.
Chris Conlon firstname.lastname@example.org 704-609-5017
Bob Parm email@example.com 704-778-2603