Good news: a 20% downpayment is no longer the norm!
By Anita Newhouse
I can’t be the only one who hears the dramatic dun dun duuuuun sound effect the moment someone utters the phrase “downpayment.” The phrase echoes through my head and drifts into my nightmares, because for most of my life, I’ve assumed two things: You need a downpayment to buy a home and that downpayment has to be at least 20% of the purchase price.
Uh, do you know how much money that is?
Let’s say I’m in the market for something in the $515,000 range—that’s about the median sale price of a house in Portland, Oregon. (Mmm… Pine State Biscuits.) A little bit of math tells us the traditional 20% downpayment would be $103,000.
ONE HUNDRED AND THREE THOUSAND DOLLARS.
Do you know what I could buy for $103,000!??!
I could buy a brand new Model S Tesla with performance drive! I could buy a zero gravity flight for myself and 14 of my closest friends! I could buy enough plastic balls to fill a pool large enough to rival one of the biggest ball pits in the history of the world!
OK, now I’m just rambling and probably projecting my anxiety onto you. I’m sorry.
If you, like me, begin to break out in hives over the thought of a) saving up six figures and b) handing it over to the bank the moment you’ve got it, know this: You do not need to put 20% down when buying a home.
Did you know this? I did not know this! My whole idea of adulthood has been a lie!
It’s possible to put as little as 5% down, even, and yes, while $25,750 is still a big chunk of change, it’s not nearly as daunting as—dun dun duuuuun—$103,000, right?
When opting to put down less than the traditional 20%, you’ll likely have to pay for private mortgage insurance, aka PMI. Flyhomes mortgage expert Ami Shah gets into the nitty-gritty of PMI here, but I’ll give you the 30-second gist: When a buyer puts down less than 20%, the lender (understandably) wants to be sure they’re good for the money. This smaller amount of money means the buyer will initially have less equity in the house, after all, so to protect themselves from getting burned, the lender will tack on PMI. It’s a monthly fee that will generally be built into your monthly mortgage payment. (That way you don’t have to worry about too many bills coming from a bunch of different places, a feature I very much appreciate.)
“Extra fee!? Doesn’t that defeat the purpose of paying less initially?”
Not necessarily! The cost of PMI depends on a variety of things—your credit score, the type of loan you get, and the size of your downpayment, for example—but it’s often a relatively manageable amount. The example Ami gives is a whopping $42 a month. That’s a few pints of Jeni’s ice cream. Plus, the PMI isn’t forever. You can get rid of it in a number of ways. (Read more about that here, too.)
Plus, choosing a smaller downpayment isn’t just for folks who don’t have the giant wad o’ dough upfront. PMI is an option worth considering even if you do have that initial $100,000 or whatever. Opting to pay less initially can keep more cash in your hands should you need it for home improvements or a financial emergency … or that Zero Gravity Flight.
If this is all news to you as it was news to me, here’s another little-known fact: You can talk to a mortgage lender right now! No, you don’t have to wait until you know exactly how much money you have. No, you don’t have to wait until you have found your perfect home and are in a rush to put in an offer.
A good loan officer will prepare you with the knowledge you need to buy a home you love in a way that works best for you. We’re all different and our homebuying experiences are going to be different, too. I’m afraid of six-figures, you might be afraid of your credit score—we all hear that dun dun duuuuun at some point.
Your loan officer will help you sort through your options. They’ll tell you about things like PMI and possibly save you years of anguish. They’re the experts, we’re just the dummies piecing together what we think is the truth based on old information and myths that’ve been passed down through generations.
Welcome to homebuying. Now question everything you think you know about the process. The truth may surprise you.
Anita Newhouse is here for you and so is our team of pros.