There seem to be buyers that fall into one of two categories that we work with. Those that say “What’s the minimum I can put down and still own a house?” and the crowd that wants to wait until they have the elusive 20% down so that they can avoid paying Private Mortgage Insurance (PMI). Regardless of where you fall on the ‘Totally leveraged’ to “All cash” scale, there are some ups and downs in the current market that you need to be aware of.
When I hear people say that they don’t want to pay PMI for owning a home what they’re really saying in essence is “I don’t want to overpay!” And who would! We don’t want anybody to overpay either for a home in price or in a mortgage strategy. (I just felt the hair raise on the necks of 80% of the people who read “mortgage strategy”) Read on.
Right now, rates are at a historic low and unless the Fed gets their act together and lets this housing market continue to recover (not likely) those rates are going to go up significantly. So let’s set up an example. Let’s say you have enough for a 5% downpayment now on a 15 year conventional loan on a $150,000 house. You would really like to save up 20% though. How long with that take? Let’s say 2 years since you’re motivated and a quarter of the way there already but even at that point, you’re going to be putting away quite a bit of cash for an extended period. Right now we’re seeing prices rise due to low inventory and mortgage rates predicted to be as high as 5.5% 2 years from now. Nobody knows exactly where they’ll be at, but they won’t be this good forever. So let’s split the difference and call it at 4.5%. Here’s the payment with 5% down. Compare:
Now if you saved for 2 years for a 20% downpayment you would likely be looking at a higher home price for the SAME HOUSE and a higher mortgage rate. So what would that look like?
What?! A whopping $67???? You save for 2 years to save…. $67 per month? Feeling a little less excited about getting to skip that PMI? Most people who look at the numbers are too. Additionally, at the 5 year from today mark, in either case, your equity isn’t that much changed. The 5% down buyer has $47,700 in equity and the 20% down saver has $53,391 in equity. Roughly a $5000 difference.
Do you see what we’re saying? 2 years, for a $5000 difference at the 5 year mark, and you paid $15,000 extra for your home. With rates so low and fixed now is the time! Don’t gamble you’re financial future away if prices and interest rates go up. With the help of a real estate expert you can put yourself in a winning position and secure a home before it’s too late.