A down payment is a necessary part of a mortgage, but it can be tough to come up with a sizable amount. That said, if you can manage to save up 20% as a down payment, you can avoid paying mortgage insurance. Let’s compare saving a 20% down payment versus paying mortgage insurance in WA.
You have already noticed that rents are rising in the Seattle area. Real estate values are, too. The appeal of our beautiful region draws people like a magnet — and more people means higher demand for housing, which means higher prices.
Rents will go up — that’s a given. But for those fortunate enough to own homes now, the upward trend in price is good news; the equity in their homes is increasing as values rise, but their payment stays the same.
That’s why owning a property can be much more beneficial than renting. The thing is, you’ll need to come up with a down payment in order to secure most mortgages. Unless you’re a qualifying veteran or member of the military who can get a VA loan, you’ll need some money to put forward in the form of a down payment.
But if your down payment is less than 20% of the purchase price of the home, you will be stuck paying mortgage insurance. But some may argue that saving your money to invest elsewhere and paying far less than 20% and instead paying mortgage insurance might be the better alternative.
Either way, buying and owning a home can allow you to accumulate equity in a valuable asset that can help you build wealth over time, as opposed to renting and paying someone else’s mortgage.
Owning Can Help You Build Equity and Wealth Over Time
We have already discussed the advantages of owning over renting, but for many would-be homeowners thinking about taking the plunge, the down payment seems like an insurmountable barrier. People scrimp and save to set aside what they think is the “normal 20% down payment,” while the ever-increasing prices seem to keep ownership just out of reach.
Related: Buying a rental property? Here’s what you need to know about loans
Large Down Payments Not Mandatory in WA
The fact is that home ownership is attainable for a down payment as low as 3%. I can hear you say, “But then we’d have to pay that horrible mortgage insurance!” While it is true that lenders do require mortgage insurance when a buyer gets a loan for more than 80% of the home’s value, that mortgage insurance can actually save you money.
Mortgage insurance actually makes it possible for people to buy homes that they otherwise wouldn’t be able to qualify for. By becoming a homeowner sooner rather than later as a result, you can start building equity and wealth sooner, allowing you to accumulate more wealth over time. Plus, you can save all that money that you’ve been spending in rent and actually put it towards something that you own.
Keep in mind that home values in the Seattle area have been increasing year after year. And they’re expected to continue doing the same throughout 2021. This means a home worth $755,600 today will likely be a lot more into the future.
If you buy that home with a $37,780 down payment (5%), you’ll have to pay mortgage insurance each month. Depending on your credit score, you can expect to pay around $120 each month.
Dropping Mortgage Insurance is Possible
But here’s what you should keep in mind: once you can show the lender that your loan balance represents 80% or less of your home’s value, you should be able to get it taken off. If home values appreciate in price year after year, you can effectively build equity in your home even without considering your contributions to paying your mortgage.
With every mortgage payment you make, you’re putting more money towards the principal. That, combined with an appreciation in value, means that you are effectively increasing your home’s equity. After a certain amount of time, you’ll eventually own at least 20% of your home, which makes you eligible to drop your private mortgage insurance payments.
What does this mean to you? It means that by becoming a homeowner sooner, without waiting to save up a larger sum of money, you’ll be able to start making home appreciation work for you, rather than against you. The small amount of money paid for mortgage insurance can pay you a handsome return, in the form of home equity.
On the other hand, there is always the possibility of continuing to rent, and watching home prices continue their upward march. It’s your choice.
Want to Apply for a Mortgage?
Are you ready to apply for a mortgage? Let Sammamish Mortgage help! We offer home loan programs for home buyers across Washington State. We’re a local mortgage company serving the broader Pacific Northwest region, including Washington, Idaho, Colorado, and Oregon. We are proud to offer a wide variety of mortgage programs and products with flexible qualification criteria since 1992. Please contact us if you have any questions or are ready to apply for a home loan.