There is an enduring myth about home ownership still making the rounds after many years. It says, “You should always make a down payment of at least 20%. That is the norm when buying a house.”
Many aspiring homeowners in Seattle, WA still buy into this myth and are putting off their purchase until they have the “normal 20% down payment.” This is unfortunate. Saving money in today’s high-priced world can be an uphill battle—and making such a large down payment is unnecessary. Waiting to buy can also be expensive, with both home prices and mortgage rates trending higher.
There is no such thing as a “normal 20%” down payment. In 2018, the average down payment nationwide was 11%. More than 54% of all home buyers put less than 20% down, and 70% of all first-time buyers made a smaller down payment. The average down payment for first-time buyers was 6%. Both examples are a far cry from 20%.
When a lender makes a loan for more than 80% of the home’s value, they’ll require some form of mortgage insurance to limit their risk. The cost of mortgage insurance depends on the loan to value ratio and the borrower’s credit score. A buyer with a credit score of 760 making a 5% down payment can expect a monthly premium of about .40%, or $195 for a $600,000 home.
It is possible to make a small down payment and avoid monthly mortgage insurance altogether. Paying a single premium at close of escrow will also satisfy the lender’s requirements. Just as with monthly insurance, the cost varies according to credit score and loan to value ratio. A 95% loan for a $600,000 purchase will carry a single premium of about $6,900 for a buyer with a 760 credit score. In many cases, the borrower can add the premium to the loan to avoid having to pay it out of pocket.
There may also be times when making a smaller down payment makes sense even when a buyer has the cash available for a 20% down payment. Anyone who is carrying expensive consumer debt, such as credit cards and car loans, may benefit from using some of their available cash to pay off that debt instead of using it for the down payment. The cost of monthly mortgage insurance and larger mortgage could be more than offset by the elimination of other monthly debt payments.
Mortgage insurance for conventional loans is not a permanent expense. Once the loan balance reaches 80% of the home’s value, the homeowner can ask the lender to drop the requirement. Different lenders have their own procedures for doing this, but it typically involves paying for an appraisal to document the home’s market value.
Because the cost of mortgage insurance is indexed to the borrower’s credit score, it may be possible to reduce the cost with even a minor improvement in the credit score. A buyer with a credit score of, say, 735 could save money by raising their score just five points, to 740. For a $540,000 loan on a $600,000 home, these five points would result in a $40 reduction in the monthly premium. Finding the additional points could be as simple as paying down the balance on a credit card by a few hundred dollars. Contact Sammamish Mortgage Today to learn more about Mortgage Down Payments in Seattle, WA