Owning a home can be a sign of independence and success. It allows you to build up equity and the mortgage interest and property taxes are tax-deductible. What can you do to make a home affordable for you?Reputable lenders look at a list of criteria to decide how much they'll loan you.
Over the past few weeks, we’ve been writing about the different mortgage financing strategies available to borrowers these days. Today, we’ll look at the reasons why some home buyers in Washington State make a down payment of 20% or more.
There are two primary reasons for putting 20% down. It reduces the size of your monthly payments, and it helps you avoid paying for mortgage insurance.
What Is PMI, and What Triggers It?
Private mortgage insurance, or PMI, is a type of insurance policy that protects banks and mortgage lenders from losses that might result from borrower default, or failure to repay.
In Washington State, a PMI policy is typically required whenever the loan-to-value (LTV) ratio exceeds 80%. For example, if a borrower uses a home loan for 90% of the purchase price, and pays the remaining 10% as a down payment, private mortgage insurance would probably be required.
Of course, there’s an upside to PMI as well. Without this kind of insurance, borrowers across the board would have to make down payments closer to 20%. So PMI essentially allows people to buy a home sooner, and with less money down. It increases access to mortgage financing, thereby supporting homeownership.
There are several ways to avoid private mortgage insurance in Washington State. We’ve covered some of them in the past, including the option of taking on a higher rate. You could also avoid PMI by combining a first and second mortgage loan to buy a home in Washington (such as the 80/10/10 financing strategy).
Why Put 20% Down When Buying a House in Washington?
There are several ways to avoid PMI when buying a home. One way is to make a down payment of 20% or more, when buying a home in Washington.
You don’t necessarily have to put that much down. There are several mortgage programs available today that allow for a smaller upfront investment. But putting 20% down toward your home purchase allows you to avoid private mortgage insurance.
You’ll recall from earlier that PMI is generally required with the loan-to-value ratio is higher than 80%. When you make a down payment of 20% to buy a house in Washington State, you’ll end up with an LTV of 80%. This means you’ll avoid the “trigger” requirement for private mortgage insurance. Additionally, your LTV will likely decrease over time as your home’s value increase.
Monthly payments are another important consideration here. For some home buyers, minimizing the size of the monthly payment is a top priority. Making a larger down payment helps you achieve this goal.
Granted, not everyone can afford to put 20% down when buying a home. But for those who can, this strategy comes with the added benefit of smaller monthly payments.
Recap: You don’t necessarily need a down payment of 20% or more when buying a home in Washington. But it’s a strategy worth considering for those who can afford it. It could help you avoid private mortgage insurance while also reducing the size of your monthly payments, compared to a smaller down payment.
Please contact us if you would like to know what kind of down payment you’ll need to make. We can help you choose the best type of loan for your specific needs.