Many homeowners would love to lower their interest rate or take advantage of other benefits associated with refinancing, but they are concerned about the time and expense associated with refinancing their current mortgage. The FHA Streamline Refinance loan program is designed to provide those who currently have an FHA loan with an easier way to refinance their mortgage, and this may be a desirable option for many.
In previous blog posts, we’ve looked at some of the ways a home buyer in Washington State could buy a house with a low down payment. Today, we will examine the pros and cons of making a relatively small down payment on a home purchase in Washington.
What Is Considered a ‘Small’ Down Payment?
Big. Small. Medium. These are relative terms that don’t mean much until we plug in actual numbers. So, what constitutes a “small” or low down payment in Washington?
In this context, we are talking about putting down less than 20% of the purchase price. That percentage is significant, because it can determine whether or not a borrower has to pay for private mortgage insurance. These policies protect the lender, but they also allow borrowers to buy a home sooner.
Private mortgage insurance (PMI) is typically required when a home buyer in Washington uses a mortgage loan that accounts for more than 80% of the property value. This is known as the loan-to-value ratio, or LTV. When the LTV rises above 80%, PMI is usually required. This is just a long-time industry standard.
Here’s why the 20% down payment is an important threshold for borrowers:
- If a home buyer in Washington State makes a down payment below 20%, and thus ends up with an LTV above 80%, private mortgage insurance will likely be required.
- If a buyer makes a down payment of 20% or more, and therefore has a loan-to-value ratio of 80% or less, PMI can generally be avoided altogether.
The cost of a PMI policy can vary due to a number of factors. The annual premiums typically range from 0.3% to about 1.5% of the original loan amount. (You can learn more on this subject in our guide to Washington mortgage insurance.)
Pros and Cons of Going Low
Now you can understand the potential pros and cons of making a small down payment (below 20%) when buying a home in Washington State. Here they are in a nutshell…
- Pro: Putting less money down allows you to purchase a home sooner and with less upfront investment. For many buyers in Washington, a down payment of 20% is either unrealistic or would take a long time to accumulate. An investment of that size can be a roadblock for some folks. So a low-down-payment mortgage option helps home buyers with limited funds move forward with their purchases.
- Cons: As with many things in life, there are some downsides. Depending on the structure of your mortgage loan(s), you might have to pay for PMI coverage when making a smaller down payment on a house in Washington. This requirement is usually triggered when the LTV ratio climbs above 80%, which is often the case with borrowers who make a small down payment. But again, you’ll be able to make your purchase sooner.
So how low can you go? What’s the lowest possible down payment when buying a home in Washington State? This will depend on the type of loan you are using, among other factors.
A conventional home loan (that’s not insured by the government) might allow you to make a down payment as low as 3% of the purchase price. The Federal Housing Administration (FHA) loan program generally requires a 3.5% investment.
The VA home loan program for military folks is a clear winner in this department. It gives eligible borrowers a way to buy a house with no down payment and, in most cases, no mortgage insurance. Of course, not everyone qualifies for this program, which leaves FHA and conventional financing.
The bottom line: When it comes to mortgage loans, the best strategy is to choose an option that supports your financial goals and priorities. That might mean making a small down payment and paying for PMI, or saving up for a larger investment to avoid mortgage insurance. This will depend on your savings, your budget, and your priorities.