If you’re thinking of buying a home, you’re probably wondering what you need to save for your down payment. Is it 20% of the loan, or could you put down less? While there are lower down payment programs available that allow qualified buyers to put down as little as 3.5%, it’s important to understand the many perks that come with a 20% down payment.
Here are four reasons why putting 20% down may be a great option if it works within your budget.
1. Your Interest Rate May Be Lower
A 20% down payment vs. a 3-5% down payment shows your lender you’re more financially stable and not a large credit risk. The more confident your lender is in your credit score and your ability to pay your loan, the lower the mortgage interest rate they’ll likely be willing to give you.
2. You’ll End Up Paying Less for Your Home
The larger your down payment, the smaller your loan amount will be for your mortgage. If you’re able to pay 20% of the cost of your new home at the start of the transaction, you’ll only pay interest on the remaining 80%. If you put down 5%, the additional 15% will be added to your loan and will accrue interest over time. This will end up costing you more over the lifetime of your home loan.
3. Your Offer Will Stand Out in a Competitive Market
In a market where many buyers are competing for the same home, sellers often like to see offers come in with 20% or larger down payments. The seller gains the same confidence as the lender in this scenario. You are seen as a stronger buyer with financing that’s more likely to be approved. Therefore, the deal will be more likely to go through.
4. You Won’t Have To Pay Private Mortgage Insurance (PMI)
“For homeowners who put less than 20% down, Private Mortgage Insurance or PMI is an added insurance policy for homeowners that protects the lender if you are unable to pay your mortgage.
It is not the same thing as homeowner’s insurance. It’s a monthly fee, rolled into your mortgage payment, that’s required if you make a down payment less than 20%. . . . Once you’ve built equity of 20% in your home, you can cancel your PMI and remove that expense from your monthly payment.”
As mentioned earlier, if you put down less than 20% when buying a home, your lender will see your loan as having more risk. PMI helps them recover their investment in you if you’re unable to pay your loan. This insurance isn’t required if you’re able to put down 20% or more.
Many times, home sellers looking to move up to a larger or more expensive home are able to take the equity they earn from the sale of their house to put 20% down on their next home. With the equity homeowners have today, it creates a great opportunity to put those savings toward a larger down payment on a new home.
If you’re looking to buy a home, consider the benefits of 20% down versus a smaller down payment option. Let’s connect so you have expert advice to help make your homeownership goals a reality.
To succeed as a buyer in today’s market, it’s important to understand which market trends will have the greatest impact on your home search. Danielle Hale, Chief Economist at realtor.com, says there are two factors every buyer should keep their eyes on:
“Going forward, the conditions buyers face are primarily dependent on two things: mortgage rates and housing supply.”
Here’s a look at each one.
Mortgage Rates Projected To Rise in 2022
As a buyer, your interest rate directly impacts how much you’ll pay on your monthly mortgage when you purchase a home. Rates are beginning to rise, and experts forecast they’ll continue going up in 2022 (see graph below):As the graph shows, mortgage rates are expected to climb next year. But they’re still low when you compare to where they were just a few years ago. That presents today’s buyers with some motivation to lock in a low mortgage rate before they climb higher.
More Homes Are Expected To Be Available This Season
The other market condition buyers need to monitor is the number of homes available for sale today. The latest Existing Home Sales Report from the National Association of Realtors (NAR) shows the current supply of inventory sits at just 2.4-months. To put that into perspective, a 6-month supply is ideal for a balanced market where there are enough homes to meet buyer demand.
However, there may be good news for buyers who are waiting for more options. A recent realtor.comsurvey shows more sellers are planning to list their homes this winter, meaning more choices will likely be available soon.
What Does That Mean for You?
Even if your options improve some this season, it won’t significantly shift market conditions overnight. According to NAR, many more listings need to be available to move closer to a more neutral market:
“Given the average monthly demand . . . , 3.55 million homes should be on the market to meet a level of inventory equal to six months of demand, implying a shortage of homes for sale of 2.24 million.”
So remember, even with more homes expected to come to market this season, competition among buyers will remain fierce as there still won’t be enough homes for sale to meet the current demand. That means you’ll need to act quickly when you’re ready to make an offer.
If you’re planning on buying a home this winter, more options are welcome news, but it doesn’t mean you should slow down. Let’s connect today so you have an expert on your side to help act as quickly as possible when the right home for you hits the market.
If you’re a homeowner who’s decided your current house no longer fits your needs, or a renter with a strong desire to become a homeowner, you may be hoping that waiting until next year could mean better market conditions to purchase a home.
To determine whether you should buy now or wait another year, you can ask yourself two simple questions:
Where will home prices be a year from now?
Where will mortgage rates be a year from now?
Let’s shed some light on the answers to both of these questions.
Where Will Home Prices Be a Year from Now?
Three major housing industry entities are projecting ongoing home price appreciation in 2022. Here are their forecasts:
According to the National Association of Realtors (NAR), the median price of a home today is $353,900. Using an average of the three price projections above (6.53%), a home that sold for $353,900 today would be valued at $377,010 at the end of next year. As a prospective buyer, you would therefore pay an additional $23,110 by waiting.
Where Will Mortgage Rates Be a Year from Now?
Today, Freddie Macestimates the average 30-year fixed mortgage rate in the fourth quarter of this year will be 2.8%. However, most experts believe mortgage rates will rise as the economy recovers. Here are the forecasts for the fourth quarter of 2022 by the three major entities mentioned above:
That averages out to 3.73% if you include all three forecasts. Any increase in mortgage rates will increase your costs.
What Does It Mean for You if Home Values and Mortgage Rates Increase?
If both variables increase, you’ll pay a lot more in mortgage payments each month. Let’s assume you purchase a $353,900 home in the fourth quarter of this year with a 30-year fixed-rate loan at 2.8% after making a 10% down payment. According to mortgagecalculator.net, your monthly mortgage payment would be approximately $1,309 (this does not include insurance, taxes, and other fees because those vary by location).
That same home one year from now could cost $377,010, and the mortgage rate could be 3.73% (based on the industry forecasts mentioned above). Your monthly mortgage payment after putting down 10%, would be approximately $1,568.The difference in your monthly mortgage payment would be $259. That’s $3,108 more per year and $93,240 over the life of the loan.
Add to that the approximately $23,110 a house with a similar value would build in home equity this year due to home price appreciation, and the total net worth increase you could gain by buying this year is over $115,000 (the $93,240 mortgage savings plus the $23,110 potential gain in equity if you buy now).
When asking if you should buy a home, you may think of the non-financial benefits of homeownership. When asking when to buy, the financial benefits make it clear that doing so now is much more advantageous than waiting until next year.
Since the pandemic began, Americans have reevaluated the meaning of the word home. That’s led some renters to realize the many benefits of homeownership, including the feelings of security and stability and the financial benefits that come with rising home equity. At the same time, many current homeowners have decided their house no longer meets their needs, so they moved into homes with more space inside and out, including a home office for remote work.
However, not every purchaser has been able to fulfill their desire for a new home. Here are two obstacles some homebuyers are facing:
The ability to save for a down payment
The ability to qualify for a mortgage at the current lending standards
This past week, both of those challenges have been mitigated to some degree for many purchasers. The FHFA (which handles mortgages by Freddie Mac, Fannie Mae, and the Federal Housing Administration) is raising its loan limit for prospective purchasers in 2022. The term used to describe the maximum loan amount they will entertain is the Conforming Loan Limit.
What Is the Difference Between a Conforming Loan and a Non-Conforming Loan?
“Conforming loans are the only loans that meet the requirements to be acquired by Fannie Mae and Freddie Mac. Jumbo loans, which exceed the conforming limit, are the most common type of nonconforming loan.”
What Difference Does It Make to Me as a Home Buyer?
A Forbesarticle earlier this year explains the benefits of a conforming loan and why they exist:
“Since lenders can’t sell non-conforming loans to Fannie Mae or Freddie Mac to free up their cash, they’re a bit riskier for the lender. This is especially true for jumbo loans, which aren’t backed by any government guarantees. If you default on a jumbo loan, it’s a huge blow to the lender.
Thus, lenders generally charge higher interest rates to compensate, and they can have even more requirements. For example, lenders who give out jumbo loans often require that you make a down payment of at least 20% and show that you have at least six months’ worth of cash in reserve, if not more.”
What Happened Last Week?
The FHFA has significantly increased its Conforming Loan Limits for 2022. Sandra L. Thompson, FHFA Acting Director, explains in the press release that:
“Compared to previous years, the 2022 Conforming Loan Limits represent a significant increase due to the historic house price appreciation over the last year. While 95 percent of U.S. counties will be subject to the new baseline limit of $647,200, approximately 100 counties will have conforming loan limits approaching $1 million.”
This means that more homes now qualify for a conforming loan with lower down payment requirements and easier lending standards – the two challenges holding many buyers back over the last year.
The Federal Housing Administration (FHA) also increased its Conforming Loan Limits for 2022. That could also mean an easier path to homeownership for many prospective buyers. As the Forbes article explains:
“FHA loans can be very beneficial if you don’t have as much savings, or if your credit score could use some work.”
Buying your first or your next home may have just gotten much easier (less stringent qualifying standards) and less expensive (possibly lower mortgage rate). Let’s connect to discuss how these changes may impact you.
To get more information on the new FHFA Conforming Loan Limits, click here.
To get more information on the new FHA Conforming Loan Limits, click here.
If you’re living on your own and looking to buy a home, know that you can make your dream a reality with thoughtful planning and the right team of experts. Research from Freddie Mac shows 28% of all households (36.1 million) are sole-person, and that number is growing. Over the past 40 years, the number of sole-person households has nearly doubled, and that’s a trend that’s expected to continue. According to Freddie Mac:
“Our calculation suggests that there will be an additional 5 million sole-person households in the United States by the next decade. This means 42% of the household growth will be contributed by sole-person households, . . .”
If you fall into this category, here are three tips to help you achieve your homeownership goals.
1. Know Your Credit Score
When you buy a home on your own, you have to qualify for your loan based solely on your own finances and credit history. Investopediasays:
“. . . lenders will be looking at just one credit profile: yours. Needless to say, it has to be in great shape. It is always a good idea to review your credit report beforehand, and this is especially true of solo buyers.”
It’s important to find out your score so you know where it falls. If you’re not sure if it’s strong enough or where to focus your energy to improve it, meet with a professional for expert advice on your individual situation.
2. Explore Down Payment Options
Next, look into down payment programs so you can get a feel for what you’ll need to save to buy a home. Rob Chrane, CEO of Down Payment Resource, explains:
“Buyers should discuss their program options with their loan officer and real estate agent to make sure they choose the program best suited to their personal needs.”
You should also spend time thinking about what you want. What type of home do you picture yourself in? To answer that question, Quicken Loans shares this advice:
“Think about your lifestyle, what you want out of your home and your needs. Is being close to work important? Do you need a lot of yard space? Do you want an extra bedroom that you can transform into a home office? Condo or detached home? Lots of space for entertaining? It’s all up to you (and your budget).”
Again, a professional can help you balance what you want and how much you should spend on your monthly housing costs to determine what type of home is right for you.
While buying a home solo can feel like a big challenge, it doesn’t have to be. If you lean on the professionals, they can help you navigate these waters and make sure you’re able to take advantage of the great opportunities in today’s housing market (like low mortgage rates) to buy your dream home.
The share of sole-person households is growing. If you’re looking to buy a home on your own, be confident that the dream is achievable. When you’re ready to begin your search, let’s connect so you have expert advice each step of the way.