Buying a home may just be more affordable than ever this summer. While the strength of the US economy and personal finances are on the minds of most of us, low down payment mortgage options are more appealing than ever. Mortgage interest rates are at historic lows, making it possible to qualify for and afford a home loan while keeping rainy-day funds on hand.
If you are looking to buy a home, but don’t have 20% down, you’re not alone. The National Association of Realtors revealed that the average down payment in 2019 was just 6% for first-time buyers. It is now possible to qualify for a conventional loan with just 3% down.
Private Mortgage Insurance (PMI) makes this possible.
It has been around for decades and helped over 1.3 million homebuyers last year. It is a temporary cost that allows for a down payment as low as 3% of the purchase price. While some believe they should save this cost and wait to buy until they amass 20% for a down payment, it could take an average family 21 years to save that much in today’s market! Meanwhile, the added years of saving will most likely translate to higher interest rates and more expensive home prices in the future.
How can buying now save money later?
Consider a purchase of a home priced at $275,000. A 20% down payment would require a $55,000 down payment, while 3% down requires only $8,250. Today’s low interest rates make monthly payments affordable, despite being calculated on a higher loan amount. PMI in this scenario would cost about $120 per month until the loan balances reaches less than 80% of the home’s value.
That same home will most likely be valued over $325,000 by the time 20% could be saved (and now the down payment equals $65,000, not $55,000). Interest rates are likely to be higher as well, which translates to a higher monthly payment that could easily exceed the $120 monthly PMI that would have been paid if the home had been purchased earlier.
Why buy a home at all?
Homeownership is the biggest driver of affluence in this country. That’s because owning property is a fundamental means of accumulating wealth as we age. Asset wealth is a more secure predictor of future financial stability than income. Some of the benefits of purchasing a home are:
Equity – Renting has been compared to paying 100% interest, but when you own a home and a mortgage is in place, a portion of your payment goes toward the principal balance on your loan. This builds your equity and acts as a savings account
Tax Savings – The government rewards homeowners by providing excellent tax benefits. The interest paid on your mortgage and the amount paid for property taxes can generally be deducted from your income.
Appreciation – Home values have a well-documented history of increasing over time, on average 3-4% per year. This increase becomes equity you can cash out when you sell, or you can leverage while you are in the home to finance home improvements, or protect your family in times of economic distress.
Roots – People who own rather than rent stay in their homes four times longer. This provides an opportunity to get to know your neighbors and connect with your local community.
Education – Research shows children of homeowners earn higher test scores and graduate at a higher percentage than those of renters.
Happiness – The feeling of owning your own home is unmatched. You can fix it up, make it your own, geta a dog, or plant a garden. It is your own piece of the world, a stake in your community, and a springboard to a stronger financial future that can be passed down to your children to help the next generation build wealth.
If you think you’re ready to buy, it’s a great time to make the move. If you’re not sure that you’re ready, reach out and let’s see what you need to do to prepare.