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For years banks have asked for 20% down on a mortgage, but cash-strapped Americans are buying homes with less

Published by Business Insider on Tue, 12 Jan 2021


<p><img src="https://static6.businessinsider.com/image/5e336af062fa813bdd7ca6c4-1885/gettyimages-1091921974.jpg" border="0" alt="homebuying" data-mce-source="sturti/Getty Images" data-link="https://www.gettyimages.com/detail/photo/showhome-viewing-royalty-free-image/1091921974'adppopup=true"></p><p></p><bi-shortcode id="disclaimer" class="mceNonEditable" data-type="pfi"></bi-shortcode><bi-shortcode id="summary-shortcode" data-type="summary-shortcode" class="mceNonEditable" contenteditable="false">Summary List Placement</bi-shortcode><ul class="summary-list"><li>For many would-be homebuyers, saving a 20% down payment for a mortgage can be a big barrier to homeownership. Consequently, more people are buying homes by putting less money down.</li><li>Putting a full 20% down on mortgage ensures you won't pay <a href="https://www.businessinsider.com/what-is-private-mortgage-insurance-definition-cost">private mortgage insurance</a> and will most likely get the lowest available interest rate.</li><li>Some real-estate agents, however, say the benefits of making a smaller down payment outweigh the consequencesit can help homeowners build wealth and equity sooner rather than later.</li><li><a href="http://newsletter.businessinsider.com/join/4np/personal-finance" data-analytics-module="summary_bullets" data-analytics-post-depth="0">Sign up to get Personal Finance Insider's newsletter in your inbox </a></li></ul><p>Putting <a href="https://www.businessinsider.com/personal-finance/down-payment-on-a-house" target="_blank" rel="noopener">20% down on a home purchase</a> is daunting, and rightfully so.</p><p>For many young Americans struggling with student-loan payments, higher rent costs, and relatively stagnant salaries, saving a fifth of a home's value to <a href="https://www.businessinsider.com/personal-finance/what-is-a-mortgage" target="_blank" rel="noopener">get a mortgage</a>simply isn't on the radar.</p><p>Would-be homebuyers are finding it can take years to save a full 20% down payment, especially for anyone living near a big city, where real-estate prices are soaring. According to <a href="https://www.zillow.com/los-angeles-ca/home-values/" target="_blank" rel="noopener">Zillow</a>, the typical home value in Los Angeles is $794,935. You'd have to save $158,987 to place 20% down.</p><p>And for many millennials in particular, it's just not feasible. A survey of 1,000 Americans planning to buy a home in 2020 by the real-estate listing site <a href="https://listwithclever.com/real-estate-blog/2020-millennial-home-buyer-report/'utm_campaign=engaged-2019#section4" target="_blank" rel="noopener">Clever</a> found that 70% of millennials planned to put down less than 20%. Twenty-seven percent planned to put down less than 10% on their home purchase. Survey data from the <a href="https://cdn.nar.realtor/sites/default/files/documents/2020-11-realtors-confidence-index-12-22-2020.pdf" target="_blank" rel="noopener">National Association of Realtors</a>found that 73% of Americans who bought a home in November put down less than 20%.</p><div><div class="ca-widget" data-token="j62b4dda1084"></div><script async defer src="https://www.consumersadvocate.org/embeds/embedder.js'v=1"></script></div><p>These days, the practice of putting down less than 20% to secure a mortgage is becoming more common, and real-estate agents say it's a practical way to get into the market.</p><h2>Buyers traditionally put 20% down to lower their interest rate and skirt insurance</h2><p>The 20% figure comes from the minimum payment most lenders require to avoid paying <a href="https://www.businessinsider.com/what-is-private-mortgage-insurance-definition-cost" target="_blank" rel="noopener">private mortgage insurance</a>, an extra monthly payment that can cost 0.2% to 2% of the loan's <a href="https://www.businessinsider.com/personal-finance/mortgage-principal" target="_blank" rel="noopener">principal balance</a>. Banks charge PMI to borrowers who put down less than 20% to get some protection should the borrower stop making mortgage payments.</p><p>But <a href="https://christian-morrison.com/" target="_blank" rel="noopener">Christian Morrison</a>, a real-estate agent with Keller Williams in South Dakota, says that in areas where homes are increasing in value quickly, <a href="https://www.businessinsider.com/personal-finance/private-mortgage-insurance" target="_blank" rel="noopener">paying a small amount of PMI each month</a> might be worth it while your home value climbs.</p><p>"I had a client that bought a house at the beginning of 2018 and they didn't put any money down," Morrison said, explaining that the client used a <a href="https://www.businessinsider.com/personal-finance/first-time-homebuyer-programs-by-state" target="_blank" rel="noopener">state program in South Dakota</a> allowing people to buy a home without making a down payment. "They had to have PMI on it, which cost them an extra $86 a month."</p><p>"At the end of 2019, they went back to the bank to see what the equity stake was at the moment," Morrison continued. "And due to appreciation, their loan-to-value was 76%." <a href="https://www.businessinsider.com/personal-finance/loan-to-value-ratio-mortgage-refinancing" target="_blank" rel="noopener">Loan-to-value ratios</a> compare the size of your loan to the total value of the home, and generally, loans with loan-to-value ratios below 80% don't require private mortgage insurance.</p><aside class="quick-tip headline-regular"><strong>If home values are increasing rapidly in your area, it could make more financial sense to buy sooner, rather than save for years until you have a 20% down payment.</strong></aside><p>Once a mortgage's value reaches 78%, private mortgage insurance is automatically canceled. You can request for it to be canceled sooner, however, once your loan-to-value ratio reaches 80%.</p><p>In this buyer's scenario, the market helped the person reach 20% equity in just under two years. In a market that's growing, Morrison says, PMI can be gone rather quickly. When the home's value increases, the loan-to-value ratio decreases, making your loan eligible for PMI removal.</p><p>As for interest rates when you put down less than 20%, they may be slightly higherMorrison says he typically sees interest rates for clients making low or no down payments increase by about 0.25%. That percentage can vary by state, however. It is also possible to <a href="https://www.businessinsider.com/personal-finance/how-to-refinance-your-mortgage" target="_blank" rel="noopener">refinance down the road</a> to <a href="https://www.businessinsider.com/personal-finance/when-to-refinance-mortgage" target="_blank" rel="noopener">get a new interest rate</a> on your mortgage, though you'll have to have an appraisal and pay closing costs to complete the process.</p><h2>You can buy a house with less than 20% down, and it's not uncommon</h2><p><a href="https://christian-morrison.com/"></a>Morrison bought his first home in 2019, at age 24. "I put 5% down on my house, which cost $157,700," he told Business Insider. His down payment totaled about $7,800.</p><div><div class="ca-widget" data-token="afc76caf4c18"></div><script async defer src="https://www.consumersadvocate.org/embeds/embedder.js'v=1"></script></div><p>Putting 5% allowed him to start building equity sooner rather than later. "Where I live in the Black Hills, our appreciation is starting to jump up," he said. "We're starting to speed up to the point where if you don't have a down payment, your interest rate may be a quarter percent higher, but you're going to gain so much equity in that time. It's either wait six months to a year and save up the money, or pay a little bit higher interest rate and gain a lot in equity."</p><p>In his personal homebuying strategy, it worked. "My house was $157,000, and it's already worth $185,000," Morrison said.</p><p>In Morrison's professional experience, he estimates that 90% to 95% of his clients have paid down payments of less than 20%.</p><p>In other parts of the US, especially in more expensive areas, it's becoming common to make a smaller down payment. "I think 10% is, if not the new standard, it's acceptable," said <a href="http://corrie.withwre.com/" target="_blank" rel="noopener">Corrie Watterson</a>, a realtor in Seattle. "Even if you're below that, if you have a <a href="https://www.businessinsider.com/personal-finance/conventional-mortgage" target="_blank" rel="noopener">conventional loan</a> at 3% down, it's likely not going to impact the quality, price, or location of the home you can afford."</p><h2>Focus on the monthly payment, not the down payment</h2><p>For those wanting to get the lowest interest rate possible, and make their offer stand out as much as possible, 20% down is still something to aspire to.</p><p>"Everybody likes to put down 20% if they can," Watterson said. "It helps distinguish their offer from other offers in a multiple-offer situation. The smaller the loan, the less uncertainty, if you have a finance contingency, that the loan could potentially fall through somewhere between the offer being accepted and closing."</p><p>But to Watterson, the down payment isn't the main consideration when thinking about buying a home. "The most important thing is making sure that you feel confident that you can <a href="https://www.businessinsider.com/personal-finance/how-much-house-can-i-afford" target="_blank" rel="noopener">make your monthly mortgage payment</a>, however much you put down," she says.</p><p>Note that PMI does increase your monthly paymentsfor someone with a typical good credit score between 720 and 759, <a href="https://www.valuepenguin.com/mortgages/how-much-is-pmi">ValuePenguin</a> reports that your private mortgage insurance will cost 0.5% to 0.41% of your home's value each year. But PMI payments aren't forever. As you build equity, you will be able to stop making them.</p><p>In Watterson's experience, a lower down payment has become a way for many to get into homeownership and start building equity, despite the higher costs.</p><p>"Equity is still the major component of wealth for Americans who aren't already wealthy," Watterson said. "As long as you're sure you can pay that potentially higher monthly payment at 3% down, at 10% downversus 20% downI do encourage my clients to consider it."</p><div><iframe src="https://smartasset.com/captivate/frame/umonjdcr" width="100%" height="630px" scrolling="auto" style="border: none;"></iframe></div><ul class="read-more-links"><li><bi-shortcode id="related-content-module" class="mceNonEditable" data-type="more-mortgage-coverage" data-sheetname="More Mortgage Coverage">Related Content Module: More Mortgage Coverage</bi-shortcode></li></ul><p><a href="https://www.businessinsider.com/personal-finance/20-percent-down-payment-rule-mortgage-homebuying#comments">Join the conversation about this story &#187;</a></p>
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