Why buying a house sooner with a small down payment and private mortgage insurance may be a wiser move than waiting
3 Reasons Why PMI Saved Me Money—Really!
Yes, you can buy a home with less than 20% down!
Before you select a low down payment mortgage, it’s important to do some homework. Compare loans and do the math to find what works best for you. You should consider how much cash you need in hand, the monthly mortgage payment, and if that payment will go up or down in the years to come.
In most cases, for example, buying with a 5% down payment versus a 3% results in savings to the monthly mortgage bill due to more attractive loan terms.
Here’s a crash course in low down payment mortgage options to help you make a more informed decision.
Conventional Loan with PMI
A borrower can get a conventional loan with PMI with as little as 3% down. PMI can be cancelled once 20% equity in the home value is reached, which means your monthly bill decreases. In the event that borrowers experience financial hardships, PMI companies have strong incentives to work with the GSEs and others to help borrowers avoid foreclosure, often through loan modifications.
For some borrowers, a 5% versus 3% down payment may be a better deal as costs may be lower. However, for many prospective homebuyers looking to lock in low interest rates, build equity and home appreciation faster, an option to get into a home with the lower down payment may be better.
FHA loans are mortgages insured by the government through the Federal Housing Administration. However, FHA mortgage insurance cannot be cancelled and must be paid for the life of the loan. FHA has other specific requirements, like the condition of the home.
A borrower can get a FHA loan with as little as 3.5% percent down and a FICO score as low as 580 may qualify.
For almost all loans backed by the FHA, mortgage insurance cannot be canceled, so your monthly bill won’t be reduced the way it is with a conventional loan with PMI. Also, FHA loans are subject to an upfront fee of 1.75% that is typically financed over the life of the loan. FHA mortgages are subject to more stringent restrictions, especially for condos which are often the desired property type for many first time homebuyers.
A Combo Loan (aka Piggyback Mortgage)
A piggyback involves two separate simultaneous loans, often structured with an 80% first line mortgage, a 10% second lien mortgage, and a 10% down payment (“80-10-10”). Piggybacks are often more expensive than conventional loans because borrowers are paying closing costs on two loans and the second mortgages often carry higher interest rates that are adjustable.
The borrower will not pay PMI.
It may be a more expensive as the borrower will pay closing costs on two loans and the second loan often comes with a higher interest rate. This mortgage option typically has more stringent credit score and debt-to-income (DTI_ requirements than a traditional conventional loan with PMI. Borrowers with piggyback mortgages may find it more difficult to receive a loan modification or workout in the event of financial hardship.