Should I Buy My First House If I Don't Have a 20 Percent Down Payment?
We recently received a question from a reader who asked: “Do you really need a 20 percent down payment? That’s not a real thing, right? How can anyone save that much?” And she’s right. A lot of people do struggle to get that 20 percent. So what happens if you want to buy a home without it?
Say “hi” to PMI
If you’re going to take the plunge without having a full 20 percent down payment, you can expect to pay private mortgage insurance or PMI. It’s an extra fee on top of your mortgage that’s usually about 0.5%-1% of your total loan. So, if you’re taking out a loan for $200,000 you’ll be paying between $83 and $167 per month on top of your mortgage payment.
Is it worth it? It depends on how much you pay in rent. Taking the $200,000 mortgage example, your monthly mortgage payment with PMI would be around $1,120 depending on your interest rate, and if your rent is higher than that it might be worth it to deal with the PMI for a while.
Even if the combined mortgage and PMI payment is slightly higher than your rent, it might still be worth it. Because let’s face it, saving money can be hard. But with your mortgage, you’re forced to save every month. The money going to PMI could be equated to the money you'd be setting aside for a down payment if you had decided to save up for that cost. You're just already in the house when you're paying PMI.
Try to look at it this way, unless you want to move back home with you parents, you have to pay to live somewhere anyway. At least this way you’re building equity. If you ever need to, you can take out a HELOC and use that equity for things like going back to school, paying for child care, or putting an addition on your house.
The other good news is that you only have to pay PMI until your equity is 20 percent of the value of your loan—or the amount you would have needed for the down payment in the first place.
First-time buyer programs
Just because 20% is the standard, that doesn’t mean that’s what you actually have to have saved for a down payment. There are plenty of first-time buyer programs that you might be able to take advantage of.
All these programs come with some restrictions, so you have to do your research upfront. For example, some of them, like the HUD 203(k) loan or the Dollar Home program, might mean you have to buy a fixer-upper and improve it.
Others, like USDA loans or the Good Neighbor Next Door program, are location-specific. Definitely, do a little research and ask your mortgage lender what types of loan programs you’re eligible for.
Interest rates are going up and you might be feeling some pressure to buy now instead of saving more. So, if you’re close to having the full 20% but just need some help, then you can consider a personal loan. These are loans from the bank that you can use for just about anything. If your monthly payment on the personal loan is less than the amount you’d be paying in private mortgage insurance, it’s a feasible option.
We recommend looking at any credit unions that are in your area. If you’re eligible to be a member, you can usually get a lower interest rate through them on your mortgage and your personal loan.
Don’t forget to factor in all the expenses
Owning a home is great. At least that’s what you keep telling yourself when you're grumbling about the air conditioner breaking when it’s 95 degrees outside or the hot water heater needing to be replaced. Unexpected expenses are the worst and unfortunately they’re part of home-ownership.
You can make the unexpected become the expected by factoring in things like your insurance, HOA fees, general maintenance costs, and an emergency fund, so that the unexpected becomes the expected. Be honest with yourself about whether or not you can afford all the extras, because they can add up quick!
So, is buying a house without a 20 percent down payment doable? Definitely. Should you do it? It depends.
Do you have more questions about buying a house? Check out our tips for first-time home buyers in our education center.