The dream of owning a home is within reach for many, but the road to homeownership is not without its challenges. Recent surveys have revealed that a substantial number of aspiring homeowners have started saving for a down payment, with the majority planning to put down less than 20%. This goes against the conventional belief that a 20% down payment is necessary. While the average down payment in the first quarter of 2021 was 13.6%, up from the previous year, it is still below the presumed gold standard of 20%.
The real estate market’s lack of affordability poses a significant hurdle for buyers looking to accumulate a higher down payment. Rising home prices have made the 20% goal seem even more daunting, leading many to question if such a high down payment is truly necessary. According to experts, the national average down payment is closer to 10% or 15%, with some states even lower than 10%. Despite common misconceptions, data shows that the majority of buyers are successfully purchasing homes with less than 20% down.
Fortunately, there are loans and programs aimed at helping buyers with lower down payment options. The Department of Veterans Affairs offers VA loan programs that allow qualifying individuals to put down as little as 0%. USDA loans cater to buyers in rural areas and also offer 0% down payment options. FHA loans, requiring as little as 3.5% down, target first-time buyers, low-income individuals, and minority groups to help bridge homeownership gaps in these communities. Conventional loans can also offer down payment options as low as 3% to 5% based on credit scores and other factors.
The Hidden Costs
While a lower down payment may seem like a more affordable option upfront, it comes with added costs in the long run. Borrowing more from the lender with a lower down payment can increase your monthly mortgage costs. Additionally, lower down payments may disqualify you from the best interest rates offered by lenders. Borrowing over 80% of a home’s value could lead to private mortgage insurance (PMI) costs, ranging from 0.5% to 1.5% of the loan amount per year. This could translate to an extra $125 to $375 per month on a $300,000 loan. Buyers may explore options like “piggyback mortgages,” involving a second loan to reach the 20% equity threshold and avoid paying for PMI. However, second mortgages often come with higher interest rates, negating the benefits of avoiding mortgage insurance.
While the idea of saving for a 20% down payment may seem overwhelming, it is not necessarily the only path to homeownership. With a variety of loan options and assistance programs available, buyers can explore alternative down payment amounts that suit their financial situation. However, it is crucial to weigh the pros and cons of a lower down payment and consider the long-term financial implications before making any decisions. The key is to find the right balance between affordability and financial security when taking the leap into homeownership.