September 19th, 2016 10:19 PM by Landa Pennington
Some people wait to buy a home until they have 20% down payment to avoid paying the mortgage insurance which is required by lenders when the loan-to-value ratio is greater than 80%, with the exception of VA loans.
To illustrate a typical situation, let’s assume that buyers have $10,000 for a down payment on a $200,000 home. They could purchase it today with a 95% loan or save another $30,000 in order to get an 80% loan without mortgage insurance.
If it took three years to save the additional down payment, the $200,000 home at 3% appreciation would cost $218,545. A 20% down payment on the increased sales price would be $43,709, less the $10,000 the buyers currently have leaves them $33,709 to save which would amount to $936.36 a month. They would secure a $174,836 mortgage at the then current mortgage rates, which in all likelihood, will be higher than today’s rates.
The alternative is for the buyer to purchase the home today with a 95% loan at today’s low interest rates plus approximately $85 a month for mortgage insurance depending on their credit score. At the end of three years, the unpaid balance would be $179,548. Assuming the home will be worth the same $218,545, the buyer’s equity would be almost $39,000. To reduce the mortgage to the same amount as the first example, the buyer would need to make an additional $125 a month principal contribution above the normal payment. Then, the mortgage would have an unpaid balance at the end of three years of $174,775.
When there is sufficient equity in the home, the mortgage insurance is no longer required. Some lenders may drop the mortgage insurance requirement with an appraisal to provide proof. In other situations, it may require refinancing to eliminate the insurance. Call to discuss options that may be available to you.