Blog posted On July 21, 2020
Record low mortgage rates have inspired many first-time home buyers to transition from renting to owning in recent months. Even before mortgage rates fell to the lowest level in the past year, first-time home buyers accounted for a substantial share of home buyers, taking advantage of low down payment mortgage options. A report from the US Mortgage Insurers (USMI) association found more than 1.3 million homeowners put down less than a 20% down payment in 2019.
Additionally, the Urban Institute found 58% of mortgages had mortgage insurance: 41% insured by private mortgage insurance (PMI), followed by 36% insured by FHA, and 23% insured by VA. Since 2016, the share of mortgages with mortgage insurance has steadily increased, indicating that more and more home buyers are buying a home with less than 20% down. With saving for a down payment taking longer and longer, low down payment mortgages are the better option for many first-time home buyers, even with the cost of mortgage insurance.
When you finance with a conventional loan and put down less than 20% you will be required to pay PMI. PMI protects the lender in the case of you not repaying your loan. PMI typically costs on average anywhere from 0.55% to 2.25% of your loan amount and is paid through a monthly premium. Once you’ve built at least 20% equity in your home, you will no longer be required to pay PMI.
When you finance with an FHA loan you will have to pay a Mortgage Insurance Premium (MIP) throughout the life of your loan. The amount of your MIP depends on the size of your down payment. FHA borrowers will pay an upfront payment, equal to 1.75% of the loan amount and then annual insurance premiums ranging anywhere from .45% to 1.05% of the loan amount. The upfront MIP can be financed into the loan, but that will increase the loan amount. MIP will not be cancelled and you will have to continue paying it until you sell your home or refinance into a different type of loan.
The VA Loan is one of the most affordable options for home purchases because it does not require a down payment and it does not require PMI. To finance with a VA loan, qualifying buyers apply for a VA loan entitlement, that typically covers the cost of more than a 20% down payment. The basic entitlement is equal to the lesser of 25% of your total loan amount or $36,000. The bonus entitlement is equal to up to 25% of the Federal Housing Finance Agency (FHFA) loan limit, minus the basic entitlement.
If you’re interested in buying a home and locking in today’s low mortgage rates, but do not have a 20% down payment, you have other options. A great first step is talking with a loan officer about your plans. We can look at your credit score and financial background and find the right low down payment mortgage option for you.