Do you know how much you need for a down payment to purchase a home? Often people think that you need a down payment of 20% or more to purchase a home. This is a common misconception. Buyers need as little as 3% down to purchase a home.
The perk to putting 20% down is that you can avoid mortgage insurance premiums (MIP) or private mortgage insurance (PMI).
MIP is an insurance policy that FHA assesses if your down payment is less than 20%. FHA can charge the MIP upfront, at closing, or yearly in 12 installments. The amount you pay for MIP depends on the loan-to-value, therefore, the larger the down payment, the smaller the MIP.
PMI is an insurance policy that lenders assess for conventional loans if your down payment is less than 20%. A borrower may pay upfront at closing, or monthly, like MIP. The difference between PMI and MIP is that PMI is charged until when your loan balance is scheduled to reach 78% of the original value of your home, or at your request, when the equity in the home reaches 20% of the purchase price or appraised value.
Of course, being charged PMI or MIP is not ideal–no one likes to pay extra money. But with home prices on the rise in Metro Denver and all indicators point to it continuing to increase, it may be something worth considering. The economic and financial landscape in 2017 has the onset to change for borrowers. Rates are rising and will continue to do so through 2017. Metro Denver still has very little supply, which will inevitably continue to make home prices rise.
Borrowers that have been on the fence and saving for that 20% downpayment for the past few years may want to consider their options. At this juncture, with rates that only increased slightly, the numbers may make sense to pay PMI upfront or monthly and put less than 20% down. The fact that home values are appreciating so quickly can be used to your advantage, as PMI will cease once you have 20% equity in the home.
