The requirement that aspiring home-buyers must make a down payment on the home they intend to acquire has prevented many from purchasing a home when they need it. In fact, the 20 percent down-payment on the price of the house has scared many, who fear that they would not be able to save that amount of cash within a stipulated time period. To make matters worse, even if they take time and save enough money to cater for the 20 percent down-payment, they may find out that the price has risen due to inflationary pressures and other expenses.
For example, a house whose price tag was $500,000 would require a down-payment of $100,000, and if the prospective home-buyers takes 3 years to save the $100,000, he may feel disappointed to find out that the price has risen to $600,000 and the new down-payment amount required is $120,000, which he does not have. Therefore, the aspiring home-buyer is set on a race against time and inflation. Also, these aspiring home-owners may currently be renting a house where they need to pay rent and monthly utility bills among other expenses; and this limits their ability to save enough money. This creates a situation where savings are growing a slower pace than inflation growth. Consequently, most aspiring home-owners can find themselves in a limbo where they desire a home but cannot save enough for the ever-rising down-payment.
Fortunately, aspiring home-owners need not lose hope as market realities favor them. Following the housing bubble and the co-occurrent depreciation of home values, some home-owners found themselves in a unique situation where they were to service mortgage loans that cost more than the home value; and some forfeited. Loan lenders, home sellers, and mortgage firms absorbed massive losses and they were forced to find new ways to maintain their viability in the market. This led most of them to adopt a set of financial strategies that would make them profitable in the medium-term as well as sustain long-term growth. These strategies have kicked off what can be described as innovative financing.
Currently, you are not required to make a huge down-payment, and if you qualify for a mortgage, your down-payment can be as little as 3.5 percent, or less, of the price of the house. For veterans, they can easily acquire a home loan, some even without a pricey collateral. However, these forms of innovative financing raise a question; Should one purchase a home by taking advantage of the existing minimal down-payment requirement? The most appropriate answer is that it depends on your financial situation.
For some people, they are sure that it would take them years to save the 20 percent down-payment. For these people, it is advisable that they take advantage of the minimal down-payments to get a house. This is due to the temporary nature of the minimal down-payment clause, as it can be withdrawn by the financiers when they judge that their financial situation has improved considerably. Therefore, making the minimal down-payment now is recommended for aspiring home-owners who cannot save much. This is the advice that Casey Fleming, a notable mortgage professional based in San Francisco, gives to aspiring home-owners. According to Fleming, any aspiring home-owner must immediately (unless there are other compelling reasons) take advantage of the minimal down-payment requirement to acquire a home of his or her choice.
Even so, data provided by NAR (National Association of Realtors) show that the average down-payment was only 11 percent in 2016 with home-buyers under 35-years benefiting the most as their average down-payment was about 8 percent. As a matter of fact, NAR data shows that 16 percent of under-35 home-owners made no down payment, while another 36 percent made a down-payment of 5 percent or less.
Recently, the Federal Reserve has managed to maintain the interest rates at a historically low level. Therefore, if the NAR data is correlated with the low interest rates, one can project that the amount of down-payment are set to continue decreasing. Therefore, there are some aspiring home-owners who are gambling on the prospect of the down-payment rates falling so low (somewhere below 3 percent) as to allow them to easily acquire a home. However, if such projections are compared to, and also valued against, the minimal down-payment requirements, it is evident that purchasing a house now is the better decision.
Cost of Home-Ownership
Another important consideration before acquiring any home is the maintenance cost. According to Liz Weston, a Personal finance columnist, many people fail to consider the maintenance and repair costs. Weston warns that if your entire savings can cater only for the 3.5 percent down-payment, you may end up emptying your savings and then be forced into debts so as to maintain your home. You will also be required to pay your monthly installments, and this can push you into more debts.
Weston also makes another salient observation. She stated that if your down-payment amount is low, then your monthly payment (installment) will be set high. This also means that your interests rates will be high. As such, it is recommended that aspiring home-owners should review their present financial situations, as well as their short-term future financial projections so as to decide whether it is prudent to take advantage of the 3.5 percent down-payment. Still, if you have a high-income, and low debt obligations, it is advisable that you purchase your desired home now using the minimal down-payment requirement. You can also take advantage of private mortgage insurance.
Private Mortgage Insurance
Most lenders require an aspiring home-owner to have a private mortgage insurance (PMI) if the down-payment is less than a fifth of the home value. The PMI serves to protect the lender in the unfortunate situation where you default on your home loan, as the PMI will reimburse the loan lender the cash. Usually, the PMI is usually set between $30 to $70 per month for each $100,000 borrowed. Still, the monthly PMI payment is determined by the down-payment amount and your financial profile. This means that you can pay anywhere between $360 and $840 per year as PMI.
The PMI is paid till the loan is cleared, but you can request your lender to withdraw the PMI if your home equity surpasses 20 percent. However, removing PMI requires an appraisal, and you are supposed to cater for the appraisal. According to Fleming, the appraisal fee can be as high as $500. For this reason, it is recommended that you get a flexible lender who can offer a good mortgage deal that does not require any sort of PMI.
It is clear that purchasing a home is not a simple decision, and you need to approach the issue from different angles, while keeping tabs on the different scenarios. This will allow you to choose the best option that fits your current situation. I can help you along, so do not hesitate to ask me for advice.