Choose a down payment option you can live with

Choose a down payment option that you can live with

The down payment is often the biggest obstacle for first-time homebuyers. It isn’t easy to come up with a large chunk of cash, even if you’re good about saving. Luckily, you have several options for your down payment. We’ll describe the main options so you can determine which makes the most sense for your situation.

What is PMI? (private mortgage insurance)

How much should I put down for a new home?

See how a slightly larger down payment can affect your monthly mortgage payments.

This is a required insurance that you must obtain if you put less than 20% towards your down payment. This insurance protects the lender from loan default and usually costs ½%–1% of the loan. Here are some things to know about PMI:

it protects the lender if you can’t pay your mortgage
the lender usually chooses the insurance carrier
PMI does not increase your equity
the lender is the beneficiary – not you

PMI can be rolled into your monthly mortgage payments, paid yearly through an escrow account or paid up front during closing. You’ll only have to pay PMI until you have built enough equity in your house.

You may have to pay PMI to buy your house if you can’t afford to put much money towards your down payment. Paying PMI isn’t the end of the world, but you should try to avoid this cost if possible. You may be able to get around paying PMI using some creative ways to come up with 20%.

PMI paid monthly
PMI paid at closing
Piggy-back loan
20% down

PMI paid monthly

This is the most common way to pay PMI because it doesn’t require more money at closing. Since you don’t have 20% for a down-payment, it’s probably true you won’t have extra cash to put towards your PMI premium at closing. If you have an ARM your monthly PMI payments will change with your rate.

The bottom line

Although this is the most common way to pay your PMI, you cannot guarantee when you will build enough equity to eliminate the PMI. If your house appreciates quickly, you may be able to build enough equity to eliminate the PMI quickly. However, if your home depreciates or stays flat, you can end up paying PMI for a long time.

PMI paid at closing

Paying at closing costs around 2.2% of the home’s value and can be paid all at once during closing or you can choose to add the upfront cost to your monthly mortgage. The monthly option has the least immediate impact since it doesn’t require you to come up with additional money at closing.

The bottom line

Because you pay a set amount your PMI payments are not dependent on market conditions. Adding your upfront PMI to your monthly mortgage also means the PMI payments are tax deductible.

Piggy-back loan

This involves getting two loans, commonly one for 80% and a second for 10%. Getting a second loan allows you to pay only 10% for the down payment and avoid paying PMI. The smaller loan, often called a piggy-back loan, is usually at a higher rate. In a no-money down situation, you could have two piggy-back loans each for 10%.

The bottom line

If you don’t have enough to put 20% down, this option can help you get into a home without paying PMI. The piggy-back loan is usually an adjustable rate, so your monthly payments will change with market conditions. Often, the combined monthly payments of the two loans is less than putting 10% down and also paying PMI. You also get at tax break from the interest on the piggy-back loan that you don’t by paying PMI monthly.

20% down

Putting down 20% of the home’s value is a great option if you have the cash. By putting so much down, you can buy a more expensive home or lower your monthly mortgage payments.