The American dream is to own a home. Hoe ownership is a beautiful thing for many, and it’s the ultimate goal that allows many people to feel that they’ve finally made it in life. Finding a home, making it your own, and turning it into your pride and joy is a pleasure, but it’s something many buyers consider out of their price range. Even the smallest starter home seems impossible to purchase for those who aren’t familiar with the mortgage industry and how it works. The preferred method of buying a home requires making a down payment of at least 20% of the asking price of a home, but many lenders prefer their customers make a down payment of at least 30%.
For the average consumer who lives a comfortable life with a couple of cars, insurance, some kids, and a good job, that’s out of the question. It might take years to acquire a down payment that big. For example, you’d need $20,000 to make a 20% down payment on a home that costs $100,000. Every time you add $50,000 to the price of the home, you add another $10,000 to the amount you put down. It’s simply unaffordable for many families.
The good news is there are loan options for those who cannot afford to put down that much money out of pocket. There are FHA loans and other government-backed programs that allows buyers to put down much less, anywhere from nothing to 5% of the asking price of a home. This allows you to purchase a home without spending decades saving money just to afford a home. There is a stipulation that comes with this, however.
Private Mortgage Insurance
It’s commonly referred to as PMI, and you don’t want to pay this. The simple fact is you don’t want to pay PMI because it will cost you far more to purchase a home than you can afford. It can be as much as several hundred dollars each month for the average house, which means you spend tens of thousands of dollars more for your home over the course of a few years than you would if you put money down.
Banks want you to have equity in your home. If you default on your mortgage and the bank forecloses on your home, they want to sell it quickly and make their money back. This is why the bank asks you to put down at least 20%. Many loans are only available for up to 80% of the value of a home. PMI is required for all loans more than 80% of the value of a home.
Buyers pay private mortgage insurance as long as their mortgage is more than 80% of the value of their home. When buyers pay off their mortgage enough that their mortgage is less than 80% of the value, they no longer pay PMI. PMI makes it possible for lenders to recoup the losses they suffer in case a buyer defaults on their mortgage.