That’s right, down payments. If you own a house right now, it’s probably not that big of a deal if you’re thinking about buying a house because you probably have equity in this house you can use for the down payment on this house.
That’s really how the game is played, but if you don’t own a home right now. If it’s your first home or you’re getting back into the home ownership game, then this might be a big deal. It might be the big stumbling block that’s keeping you from buying a home. So let’s talk about three myths of down payments that might be sending you down the wrong path.
Starting with number one, you need 20% down to buy a house. Wrong! There are plenty of low down payment loan programs out there. FHA is the big one, that’s what a lot of people use when they’re getting that first house or back in the homeownership game. It’s a little easier to qualify for. And it only requires 3 1/2% down, pretty sweet. Conventional loan programs usually require a 5% down payment minimum, but in some cases, you might qualify for programs as low as 3% which is way less than 20%.
Now if you’re putting less than 20% down, you’re gonna have to pay mortgage insurance, which I know that sucks, but it just helps the bank feel good about giving you this loan. It’s gonna add a little bit to your payment each month. With a conventional loan, that’ll go away once you reach 20% equity through a combination of paying off your loan and property appreciation.
With the FHA, the mortgage insurance does remain on for the life of the loan, so when you reach 20% equity you’re gonna have to refinance in order to get that mortgage insurance dropped off.
Myth number two, if you don’t have that minimum down payment, you’re outta luck. Wrong again. Believe it or not, there are down payment assistance programs that have helped a lot of people get into a home with very very little down.
So let’s take for example the Home in 5 programs in Maricopa County. It’s been around about five years. It’s helped over 17,000 people buy a home. You pay a little bit higher interest rate, which funds a bond program that provides a grant to you to use for your down payment. The grant could be 3% to 4% depending on the program that you’re in. If you’re a first responder or a teacher or a veteran, you might qualify for a little bit more, but you don’t have to pay it back. It’s easy peasy.
Now the terms of that have changed a little bit this year. It used to be that the money was given to you at closing and that was it, but they’ve changed it up a little bit so now it’s actually a lien on your property, a silent second for three years, and at that time it will drop off. But if you need to sell or refinance your house during that three-year period, you’re gonna have to pay that money back.
But the interest rate differential has also increased a little bit, so as an example, with an FHA right now, the interest rate’s about 4.25. With the down payment assistance, the interest rate’s about 5 1/2%.
You can also get a gift, right? If there’s somebody, maybe your parents wanna give you some money or you got a rich uncle, you can do it that way too. They just sign a letter that says, yeah, he doesn’t have to pay it back. You’re good to go. So there are some ways to get the money even if your couch cushions aren’t producing.
Myth number three, it’s better to wait and save up the down payment. It’s usually not true. Let’s take for example a $250,000 house that you might have your eye on right now. You don’t have the down payment, right? 3 1/2% down, that’s $8,750. You just don’t have that kind of cash.
Down payment assistance, you’re gonna pay that higher interest rate, and that’s gonna raise your payment about $190. Ouch. So you might be thinking, no way. I’m just gonna save it up. You’re gonna have to save about $750 a month if you’re going from zero to $8,750 in one year’s time. But let’s say you do it and you go back to buy that $250,000 house.
Well, now that house is gonna cost you $265,000, at least, because that price point is increasing by at least 6% per year. So at $265,000, you’re paying $15,000 more dollars for the house.
If you compare that to that $190 extra you’re paying per month, it’s gonna take you 78 months to break even. Add to that the fact that interest rates are gonna be going up between this year and next, so the payment’s gonna be even higher.
So there’s no way in that scenario that it makes sense to wait if you can get in now. Does it make sense to save up the 20% so that you can avoid that whole PMI thing, the mortgage insurance? Usually not, because if you’re looking at 20% down on that $250,000 house, tracking $50,000, it’s gonna take you several years to put that away unless you’re capable of saving $3,000 to $4,000 a month.
If you could, it would make sense. I think then the price differential, the different payments and things like that, it would make sense. But if it’s really gonna take you more like the five years or whatever to save that up, then the house is gonna cost $300,000, interest rates, who knows where they’re gonna be. It doesn’t make sense. It makes a lot more sense to buy now and gain equity and then use that equity as a down payment on a better house in five years’ time.
In any case, it is a good idea if you’re thinking about buying to start saving, even if you can cover the down payment, what about all those trips to Home Depot, right? So start cutting back on those extra luxuries, like forget the new car, stop buying new clothes, maybe postpone the vacation.
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