Do You Really Need To Put 20% Down?

If you are considering buying a home soon, chances are you have a number of questions running through your head. One of those questions might be whether or not you have enough saved for a down payment. 

There’s no need to stress, though. There are many low and even zero down payment options you may qualify for. There are many advantages to making a higher down payment, for example, the more you put down, the less you will owe to your lender. However, there could also be many advantages to buying now, without saving longer for a down payment. 

So, what happens if you can’t put 20% down? 

On a conventional loan, if your down payment is less than 20% of the loan amount, your lender will require private mortgage insurance (PMI). This is an added insurance policy that protects the lender if you can’t pay your mortgage. 

The amount that is paid each month for PMI is dependent on the loan to value (loan amount divided by sales price) and your credit score. Keep in mind, there is a big difference between Conventional and FHA loans because FHA always require PMI on the loan, allows lower credit scores compared to conventional mortgages, and is easier to qualify for. Conventional loans allow slightly lower down payments. 

The good news is, there are ways to build your home equity and ditch PMI on a conventional loan.

According to Freddie Mac, a borrower typically pays between $30 and $70 per month in PMI for every $100,000 of loan principal. The amount that you owe is dependent on your credit score, mortgage and loan term, and the amount of your down payment. 

Once you reach 20% equity in the property or own 80% of the value of the home, then you can reach out to the servicer and request the PMI to be dropped. If you don’t reach out, the servicer will automatically drop it at 22% equity or 78% of the value of the home. 

So, how can you build your equity? 

You have two options, either you pay down your home loan balance or increase your home value. So you would either pay down the balance, either through your regular payments or via extra payments, to reach the equity mark or call the servicer to get an appraiser out to your house to appraise the property. If the appraisal on the property goes higher than 80% of the new value, then the mortgage insurance will be dropped. 

In situations like this, it’s always important to weigh the pros and cons. Our team at Georgia Platinum Mortgage can help you determine the different down payment options available and determine what makes the most sense for you. Contact us today!