jlink
Sunday, October 22, 2017

One of the most asked questions for first-time home-buyers is “How much do I need for a down payment?” All I can tell you is never assume the answer is the most you can put down, because there are many low down-payment options today. In this article we debunk the top three down payment myths.

Myth 1: You need a 20 percent down payment to get a mortgage.

This is one of the biggest myths. Today, you can get a conforming, conventional mortgage with a down payment of as little as 3 percent. Many homebuyers are putting down between 5 percent and 10 percent. Last year, nearly one third of the Freddie Mac funded loans, 1.6 million, had down payments of less than 20 percent.

Myth 2: Only your money can be used for a down payment.

It really depends on the program, but most programs allow for gifts, grants or loans from non-profits or public agencies.

Myth 3: Only first time-homebuyers have low down-payment options.

Keep in mind, with down payments under 20 percent comes some form of mortgage insurance.

What is mortgage insurance?

Lenders typically require mortgage insurance for loans with less than 20 percent equity or down payment. The most common types of mortgage insurance options are provided by either Federal Housing Administration (FHA) or private companies. As payment for that risk, the insurer collects a premium from the lender, who then typically recovers the cost of the premium from the borrower.

The four types of mortgage insurance available are as follows:

Monthly: an additional premium paid monthly and added onto your mortgage payment

Single: a lump sum paid up front or financed on top of the loan

Split: a combination of single and monthly

LPMI: insurance that is built into the rate but typically offers the lowest payment

One size does not fit all. You should consider that private mortgage insurance is available on a wider variety of loan products, and typically may be canceled sooner than FHA mortgage insurance (in many cases, due to the recent changes, FHA mortgage insurance cannot be canceled at all). LPMI is not cancelable. The key is to decide on your short- and long-term goals and structure the mortgage insurance around your game plan. On purchase transactions, sellers may offer concessions that may be used to offset mortgage insurance costs and allow you a no-cost option to buy out the mortgage insurance.

Financing with mortgage insurance creates opportunities for you in many ways, such as:

  • Increased buying power: Because private mortgage insurance makes it possible to buy a home with less than 20 percent down:

o Homebuyers—especially first-time homebuyers—can reach down payment savings goals faster and become homeowners sooner than otherwise possible

o Move-up buyers are able to consider a wider range of homes and leverage their investment in their current home

  • Expanded cash-flow options: Borrowers can benefit by putting less money down and keeping cash for other uses: making investments, paying off debt or paying for home improvements or emergencies.
  • Lower monthly payments: Private company mortgage insurance premiums are usually lower than FHAs and have more options available. That translates to lower monthly mortgage insurance costs and often monthly mortgage payments that are less than borrowers would receive with FHA financing.
  • Secure, competitive, predictable monthly payments: A fixed-rate mortgage with monthly mortgage insurance provides borrowers with a locked-in monthly payment that will not increase and that will be reduced when mortgage insurance is canceled.
  • Private mortgage insurance may be canceled: On most loans with private mortgage insurance, coverage must automatically be canceled by the lender when the loan reaches 78 percent of original value through amortization. Private mortgage insurance also may be canceled when extra payments bring the loan below 80 percent of original value. Borrowers may also request that private mortgage insurance be canceled based on a new appraised value. The mortgage servicer should be contacted to find out their policies and guidelines.
  • Reduced taxes: Borrower-paid mortgage insurance premiums paid in 2014 were tax-deductible and extended in 2016, but limited to income phaseouts. The interest portion of LPMI may be fully deductible. The deduction is not restricted to first-time homebuyers.

The takeaway: Mortgage insurance is a great financing tool. You can buy a home for a low down payment or refinance with a small amount of equity using mortgage insurance. The key is to pick the best mortgage insurance option for your financial circumstance.

By Carl Guzman

 Carl Guzman, NMLS# 65291, CPA, is the founder and president of Greenback Capital Mortgage Corp. He is a residential financing expert and a dealmaker with over 25 years experience. Carl and his team will help you get the best mortgage financing for your situation and his advice will save you thousands!