Debunking Down Payments

The homebuying process can seem maddeningly vague, but it doesn’t have to be. One of the biggest misconceptions I run into as a Realtor is how much money one needs to buy property. If you’ve ever been curious about how down payments work, read on!

The Myth

Let’s say you want to buy a house, but don’t have a ton of savings in the bank. A 20% down payment seems impossible so you resign to renting for another year…and then another…and another. The problem here is that you’re constantly spending money without gaining anything back in the form of equity. Austin is one of the fastest growing markets in the country and waiting just one year to save that 20% can literally push buyers out of a price range.

The Reality

Here’s a secret that every single prospective homebuyer should know: the 20% downpayment rule is not, in fact, a rule at all.

For example: Say you want to buy a $300,000 house. Let’s assume a mortgage rate of 4.5% and a property tax rate of 2.5% with no HOA fees. At 20% down ($60,000) you’d pay roughly $1,940 per month.

Now let’s assume you don’t have $60,000 to invest in a house. Mortgage lenders will often approve down payments as low as 5%, and in some cases even 0%. They are able to do this by adding what’s called private mortgage insurance (PMI) to your loan.

PMI is an extra monthly insurance fee wrapped into your mortgage payment. It protects the lender in case you default on your loan, and it can be removed from your payments once you reach 20% equity in your property. In Austin, real estate is appreciating so quickly that this level of equity can be obtained in a few years.

If we take the same $300,000 house and apply a lower down payment of 5% ($15,000), the new monthly payment is only slightly higher at $2,175. Add roughly $100 per month for PMI for a total monthly payment of $2,275. Again, once you reach 20% equity the house can be re-appraised, removing PMI for the remainder of your loan term.

The Point

To recap, for a slightly higher monthly payment at the start of your loan, you can save tens of thousands of dollars on a down payment. Additionally, if you’re a first-time homebuyer there are many lender incentives and down payment assistance programs available. Property in Austin appreciated an average of 8% last year, with the national average at 3-5%. If trends stay the same, buying a home is not only a personal achievement but a sound financial investment.

Saving for a down payment doesn’t have to be stressful, and there are many different ways to finance a home. I’d love to be your real estate resource and would be happy to grab coffee and talk about housing options. Please contact me with questions any time!

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